US proposed change to foreign profits, help me understand the situation more

[JimKiler]

reading this story today

Obama's bid to tax foreign profits could cost Apple $10 billion

First they talk about how the US is the onyl company to double tax foreign profits. But if a company like Apple has foreign profits it is through a local subsidiary and not technically a US company, albeit it is controlled by a US company.

So obviously to tax that money coming back to the US is good for the US governemnt and (hopefully US economy).

My questions are

1. isn't it better for the companies to leave the money overseas and spend it in the region of the sales? This boosts local economies and does not make us look like greedy Americans.

2. Am i right in thinking this money is spent overseas and not just sitting in bank accounts?

Please no political bashing, stay on target.

 

[Genx87]

Heh typical. When a policy fails double down on stupidity.

Why not get with the rest of the world and not tax foreign profits? Imagine if those companies brought back most or all of that estimated 2.1 trillion in wealth that is stuck overseas because no idiot would willingly be taxed twice?

 

[K1052]

This is just the opening gambit on deciding what the rate on repatriated profits should be and where the money should go, not if there is going to be one.

If we are using Apple as a barometer, Tim Cook has advocated a scheme that taxes foreign profit brought back into the US at a lower rate than 35% yet still be substantial enough to be workable. A tax rate in the mid to high teens would seem to meet such a standard.

 

[zephyrprime]

2. Am i right in thinking this money is spent overseas and not just sitting in bank accounts?

It is sitting in overseas banks accounts. Any money spent overseas would not be subject to this or any taxing law ever since money spent would be an expense.

The best thing to do would be to tax foreign company's profits made in the country where they are made, not where they are domiciled. Foreign profits should be untaxed since those profits should be taxed by the foreign government.

 

[dullard]

2. Am i right in thinking this money is spent overseas and not just sitting in bank accounts?

In many cases (possibly most cases) the money is back in the US, but under a thinly veiled "I'm still in another country" label.

One common solution: set up a foreign company, then use that foreign company to simply buy stocks / securities in the US. Apple is a great example. http://wallstcheatsheet.com/stocks/how-does-apple-invest-its-massive-cash-hoard.html/?a=viewall

Apple has billions ($145B at the time of that article) of foreign profits. No, it does not intend to spend $145B overseas. And no, it does not have massive amounts of cash in foreign banks (According to that article less than 5% is in cash). Instead it owns US stocks and US securities, held in the US, but held by a foreign subsidiary.

So basically, the money is back in the US, but it isn't in the US since that would cause taxation.

Another common solution, hinted at by that article is to loan yourself money. Issue a bond in the US and have your foreign subsidary loan that money to the US company.

Suppose you are Apple and have $100 billion "overseas". Create $100 billion in debt in the US, have your foreign subsidiary be the entity that loans the money. Now you have $100 billion in cash in the US. Use it to buy your own US stock, give to your US CEO, or pay dividends to US shareholdes. All tax free, because of course, that money in the US isn't in the US.

Basically it is just hocus pocus to do whatever it takes to pretend that you didn't bring the money back and then you essentially pay no taxes anywhere in the world (because you can always find a country willing to give you a tax free period to set up an essentially fake company there). Then wait it out until the US gives a tax holiday and unwind the hocus pocus for nothing, or maybe a token 5% tax. 35% tax -> 5% tax just by loaning yourself money.

 

[werepossum]

It is sitting in overseas banks accounts. Any money spent overseas would not be subject to this or any taxing law ever since money spent would be an expense.

The best thing to do would be to tax foreign company's profits made in the country where they are made, not where they are domiciled. Foreign profits should be untaxed since those profits should be taxed by the foreign government.

Easily done with a sales tax, hard to do with an income tax as companies with foreign subsidiaries can set the price at which the foreign subsidiary sells to the American company. I suspect this is a fleeting problem anyway since unless a company buys tax breaks like GE, being headquartered in America is becoming a serious disadvantage.