Do you avoid taxes?
Well, if you do… congratulations!
You see, tax avoidance is the legal minimization of tax liabilities. Tax evasion, on the other hand, is illegal.
As it turns out, large multinational companies are coming under increased scrutiny for their tax strategies.
Are they paying too little?
Apple (AAPL) and Starbucks (SBUX) are currently being investigated by the European Commission for tax avoidance. These companies have saved billions of dollars, thanks to foreign subsidiaries and tax deals in Ireland, Luxembourg and the Netherlands.
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If you’ll remember, the U.S. Senate established a sub-committee to examine offshore profit shifting by Apple in 2013.
Apple and the Irish government both claim that no tax laws have been broken. But that’s not really the issue…
European Union Competition Chief, Joaquin Almunia, contends that selective tax advantages distort competition and allow multinationals to bypass paying their “fair share in taxes.”
To be sure, it’s not hard to see Almunia’s point – Apple only paid 3.7% tax on the profit it made outside of the United States last year.
Foreign profits would face additional taxes if they were repatriated back to the United States. But many firms have decided to let the cash hoards remain overseas and raise debt to fund acquisitions, buybacks and dividends, instead.
According to the Financial Times, just 14 U.S. technology and pharmaceutical companies (including Apple) hold nearly $500 billion in cash offshore.
These cash coffers appear to be the result of years of tax avoidance… or should we call it savvy tax haven utilization?
If the efforts to clamp down on tax avoidance were to result in a change in tax laws, there could be significant ramifications for U.S. corporate profits going forward.
But what about past profits?
Well, Reuters reported this week that the Senate is considering a corporate tax holiday – a one-time tax break to repatriate profits now held abroad.
This could be a major boon to the companies holding half of a trillion dollars in cash offshore… stay tuned.
Income Research Team