Friday, June 29, 2007

Offshoring... blame the tax code?

Now we get to the fun part.

The tax code is written in a way that allows companies not
to pay the full 35% U.S. corporate tax rate on foreign
income when that money remains invested overseas.

Backing up a step, here's how it works before the loophole:
A company earns $100 million abroad in Lowtaxistan where the
corporate tax rate is 20%. The foreign subsidiary pays that
money to the U.S. parent. The parent then pays $35 million
to the U.S. government and takes a credit for the 20% (or
$20 million) payment to the Lowtaxistan government. So the
net to the U.S. Internal Revenue Service is $15 million.

But here's how it works with the loophole: The U.S.
subsidiary simply keeps the money offshore and certifies to
its accountants that the money is invested overseas. It
never remits the money to the parent and so never pays the
$15 million extra to Uncle Sam.

Do the math yourself. Which is better?

a) A factory in Lowell, Mass., that will generate $100
million in pre-tax profit that nets $65 million, or

b) A factory in Lowtaxistan that will generate $100
million in pretax profit that nets $80 million.

Hillary is opposed to offshoring:

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