Obama taking on tax havens???

By: ispeculatornew
Date posted: 05.06.2009 (5:00 am) | Write a Comment  (0 Comments)

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thewarontaxhavenssmallWow, as much as I often admire Barack Obama, it is sometimes difficult to understand where he’s going… I mean in theory it is probably impossible to argue for tax havens. But in practice, even talking about this in such tough times is probably not the best incentive for companies to send money to their US businesses or to invest more broadly in the US.

Tax Havens have been becomming a lot more complex year after year as clever accountants and fiscal specialists find smarter and smarter ways to avoid paying taxes in countries with higher margins by reporting their income in other countries. There really is no limit to the ways to do it and talking with someone in the field for an hour or two will blow you away.

I think that most people oversimplify the issue and simply say that Tax Havens are used by cheaters. Turns out that it is not quite that clear. In fact, over 80% of the largest US companies have a base in a tax haven.  Here is a simple example:

-A plane company based in Canada builds a piece in Mexico that costs 100$. This piece will be sold to a Canadian client for 1000$, a 900$ profit.

If the company simply buys the part from its Mexican subsidiary, it will be paying taxes on 900$ of taxes. At a corporate rate of 20%, that would be 180$.

-Now let’s imagine a different scenario, one where the Mexican company sells the piece to a company based in the Cayman Islands for 100$. The Cayman Islands company then sells it to the Canadian company for 900$.

In this case, the Cayman Islands company has a profit of 800$ (900$-100$) and the Canadian company has a profit of 100$ (1000$-900$). If the tax rates are very different from one place to another, this can have a major impact on the taxes paid. Confusing? Imagine if you start doing this for services or pieces that are difficult to price for the Canadian government. It becomes very very difficult for the government to act. And in this case, the Canadian government would have a tough time going after the Canadian company as it will need proof that the transaction was legitamate.

This is just one of an almost infinite amount of schemes that can be developed. I’m not saying these should not be looked into, I really am not. But I somehow think that right now this should not be a priority but rather Barack Obama should be looking into further stimulus for the economy, not further taxation that could drive away some business…

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