To keep it really simple:
Lets say I own a large company in the US called XYZ Records America which records and sells music albums online.
You buy an album from me online for $10 (+state taxes which come out of your pocket, not mine). Lets assume that on average it costs me $0.50/album to record and produce the album, $0.50/album to maintain the servers and site, and $1/album in royalties to the artist.
For each album, I get $10 in revenue, and have $2 of expenses, for $8 of profit.
Corporate income tax is only paid on the profit my company makes, so I pay the tax rate on $8. Lets assume it's 25%, which means I'll have to pay $2 in tax. Now my net profit is only $6.
As a corporation, my primary goal is to increase profits. More profits = more money for me, more expansion for the company, more jobs or better pay for my employees, more charitable donations, etc. No matter what my philosophy is, it's almost always driven by more profits.
* $0.50/album goes to recording. Maybe I can negotiate this down, but that means paying my workers less and that wont make them happy.
* $0.50/album goes to server management. Maybe I can outsource my servers to Asia for a better rate but at a customer service loss.
* $1.00/album to the artist. Maybe I can skim them for more next album, but they could always sign with someone else.
* I could also sell the album for more, but then that could hurt sales, and the artist would want more.
* $2.00/album is taxed. It's already the biggest factor in my profits, and if I were to shave costs elsewhere, this would go up.
It's obvious in this example that the most effective way to increase profits is to pay less tax.
So what do I do? I send my accountants on a quest to find an answer, and they come back to me with the information that Ireland's corporate tax is only 10% instead of the 25% I pay here. So what do I do? Well I could move the company there, but there's a lot of assets in the US. I don't want to relocate the studios, servers, etc. I'll lose business if I do that.
Instead, lets just found XYZ Records Ireland. I'll structure my brand so that they're the "Parent Company" of XYZ Records America.
All of the licenses XYZ Records America owns, I'll "sell" to them for $0.01 each.
When I record a new album in the U.S. I can immediately sell the rights to XYZ Ireland for $0.01.
Now I still want to *sell* the albums in the US to the same customers. So when you go to my online store and buy a record from XYZ America, I'll sell it to you for $10 just the same. You won't see a difference.
When I do that though, XYZ America will account for:
* $0.50/album towards recording - this covers the operating expenses for producing the album.
* $0.50/album towards server management - this keeps the site up and running
* $1.00/album royalties to the artist
* and lastly $8.00 in licensing fees paid to XYZ Ireland.
My revenue was $10, my total expenses were $10, "damn, the company didn't make any money". No profits to report, and 25% tax on $0 is $0 to pay in tax.
I end up paying no tax in America.
I still have to report my income in Ireland though.
So per album sold in America, XYZ Ireland's books look like this:
* $8.00 revenue from licensing fees (Paid by XYZ America to XYZ Ireland).
* $0.05 in operating costs to keep XYZ Ireland operating (I have an office to pay rent in, and a few employees there)
XYZ Records Ireland reports $7.95 of profits per album. The tax on that is 10% of $7.95, so I'll pay $0.795 = $0.80.
Net profit is $7.15 per album.
By opening a parent company in Ireland, I can now earn $1.15 extra per album.
I pay $0 to the US government in taxes, and I pay less tax overall.
If I sell 1,000,000 albums every year, that's $2,000,000 that the US Government no longer receives from me, and it's $1,150,000 of extra profits for the company.
International tax lawyer here--
This topic is a bit of a sore subject with me, as it is FAR less prevalent than people like to believe. Many of the so called 'planning techniques' that have been listed have been shut down. More on that in a bit.
The potential for abuse comes in large part from arbitraging the two major types of tax systems--worldwide and territorial. Territorial means that the local country taxes the taxpayer on monies earned in that country--so a Mauritius company generally wouldn't tax you on income the Mauritius company earns in England. Worldwide systems (like the US), however, tax you on 100% of your worldwide income.
So if the Mauritius company has 100 income in the US, and 100 income in Mauritius, and a 15% corporate tax rate, it would be paying $15 on its Mauritius income, and 0 on it's US income for a total of 15/200 = 7.5% tax. (Please keep in mind, this is HUGELY simplified right now--I'll complicate it in a bit.)
Compare to the US. The US company might have 100 in Mauritius and 100 in the US, and it would pay 35% of 200 = $70 = 35%.
If there were local taxes applied (lots of rules around this, including treaties, local law, etc.), the numbers change. The US would likely apply 35% on the Mauritius income, so the Mauritius company would actually be paying 35% of 100 US income and 15% of its Mauritius income for a total of 50/200 or 25%.
Obviously, the US company can't be competitive with those kinds of rates, so the US government actually allows a deferral of tax even though it has a worldwide system. If the money isn't distributed back to the US (under the assumption that it is reinvested in Mauritius to build additional wealth), the US won't tax it. Don't worry, though--there are a lot of anti-abuse regulations here (the concept of controlled foreign corporations, subpart F income, passive foreign investment companies, immediate income for excessive cash/cash equivalent build ups so that companies don't hoard cash overseas to avoid tax, etc.).
Bottom line, you can shift income using a number of different methods, and you shift it to where the tax rates are lowest. That's just good business practice. People whine about corporations paying their 'fair share' as if that was a stick in the sand. If foreign corporations have a super low foreign tax rate (e.g. what about the 20% rate in the UK?) then how are US corporations with a WORLDWIDE 35% rate supposed to compete on similar products? If the US government starts forcing all companies to pay 35% on their worldwide income with no deferral, and no ability to shift things around, any foreign corporation would be able to beat them out of the market--you can't beat a 15% lower cost easily. If we tax our corporations out of business, we (a) have nothing to tax, and (b) no where to work to earn a living.
Smart US corporations use every trick in the book to minimize (NOT AVOID) their taxes. They have to in order to get their effective tax rate down around to the same worldwide level that foreign corporations routinely see. However, for every 'trick' you see, there is generally a countervailing anti-abuse regime to prevent people from abusing it wholesale. For instance:
USCo owns Cayman Co. US Co makes a widget for $50, sells it to Cayman Co. for $50, and Cayman Co. sells to client for $200. That would leave $150 in the Cayman Islands for a 0% rate. Transfer pricing regulations require a fair share of profit amongst related parties be given at each level, so this no longer works. (There are also rules on manufacturing that would also disallow this scenario.) Transfer pricing impacts the profit percentage, intercompany loans etc. Basically any transaction between related parties have to be set at a rate a reasonable 3rd party might accept.
Most treaties now contain a Limitation of Benefits clause that disallow use of the treaty in certain abusive scenarios.
The US only allows deferral of active income, so you can't just shift all of your profits overseas and leave them to avoid US tax. (Subpart F income, passive foreign investment company rules)
BEPS (base erosion and profit shifting) rules are being promulgated worldwide after the OECD recommended them. These rules target financing structure where the Cayman company might 'lend' $1B to the US, and the US pays 'interest' (e.g. sucks the profit out of the US). These are a recent change, and there are a TON of countries putting these new rules into effect (like 30+ of the biggest countries, and more following).
Local rules tax income locally before it goes to the parent corporation. (e.g. UK taxes UK income before the income goes up to the foreign parent)
Many jurisdictions have withholding on payments leaving the country.
There are also indirect taxes that can impact the profits of companies (taxes on gross income, taxes on gross assets, value-added tax, sales tax)
I won't say that there aren't abuses, but the abuses are becoming much harder to find, and are constantly under attack. When you see an article claiming 'abuse,' please keep in mind that you are (at best) getting about 30% of the facts, and most of the authors are being sensationalist to spur readership. They don't care about reputation or honesty, so much as they do about creating a furor--usually over nothing.
I'm happy to answer questions if you guys are bored.
Here's one from personal experience.
I was the financial analyst for Sir Stelios Haji-Ioannou's personal holding company, the EasyGroup.
EasyGroup owns a big chunk of EasyJet, EasyHotel, EasyGym, EasyPizza (no rly)... the list goes on. Basically, if it's easy and orange, EasyGroup owns it.
EasyGroup is a Cayman Islands registered company. In the Cayman Islands, there is no corporate tax.
EasyJet plc is a London based company.
Every year, EasyJet is required to pay EasyGroup a certain percentage of its revenue. This is paid to the EasyGroup as a "brand licensing fee."
In layman's terms, this means that EasyGroup owns the brand "Easy", and EasyJet is simply renting the brand FROM EasyGroup.
Accounting-wise, this means that EasyJet has an expense called "brand royalties expense." A company deducts its expenses before paying taxes, so this income comes out of EasyJet from pre-tax money and is never taxed.
This income is received by the EasyGroup, as an accounting line of "brand royalties income."
However, as I mentioned before, in the Cayman Islands, there is no corporate tax. So this income engenders a 0% income tax.
All well and good, now the money is sitting in a bank account owned by a Cayman Islands company.
The second part of the step is getting the money from the EasyGroup to Sir Stelios.
Stelios himself lives in Monaco. Monaco is a country that has a 0% personal income tax.
So, EasyGroup pays Stelios this money as a dividend. The money now transfers ownership from EasyGroup to Stelios.
Normally, this would be when someone would pay personal income tax on their income, but because Monaco has no personal income tax, again this transfer of money experiences no taxes.
Thus, through this method, Sir Stelios earned hundreds of millions of quid while I worked for him, and paid less in taxes than I did as his analyst earning 40k EUR per year. (I had to pay for my caisse publique, UEI, and French pension/social security).
Are we having fun yet?
Most loopholes occur during international transactions. When you're dealing with the laws of dozens of countries it's easy to find an obscure scenario where you pay less taxes than you otherwise would need to. This is extremely common in video game sales, where up to 50% of your revenue may come from digital goods. Digital sales are 'new' when it comes to tax laws and they don't handle them very well.
Many companies have a tax shelter based in the Netherlands. The company based in the Netherlands 'owns' the IP for a specific video game.
When you buy a video game in the US or say France, you pay money to a company in that country. That company pays royalties to the company in the Netherlands that owns the IP. So they get to write off that amount as a business expense and pay less France/US tax.
Then, you have the Netherlands based company which made all the profit from the smaller international offices. US law, for example, says they should pay incomes taxes to the country that earned the income, Netherlands law says you should pay taxes to the country it originated from.
As a result, you pay no one taxes. Since you aren't paying income tax on up to half of your revenue, you pay less tax overall as a business.
I'm Australian so I'll use an Australian example but I imagine it's prevalent everywhere. Foreign or even Aus owned companies (mining companies are bad for this) will have their overseas branches lend money for projects etc to their Australian operations at ridiculous interest rates far above market rates so it looks like the local arm isn't making any money and therefore isn't taxed as much.
The other one mining companies use are "marketing hubs". This means the Australian operations of BHP or Rio Tinto for example will sell their commodity to a Singaporean or Hong Kong trading house (owned by the same company) at a discount rate then they will sell the product to the end customer. Same deal as before in that the transaction by the local operation is less than market value for the goods so less tax is paid.
My favorite is the ridiculous license fee scheme.
Globocorp Inc is in the USA, where it does all its business and makes all its money. But Globocorp doesn't want to pay taxes. So Globocorp Inc founds Globocorp LLC in Ireland or a similar tax haven. Globocorp Inc sells all of its trademarks to Globocorp LLC for $1. Then Globocorp LLC licenses those trademarks back to Globocorp Inc for however much profit Globocorp Inc makes every year.
Now Globocorp Inc can write off 100% of its profit as a business expense. Booyah, no taxes!
Here's a great one
As a result of this loophole, a company can save thousands of dollars by
Building 2 seats.
Attaching them to the vehicle.
Shipping it to America.
Removing the seats.
Throwing the seats *in the garbage*
This whole process is thousands of dollars cheaper than
Building zero seats.
Shipping to America
Because of the tax loophole. Click and read
One thing that people don't like but *isn't* a loophole is refusing to repatriate profits.
If Coca-Cola has a subsidiary in India that bottles a can of coke and ships it to China for sale that money has nothing to do with America and America had no part in earning it, beyond the corporation being based here. So, generally, the corporation won't bring the money back to America because it would be taxed as a profit of the parent company. There's various things they can do with it overseas - expand into Korea, or borrow against it in America and pay dividends. Apple just hordes it, to the tune of several hundred billion dollars. But America really has no claim to it and it's never going to come back in a way it can be taxed.
And any attempt to collect foreign profits that have nothing to do with America will only result in companies moving overseas for real - including all their executive jobs.
I will give you 3 huge ones but there are many
1) Asian and international companies in Asia. Take for example the pharmaceutical industry and Pfizer. If Pfizer brings profits back to the USA or western Europe, they must pay corporation tax, say between 12.5% (Ireland) and 35% (USA). But as you say big corporations don't pay these taxes, what is the loophole? The answer is Singapore. If you structure your business correctly and follow all protocols and regulations, it is possible to pay ZERO % corporation tax in Singapore. Now very few companies actually qualify for 0% but they pay significantly less than in domestic jurisdictions, thus Singapore acts as a host for a swathe of international companies. This applies even to e.g. Japanese or Chinese pharmaceutical firms who sell products in their domestic markets. They structure the business such that all the money flows through Singapore and they are not liable for tax in Japan or China. They then use the Singapore entity to make low-tax or tax-free investments in their businesses. If a company with HQ in Singapore brought their profits back to Japan or China, they would be liable for corporation tax.
2) American firms in e.g. Ireland, Luxembourg (the Amazon scam), Singapore etc. If US firms (like Apple, Microsoft, Facebook) have an HQ in Ireland they funnel all money made outside the US through Ireland and *hold it in Ireland or offshore*. It is actually a policy of the Trump administration to "repatriate" the money made by American multi-nationals to America, where they would pay 35% corporation tax instead of the 12.5% they pay in Ireland. So this situation leads to American firms holding the majority of their wealth outside of America, paying 0% tax in the USA on overseas profits. Now it's not always quite that black and white such that companies hold all of their international revenue outside of the USA. In circumstances where e.g. Apple send profits back to the USA they don't get taxed twice. They get tax credits so that if they pay 12.5% in Ireland they pay 35% minus 12.5% in the USA on those same profits
3) Off-balance sheet trading. Major corporations (basically all financial institutions and multi-national firms) are legally allowed to use off-balance sheet trading. What is that? It's exactly what it sounds like. They can create entities (e.g. Enron Raptor Entities) that are not officially on the books of the company over a particular horizon or permanently. So Goldman Sachs or Bank of America can simply transfer profits off-balance sheet and reintegrate them whenever it suits - e.g. they have a bad quarter and lose money, they add funds from off-balance sheet entities to make their official position break-even. Remember taxes are paid on profit, no profit no corporation tax. The technical legality of all these entities is not clear but was supposed to be addressed by the US legislative response to Enron - in laymen terms the exec and non-exec directors are required to tell the person on their board responsible for compliance of their off-balance sheet positions, especially if those positions can have significant influence on share price, liquidity of the company, credit ratings, pensions schemes etc. The Trump administration is attempting to remove this legal safeguard (which to be fair fails most of the time anyway).
I will give you an example from the phone market.
When you buy a new iPhone or a new galaxy, you don't buy them from apple/Samsung, but you buy them from Apple llc/Samsung LLC, which are a different company which is based in Ireland. That means their income is written in a country with almost no tax.
That means they do not pay taxes from their sales of phones or other items.
This is true for abobe for example.
When you register and buy license from adobe, you don't it from the us company but from Ireland one, so they make no income on the us, so as well, they don't pay any tax.
From Ireland the money is transferred to other banks in countries that you don't pay purchase taxes on companies etc, so you turn your income tax free money to available funds to be used on other things.
There are many, the IRS tax code is thousands of pages long. My personal favorite: there is a rule that says if an employee must be on the premises 24/7 because they are critical to the business, then the business can deduct the cost of their housing and their food as a business expense and the person does not included as income. Think hotel manager or maintenance guy. Certain corporations have built very large mansions on property very close to the factories that they own and claimed that it was a necessity that the owner be on hand 24/7 even though they don't check to see if you are. They were able to deduct the cost of the Mansion and the staff and the food that fed the owner of that company because he was the controlling member of the board and stated that it was absolutely necessary for him to be there. My example is from a specific alcoholic beverage company that they taught us about in law school and though the exact status of the current loophole I am uncertain on
What we think is a 'company' is usually a collection of companies that are based all over the place.
company A sells things to its sister company B in such a way that company A makes a loss in America so pays no tax there. Company B is located in a country where they either have negotiated a 0% or small percentage. They do this multiple times so that the company at the top collects all the revenue and all the profit but doesn't actually pay any tax.
All the smaller companies pay the appropriate rates in there respective countries - it's just they didn't make any money on paper.
So someone looks at a multinational and says 'hey they only paid 2% tax! That's robbery!!' Well overall they might have but each small part of the business paid the right amount in the correct country.
If you're wondering how loopholes exist, it's not by accident. Corporate lobbyists directly influence, and yes, sometimes even write and provide, legislation for our beloved congressmen, who then receive handsome campaign contributions from said corporations.
Chattanooga TN: Property taxes were just raised 10% "for school funding." We've had decades of PILOT programs that give yuge tax breaks to "local" corporations in exchange for the future creation of jobs. These PILOT programs defund public schools. Alstom most recently paid 3 million for defaulting on their 20+ year bs PILOT program, only an estimated 50+ million dollar difference. So essentially Chattanooga just raised property taxes to give corporations tax breaks. Over the course of years most citizens are too busy to connect the dots. Murica.
*cough cough* [Fair Tax](https://fairtax.org/about/how-fairtax-works
) *cough cough* progressive consumption tax *cough cough* no bullshit loopholes
The current system works as intended and it sucks. The US corporate income tax rate of (essentially) 35% is technically one of the highest in the world. But the US has a lot more "wiggle room" for various loopholes. The expectation is that no corporation actually pays this much tax.
Every big company has entire departments of people dedicated to minimizing tax burden. The tax code is complicated, and it's so necessary to exploit loopholes, that there's no way around it.
I can tell you that any company worth its weight in shit has "subsidiaries" around the world it shifts profits to. It necessitates building a complicated web of transactions for everything and costs us billions in lost productivity. Plus, again, buildings full of people doing work created by our gummint overlords. Our current tax system is beyond saving.
Hey, had a look at some of the answers and though I might be able to shed some more light here too.
Right now, there are actually relatively few tax "loopholes" that's not to say there aren't any but there are far less than when it first came to the attention of the media. What most people these days are talking about when they say tax "loopholes" is actually tax minimisation strategies. It's fairly hard to ELI5 these as they are extremely complex and diverse (larger companies literally employ hundreds of people to arrange, execute, and maintain). Some of the basic strategies include registering a business in a low tax area so the registered location is where profits are taxed (yes this is being addressed somewhat but not fully) or certain debt structure arrangements that may offer tax offsets or deductions.
Apologies if this isn't 100% what you were after as this is the first time I have replied to one of these.
Edit: This vastly changes depending where you live, this information is what I have from studying in Australia.
Let's say you have a lot of apples and apple trees. You're neighborhood has an agreement where you limit the amount of fruit you produce but if you produce more than that, you have to give money to the neighborhood. It allows you to live outside the rules and the neighborhood gets more money to do things like hire people to protect your fruit, maybe water the trees while you're gone.
But you aren't keen on that. You have an automatic system to water your trees and you have dogs to guard your fruit. So you and your neighbor work out a deal: You can transplant some of your trees into his yard. In exchange for his land space, he will get a few apples, maybe some applesauce from you, and maybe a few other perks. He also gets to have more birds and bees visiting his yard which happens to be really good for his garden.
The trees are still yours but now the neighborhood doesn't tax you for it. But they get wise to this and start taxing people for giving apples away. So you send a cook over to your neighbor and make some more applesauce and apple pies. Your neighbor then brings those over to you. In exchange, you give him a few more apples.
The neighborhood, they want to tax the pies and sauce but they can't because those things are pies and sauces, not apples.
These tax loopholes work very similarly. You can shuffle your money into that economy. Since most countries use fractional reserve banking, this gives the money in that country a HUGE boost, lowering interest rates which increases borrowing which increases spending. In exchange, they either tax you next to nothing or keep their mouths shut about having your money. Other things that they might allow you to do is take advantage of property values. You might be able to buy some of their properties. That gives you a foothold in their country for a base of operations, their property just made them money. You might own it but it's really theirs since it's, you know, in their country.
Another way is that you can donate that money to a charity cause and use it as a tax write-off. One way might be money earned from selling equipment at or above salvage value. The equipment is gone, the money is a tax write-off. In both cases, it as listed as income for your company (a good thing) but you are not taxed for it. In other words, it makes you look good on the books and in the neighborhood.
Or you could purchase land. Say... maybe 100 acres. But you don't want to pay taxes on *all* of that land so you set part of it up as a part (or full) time charity. Or non-profit. Those charities or nonprofits will does something small but indispensable for you but you don't really get taxed on them the same as you might an office doing the exact same work without the charity.
I would add that businesses can deduct a lot of expenses that people can't such as interest expense on debt or amortization of intangibles. Not loopholes per se but things that lower taxes.
Was talking to some friends on discord last night and we started discussing how I read on Reddit not to donate when a store asks money but I forgot why. Buddy explained that they take all the money they get and donate it and get a tax write off. So we are basically letting them off the hook for taxes sometimes.
The largest is California's Proposition 13(1978). In 1978, property values were skyrocketing across the state and property tax assessors were not able to mitigate the problem by lowering taxes due to a recent scandal that hamstringed the office from setting tax rates. So the people looked to the state legislature to take action. But, due to indecision they did not pass legislation so a ballot initiative called prop 13 that capped tax increases to only increase by a few percent a year with the property unless the property switches hands (inheritance). Prop 13 was the brainchild of the new popular republican movement as a solution, and In a way, prop 13 worked: by capping property tax increases, people were able to manage the rising property values. The problem was, this issue was almost exclusively a residential problem (people being taxed out of their homes). However, prop 13's wording did not specify between residential and commercial property. As such over the decades commercial properties have gained immense tax breaks over the years (as companies rarely switch hands of properties, or can sell 49% of the property so as not not incur a new tax assessment, or simply not report the sale) This is a loophole that costs California billions of dollars a year and is partially responsible for turning the state's surplus into a debt literally overnight. It will never get fixed because powerful lobbyists and that most Californians only know it as ' it makes my taxes lower' and fail to look at the nuance of its effects.
Just to give an example: Disney pays less taxes per square foot on Disneyland than your average Californian pays for their home.
Not exactly a loophole, but some things they do:
- Fix numbers so you will seem unprofitable, achieved by wrong prices with other companies (who also do tax evading).
- Buy nonexistent infrastructure (while actually spending zero) and receive a tax refund with real money.
- Have a personal bank and a personal supplier company, so you would do business by buying from yourself, then selling to yourself all through your own bank. Profit from tax returns and using law inefficiency.
- Register a dump company on random student or dead guy with smallest possible capital funds, then do all kinds of shady or illegal transactions through it, then bankrupt it.
- Nest and branch shell companies from previous point to infinity in multiple offshore countries.
- Lobby for law exceptions for your business (e.g. solar incentives and tax returns (legal) for all solar companies in the country (fair), but for some "lucky accident" you are actually a monopolist in solar (achieved shadily or illegally previously)).
- Just plain and simple pay in unmarked cash for unfair laws. Yes, it still happens everywhere.
- Fair play in your industry, production of whatever, but block opponents in related industry (using different owners and shell companies), e.g. transportation, power supply, storage etc.
- By having "close relationship" with government structures unleash tax auditors, fire department auditors, sanitary auditors on your competitors (seemingly legal) which will cripple their operations.
And so on. Specific tax loopholes vary wildly from country to country and from year to year. In my country accountants that know how to use existing loopholes and stay up to date are in very high demand and rewarded accordingly but they are effectively incompetent in any other country, that's how ultra specialized it is.
Offshoring your money in international banks to avoid paying tax on it, huge corporate subsidies (think a giant welfare check for corporations at tax time) Also, paying their full time workers an unliveable wage meaning said workers have to go out and apply for government benefits, costing the taxpayer money. The IRS also provides tax loopholes in the tax code.
Overall, while the US has the highest corporate tax rate in the world at 40%, after loopholes and subsidies, corporations here actually pay the lowest effective (what they actually pay) rate in the world, at under 15%.
So every republican that tells you American businesses are smothered under the boot of an unfairly high tax burden, are either knowingly bullshitting you, or are unaware of their status as our biggest welfare queens or just how much the corporations actually run this place.
I'd like to add a "little guy" perspecitive. My wife owns her own Veterinary practice. It's small, 6-10 employees at any given time. Total revenues well under the "big corporate" standards.
When she and her account see the there are profits near the end of the year they start to actively seek ways to not have to pay the government. Sure we all like the roads, and the snow plowing, and the protections the fire and police departments provide, so the local taxes are pretty much unavoidable as they are more from property taxes. Simply put, her building and grounds are worth what the county assessor says and she has to write a check every year (or bi-yearly, or quarterly, I can't recall exactly) for those taxes. That covers the local.
Then we start talking about corporate taxes not he federal level, those are easier to avoid. When there is a profit in order to not pay those corporate taxes you have to get rid of the profit. A few ways that we have been advised to do this is to:
-pay bonuses to the staff...DONE
-pay bonuses to sell...done.
-purchase more equipment or other business expense. New x-ray machine likely coming eventually.
-make other building improvements.
I hate that people think of this as avoiding taxes as it really spreads he money around close to home so that the taxes get paid in sales taxes, staff income taxes, etc.
As an example, the buys a $50,000 x-ray machine. The sales person gets a commission and they live somewhere not too far off. That company that made is has employees that get income and pay taxes locally wherever they are.
Yet another example; staff bonuses. They get $200 extra dollars to spend locally and that cash stays near by.
She buys a company car, locally, the money stays here.
All of those examples were avoidance of paying corporate taxes but still taxes were compounded and distributed more locally. Sure Washington DC doesn't get it's pound of flesh but the money stays here.
This will likely get buried but thanks for reading anyway. Just don't tell my wife I was talking about her on the internet. She gets pissed at that.
A lot of people are talking about getting around taxes by using more than one business with one of the businesses owning or licensing a "brand" to the others.
But that is far from the only way to use a "loophole" (really a terrible word for it) to get out of paying taxes. An (oversimplified) example from realestate:
Let's say you as a company or person have a large chunk of money and you'd like *more* money. So you buy up a mall, or a chunk of land and have a mall built. In the US (and likely elsewhere) there is something called "depreciation" for assets (things you own). In the case of a mall or other commercial property this is meant to offset the ongoing cost of (structural) repairs and eventual need to do heavy renovations and/or rebuild. Usually this is done by having a percentage of the "value" given as a tax credit for a number of years. For the sake of this example lets say the term is 40 years, so for 40 years you get 1/40th of the original "value" as a tax writeoff.
So far everything seems reasonable, and is not too different than how a landlord with a single rental house would be. The abuse comes from several aspects. One way is that the initial cost which becomes the "value" can be inflated, such as inflating the initial construction costs that just so happen to go to a company you have indirect control over so that money just ends up back in your pockets (or a friend's, and they do the same for you making you even). Another way is that at some point a bunch of large property owners convinced the government to change the rules, and now they can take several years worth of depreciation write off in a single year, or hold off on taking any at all. So when everything is good and the stores in the mall are doing well and everyone is paying you, you can use 3-4 years worth of writeoffs and end up with little to no taxable income. When things are bad, the mall is half empty, bills (electricity etc) are high and there is little to no net profit you don't claim any depreciation, you save that for another year.
Once you have used up all or most of the depreciation you sell the property off to the the next company, who is going to do the *exact same thing*, and you use the money from the sale to fund the purchase/construction of another property to start the cycle over yourself.
Another interesting one on a personal level is art. Step 1 is buy some art for 1 million (as an example). Step 2 hold on to it for a while, have it up in your house if you'd like. Step 3 have that art appraised; since the appraiser is hired by you and wants to make you happy they aim high, now your art is "worth" 2 million, as appraised by a professional. Step 4 find a museum and offer to "donate" that art. Step 5 "donate" the art at a price of 1 million, while claiming a 1 million charitable donation for the "value" the museum did not pay you for. Bonus step, you and the museum make a big deal out of the donation, attracting good press for both parties.
The reason I bring up the second example is that it is a good example of something "anyone can do" on paper, but is only available to people who have serious cash they can afford to sit on or even lose forming an effective soft cutoff. You wouldn't be able to do that with a $10 painting. This is similar to "anti vagrancy laws affect the rich and poor alike" as a "it is true on paper, but doesn't work out that way in real life".
Before the thread gets too crowded, it is necessary to distinguish political rhetoric from actual tax code.
What many (mostly left wing) politicians refer to as "loopholes" are often parts of the tax code that fall under things like deductions, or are activities that fall outside of the USA's authority to tax, or semi-outdated codes that companies use to save a buck.
A true, honest loophole would be the company able to escape a policy because a part of the policy is ambiguous or the company found a way to avoid the entire thing within the bounds of the policy itself
One is a shell company. If your business earns income you need to pay taxes on that income. What large company's do is they buy some empty office building in another country and don't staff it or anything just leave it empty. What they do is funnel their income to this empty business so when tax time comes around, on the books they earned zero income and don't pay taxes because all of it is sitting in another country. After the tax year they can funnel that money back. There was another one but I vaguely remember it, I'm not sure if it was taxes or something else. Basically a company like a warehouse would load all their trucks and drive it around the block then back to the warehouse. They do this everyday. This lets them do something like classify their business as one thing instead of another, something shady but I forget what it was
Carried interest for the banking industry and depletion allowances for the fossil fuel industry are two HUGE loopholes.
I'm probably going to explain this poorly. Carried interest is a special payout made to the manager of an investment fund. Suppose 10 investors deposit $100,000 each into a mutual fund expecting a 5% return ($5000 to each investor, or $50,000 total). The fund manager does really well and earns an 11% return ($110,000 total). Since the manager exceeded expectations by $60000, the manager gets to keep 20% of the extra $60000. So the manager earns $12000 in carried interest. This carried interest is taxed at the lower rate for capital gains, instead of the higher regular income tax rate. Plus the carried interest is really hard to estimate, since it is often payed out in shares, whose value might go up or down over the course of a year. So the payouts are evaluated and taxed infrequently, allowing investment managers to stockpile wealth with little or no taxation.
Depletion allowances are when fossil fuel companies get huge tax write-offs for the oil they remove from the ground. The idea is that the oil company has "lost" the value of the oil that had been stored in the ground, even though the oil company also made money from selling that same "lost" oil. It would be as if a farmer sold a bushel of apples for a profit, but then the farmer also got to write-off the loss of that same bushel of apples. It's literally eating your cake and having it too.
There's a great video on this by Super Bunny Hop. It's how huge videogame companies use the tax laws on two countries that create a he-said-she-said scenario on where to pay taxes. For example, a Company with its HQ in the US makes an office in Ireland. US Tax Law states that the taxes need to be paid in Ireland, while Ireland says the taxes need to be paid in the US. In the end the taxes aren't paid, and the investors get more money in their coffers. This is an oversimplification, but that's basically how ot works.
The simplest answer I could come up with is this...it's not a loophole. It's companies that obey the tax law as written.
Loophole is a word that people who don't like the tax code use, to make people or corporations that comply with the rule, bad for doing doing so.
In their eyes, a person who takes the mortgage deduction is using a loophole, and that's just not the case.
Call it whatever the hell you want, but companies and individuals try to pay the least amount legally possible. Loopholes, bending the rules, finding exceptions, whatever you want to call it is effectively all the same thing. The tax code is ridiculously huge and overcomplicated because stupid shits want more laws all the time and never stopped to think that maybe companies would pay more taxes if the rules were SIMPLIER since huge megacorporations have the resources to hire experts and find every reduction possible.
Corporations can't pay taxes. Only people can pay taxes. A corporate tax is a way to tax people while pretending you're not taxing people. Shareholders pay directly, others pay indirectly in the form of reduced employment opportunity. Economists of all political stripes agree that corporate taxes are the least efficient way to tax. If you want to tax rich people, tax rich people.
First off, it's not very clear what exactly a fair share really is for anyone.
However, there's one very interesting distinction between individual and corporate taxes: as an individual, you are taxed on income. Corporations are taxed based on profit.
Let's say you work for G-corp and make 100,000 a year. Congratulations. 20-something percent of your income is withheld as tax, and from the rest you pay rent, food, entertainment, education, health and childcare. Whatever is left, you get to save or invest.
G-corp on the other hand turns around 100,000,000,000 a year, then makes up a bunch of numbers about what generating that revenue really cost - rent, subsidies, morale budget, licensing fees, goodwill, subtracts that from it's gains and gets taxed on the difference. The rest it's free to reinvest or pay out to shareholders.
A lot of the schemes outlined in other posts are specific ways to inflate cost to reduce the tax load. Essentially, with some creative accounting, corporations can pick whichever amount of tax they want to pay and get in under it.
Back to the original question - what is a fair share? There are a number of interesting alternatives to the current way of taxing corporations.
* Acknowledge that corporations can make shit up and set the corporate tax rate to zero, but increase individual income tax. Based on the theory that income eventually gets paid out, but susceptible to international tax-hacking with benefactors residing in 0% income countries
* Abolish taxes and source national budgets through forced inflation. This sounds wacky, but is effectively what the US has done in the last ten years to get out of the housing crisis anyway - just print money, which automatically devalues the money held by individuals. The danger here lies in losing a lever of control for government spending, making this a pretty dicey proposition.
* Transaction taxes: get rid of all individual gains taxation and instead tax any transaction (at a much lower rate). Anytime you pay for coffee, 1% gets withheld as tax, anytime G-corp pays G-corp general brand licensing 110,000,000, 1% gets withheld as tax. As fair as they come, cheaper to enforce in modern economies but prone to over-tax transaction heavy businesses. International tax hacks don't function anymore because the 1% tax would be withheld when the money leaves the country.
I personally favor the latter, as it has simplicity, predictability and fairness going for it.