- The second basic tax strategy is
to shift income from one pocket to another.
Such as from a high tax state or country,
to a low tax state or country.
As an example, let's consider Microsoft.
Is this a US company?
Well, the company is based in the United States,
but where is its income generated.
Here you can see Microsoft's income
for 2012, 2013 and 2014.
You can see rather quickly that Microsoft is generating most
of its income outside of the United States.
Okay, now why would the company structure
its operations like that?
Well, in its publicly available financial statements,
Microsoft reports that it produces and distributes products
and services through regional operating centers located
in Ireland, Singapore and Puerto Rico.
Now, why these three locations?
Simple, tax rates are lower than those in the United States.
Here's another exhibit with
average tax rate information for four companies.
Exxon Mobile, Microsoft, Home Depot and Walmart.
You can see that Walmart has an
average tax rate of about 33%.
Home Depot has an average tax rate of about 36%.
Microsoft comes in with an average tax rate of 21%,
and Exxon Mobile has an average tax rate of 42%.
Why this big variance in average tax rates?
Well, each of these organizations
employs different operating strategies
that effect their worldwide average tax rate.
Exxon Mobile has to pay taxes based on where they find
and process the oil,
and the tax rates in those locations are high.
Home Depot, primarily based in the United States,
pays the US corporate tax rate,
which at the time was 35%.
Note, Home Depot's total income tax rate is a little higher
because of state income taxes in the United States.
Walmart, which primarily operates in the United States,
but has diversified into other countries,
has a tax rate that is a little lower than Home Depot's.
Okay, but how about Microsoft?
Why is Microsoft's tax rate so low at 21%?
Remember, the US corporate tax rate at the time was 35%.
So the answer, Ireland, Singapore and Puerto Rico.
Microsoft specifically chose those locations
for its regional operating centers because
of the lower tax rates in those jurisdictions.
Now, this strategy of moving operations
to another country in order
to avoid high taxes, is controversial.
Some commentators say that this is unpatriotic.
But remember, that the straight forward business purpose
of employing this basic tax strategy,
shifting income from a high tax country, or state,
to a lower tax state or country,
is to reduce taxes and increase profits
for the shareholders of the company.
Is this right? Is this ethical?
Well, that's not for me to decide.
But, it is clear why company managers do it.
By the way, notice that I have carefully stated
that the US corporate tax rate was 35%, at that time.
Starting in 2018, US corporate income tax rates
have been lowered to 21%.
Why? Well, an important reason is that,
as seen in these numbers,
relatively high US corporate tax rates
have prompted companies, such as Microsoft,
to shift operations overseas.
We'll see whether this lower, 21% rate,
will induce companies to return operations,
and jobs, back to the United States.
And how will other countries respond?
Will they also lower their tax rates?
We'll see.