Thursday, July 24, 2014

Taxing your brain power

A friend on Facebook reposted a link encouraging everyone to boycott Walgreens because they were planning to merge with a Swiss firm to "avoid paying U.S. income tax".

//rolling my eyes so far into my head I see brain matter//

It's called inversion, and it's partially the result of the U.S. having one of the top corporate tax rates in the world. Oddly enough, inversion can actually be good for business in the U.S.

If a multi-national company is headquartered in the U.S., they have the privilege of paying U.S. taxes on their American operations - and also on the profits from their foreign operations, as soon as they bring those profits stateside. This is why you see the news stories laden with hysteria about the massive amounts of funds companies like Apple are "hoarding" offshore. Apple is incredibly successful world wide; the instant they bring any of those profits into the U.S., for any reason, they are subject to 35% tax.

Not exactly motivation to bring those profits over.

This is an oversimplification, but it lays out the basic issues. My widget company can't use the profits earned in Germany to improve the infrastructure of my American stores without first losing a substantial chunk of those profits to tax.

If I merge with a foreign widget company, however, and the merged company is organized in a country with a lower tax rate, it's good for everyone. My company is still taxed in the U.S. for operations in the U.S. - something all the hysterics don't seem to understand. But the foreign profits are taxed at the presumably lower foreign rates, and paid in to the foreign tax systems.

Since I'm now free to bring those foreign profits (net of the foreign taxes paid) to the U.S. without fear of losing a third to U.S. tax, I can bring that money over and use it in my domestic operations, through improvements or expansion, via investment or in any of the million other opportunities available here. One would assume I'd be doing that sort of thing in order to make more money in my U.S. operations: more earned = more taxes to the U.S.

As I said, inversion can be good for everyone involved.

I hadn't really meant to impose a tax lesson on you, gentle reader; it's the kneejerk, "OMG BAD!! BOYCOTT!" reaction to these sorts of reposts in social media that make me more than a little bit cranky. People are much too prone to believe everything they read/hear. It took all of two minutes to do a search and some research into exactly what inversion is, and maybe another two minutes to think through why a company like Walgreens may be investigating using it as a corporate strategy.

The correct response here is not to swear off Walgreens because they are abandoning the U.S., but to wonder why our country has a tax structure that is so bad for business, and call for changes.

There is simply no reason these days to be uninformed. Take the time to do some research. Learn how to evaluate the sources of information. Ask questions. Ask more questions. Deliberately try to see the other side of the issue, with an open mind. Carefully think through all you've learned.

Don't just reaction without knowing more about the issue.

//rant off//

1 comment:

Francesca Watson said...

Excellent, excellent post. Thank you!