In my blog of December 9, 2010, I pointed out how our capitalist society suffers from dramatic up and down cycles that rob the middle class of their wealth. I suggested 10 points that would very much moderate these cycles and bring about a far better capitalist society.
This is the 9th of that series – part II.
In part I, I discussed what tax havens are, the financial cost of tax havens, what corporations are, and why governments like corporations.
How the Government Gets it’s Tax Revenue
Each time a corporation hires someone, they create a “job”. Every person with a job pays tax on their salary. The more jobs created, the more tax revenue created. The more jobs are created, the more buildings are built which all pay property taxes. The more machinery is purchased, the more additional jobs are created to manufacture that machinery, and so on.
So to entice corporations to to do business in a particular area, is a very smart thing for a government to do.
How Tax Havens Work
Tax havens, for the most part exist in sparsely populated islands in the Caribbean, or off the coast of Europe.
Generally they are in jurisdictions that have little or no industry, and there is little reason for corporations to do business there. So these locations have discovered a way to generate revenue for their governments. Many become tax havens.
How a Corporation Can Locate in a Tax Haven
Corporations are taxed where they are located and where they are located is determined by a very complicated set of rules and regulations that vary from country to country.
The common underlying theme is that corporations are taxed where “mind and management” resides. For the greatest part, this is where management meetings are held, where management decisions are made, and where records are kept.
Corporations Go To Extreme Lengths to Prove that their Head Office is Somewhere
Corporations go to great and ridiculous lengths to pretend that they exist in tax havens. Walk down the main street of Grand Cayman, or Monaco, or dozens of other tax havens. They have essentially no industry, no business, and little other than tourist shops, except every other doorway is a lawyer’s office or banking office, and lining the sides of each of these doorways are hundreds of small plaques and signs with the names of hundreds and hundreds of corporations.
The number of corporations listed on these plaques and doorway signs would generally comprise a “Who’s Who” of businesses operating around the globe.
If every corporation with a sign in one of these places, hired only one person, there would be more employees with jobs in that tax haven, than the entire population of that island, multiplied many times over.
Every sign indicates a corporation that is pretending to have their head office in that jurisdiction.
Some companies, have an office in one tax haven, that owns a corporation with a sign on the doorway of a lawyer in another tax haven, and so on. The myriad and complexity of these arrangements make the legal profession quite wealthy.
How do Corporations Pretend to Have their Office in that Particular Tax Haven
They have a fax machine from which they send fax’s under the tax haven’s address that pretend to instruct their employees, or they regularly have their “agent” fax or email documents describing meetings that may have occurred on the beach there, but more likely occurred by teleconference hosted there, but with the participants staying in their offices in wherever they live and pretending to have their meeting in the tax haven.
Correspondence generally is sent from the lawyer’s or banker’s office with the name of the corporation at the top of the letter. Invoices for services provided by the corporation anywhere in the world, are invoiced from the lawyer’s office or the banker’s office in the tax haven, from the address that shows their “head office” in the tax haven.
Meetings are sometimes held in the tax haven, which allows management to enjoy a vacation in a sun spot.
All of this nonsense supposedly proves that “mind and management” occurs in the tax haven.
Why do Corporations do This
The Income Tax rate on profits earned in a tax have is generally between 0% and 5%, and audits of corporations by tax authorities are rare, if ever.
There is always a ‘jurisdiction’ tax under one name or another under which the tax haven government collects a few thousand dollars a year. Lawyers and bankers flock to these tax jurisdiction to set up offices, thereby providing employment to the locals and revenues to the government.
It’s a good deal for everyone and provides prosperity where none would otherwise exist.
The only losers are the governments of the countries where the real profits are earned, and the citizens of those countries. That is the problem.
The Effect on the Countries Where these Corporations Actually do Business
If profits are siphoned off to tax havens, there is less profit to be reported in the countries where the revenue is actually earned. So the actual amount of income tax paid in the real country is reduced accordingly.
In the case of the USA, according to some estimates, there is far more income reported by US corporations elsewhere than reported in the USA. Most of this income is “earned’ in the tax havens, on which minimal, if any, tax has been paid.
In addition, all of the money spent to create this fiction of jurisdiction, and all of the money spent yearly to maintain this fiction, is spent outside the borders of the USA, and is spent only to avoid income taxes in the USA. What is worse, is that none of these profits reported in tax havens can ever come here to boost our economy.
Yet, we have this rancorous ongoing fight in Washington about raising income tax rates, which is a prime example of political doublespeak. The world of politics is never what it seems.
Next – the enormous amounts of money we are forcing away from our shores, and what we should do about this plague of financial cancer hurting us so badly.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
