How International Enterprises Can Maximize Tax Deductions and Credits
Establishing an international enterprise provides a lot of benefits to companies regarding market expansion and internalization. But aside from market expansion, international enterprises can also enjoy a lot of tax benefits in the form of reduced tax payment and asset shielding.
The corporate income tax rate in the US is one of the highest in the world—pegged at 35%; but, many American international enterprises only pay 2.3%. While this is surprising, it is indicated in the US tax code in the form of tax-offsetting incentives.
Tax Havens
Tax haven, as defined by the Organization for Economic Cooperation and Development (OECD), are countries that impose low to no taxes and lacks economic transparency. Many countries outside the United States offer lower scale tax brackets to enterprises and these are countries usually clustered in Europe and the Caribbean. Such places include Cayman Islands, Switzerland, and the Bahamas. These countries have created policies to reduce the net levy liability of corporations. If you want to benefit from reduced taxes, you can use lawful foreign incorporations to protect your assets. This is the reason why 80% of American corporations use tax havens.
Offshore Business Tax Deferrals
The tax system of the US is worldwide. This means that all US citizens and companies need to pay federal income taxes wherever they are in the world. However, it also features the deferral system that allows taxpayers to delay paying US taxes on all overseas profits made, as long as the profits are made offshore. The profits are only taxed once the income is repatriated back to the United States thus giving ample time for international enterprises to prepare their tax documents.
Many corporations in the United States take advantage of the tax deferral by creating international subsidiaries. Tax incentives such as this encourage international enterprises to create investments offshore, making it profitable for the United States’ federal government.
Profit Shifting
International enterprises can avoid paying taxes by shifting its income to its foreign subsidiary through profit shifting. Profit shifting is an accounting practice of transferring assets to subsidiaries that are located in tax haven countries. As a result, all income earned from the assets is picked up by the foreign subsidiary, so it is not subjected under the US taxation law.
Earning Stripping
This is a practice wherein the US parent corporation goes through corporate inversion so that the subsidiary located in a tax haven country becomes the parent company while the US corporation becomes the subsidiary. Also called paper inversion, this allows the corporation to have its global income to be booked by the new parent company thus the tax becomes deductible.
Understanding how international companies can maximize tax deductions and credits require a lot of research. Aside from tax planning, seek the right people to help you understand about tax breaks for offshore business. At MKS&H, we provide remarkable client service as we have a sophisticated understanding of strategic investments and make it work to the benefit of our clients.
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