Asset Protection BLOG - Mark Nestmann: So What if 80% of Big U.S. Corporations Have Tax Haven Subsidiaries? [Part II]

In my last blog entry, I described how Senators Carl Levin (D-Mich.) and Byron Dorgan (D-N.D.), along with the Obama administration, are misinterpreting a report published by the U.S. General Accountability Office to advance their anti-offshore agenda. In essence, they want to force U.S. corporations to pay tax on income earned by their offshore subsidiaries in low-tax jurisdictions, whether they repatriate it or not. And they're claiming, without any proof, that not doing so costs the U.S. Treasury over US$100 billion annually.

The GAO report concludes that 83 of the largest 100 U.S. corporations have subsidiaries in low-tax jurisdictions. But it also states that there are numerous non-tax reasons for U.S. corporations to form offshore subsidiaries.

Neither the tax-and-spenders, nor the mainstream media, have said much about the non-tax reasons U.S. corporations form offshore subsidiaries. So, what are they?

First, consider that the United States is the world's most litigious country. U.S. individuals often move their assets offshore for asset protection reasons. Not surprisingly, so do U.S. corporations.

Second, consider that state and federal regulations are a real and growing burden on U.S. corporations. Operating out of an offshore jurisdiction with more predictable and streamlined regulations can reduce those costs.

Third, it's often easier to raise money offshore than it is in the United States. Imagine that you're the CEO of a giant money-center bank in New York. You want to raise a few billion dollars. How easy will it be to raise it through the parent company, with a balance sheet riddled with sub-prime loans and other financial detritus? Not very.

But, what if you form a subsidiary with a clean balance sheet in a low-tax jurisdiction? Given adequate capital and guarantees, it should be a lot easier to raise the necessary funds there than in the U.S. market. Not to mention the fact as a consequence of laws like the USA PATRIOT Act, many global investors avoid the U.S. market like the plague.

Fourth, U.S. corporations that do business outside the United States must often form subsidiaries in target markets. Imagine that you're the CEO of a natural resource company. You want to set up mining operations outside the United States. Not surprisingly, the host countries want you to set up local companies to do business there. In addition, since many countries no longer permit U.S. residents or companies access to their financial system (again because of laws like the USA PATRIOT Act) using a foreign subsidiary may be the only way for a U.S. corporation to get its foot in the door.

It's true that a U.S. corporation can choose to retain the earnings of a foreign subsidiary offshore. Under current U.S. law, it's generally not taxed on that income until the money is repatriated. (There are exceptions for certain categories of income, generally relating to passive investments). This is the "loophole" that President Obama and the anti-offshore tax-and-spenders say is costing the U.S. Treasury US$100 billion annually.

So, what's wrong with forcing U.S. corporations to pay tax on profits from their foreign subsidiaries?

Let's begin with the fact that the U.S. corporate tax rate, at 34%, is one of the world's highest. Given this fact, is it any surprise that U.S. corporations are seeking to reduce this burden? Not according to Messrs. Obama, Levin, Dorgan and their blowhard brethren in Congress.

Let's continue with competition. If a U.S. company doing business offshore has to pay tax on profits from its subsidiaries, and a company based in another country doesn't, which company will be more successful? Certainly not the one with a higher tax burden!

Then there are jobs, which the U.S. economy is losing at the rate of about 500,000 each month. Do the advocates of taxing the unrepatriated profits of U.S. corporations' offshore subsidiaries will result in more jobs back home? On the contrary! To pay the tax bill, U.S. multinationals are far more likely to shed more jobs domestically. Therefore, this proposal is likely to lead to even higher U.S. unemployment.

It's a crying shame that the mainstream media isn't defending the right of U.S. corporations to do business through offshore subsidiaries. And if they don't start doing so very soon, the disastrous agenda of the Obama-Levin-Dorgan axis could well become law.