Mohacsy's Safe Portfolio Member Forum

[Elroy Jetson]

Multinational businesses do not have large amounts of capital stranded in foreign countries they can't use. This is an accounting fiction used to minimize income taxes. My CPA/MBA brother-in-law handled this shell company operation for Dole Foods.

https://www.americanprogress.org/issues/economy/reports/2014/01/09/81681/offshore-corporate-profits-the-only-thing-trapped-is-tax-revenue/

Forty years ago even individuals could use this tax-avoidance scheme until Congress made it illegal. How did it work?

You'd transfer all of your money to a bank account in the Bahamas then 24 hours later lend it all back to yourself. You'd deduct the "interest costs" you paid to your yourself in the Bahamas from your US taxable income. But you didn't pay any income tax on the "interest income" you "earned" from yourself in your Bahamas bank account. As the interest income you paid yourself in the Bahamas grew, you could increase your loan to yourself by this same amount.

Due to "lobbying", aka bribery, businesses can still use this tax avoidance scheme but only when there is "a business purpose" - and Congress decided profit earned outside of the US qualifies. This is why "transfer pricing" from one subsidiary to another is so closely audited. Congress should make this tax dodge illegal for corporations as well.

If we were to allow the US company to continue to deduct this fictional interest income they pay themselves from their taxes and also pay this fictional accounting interest income at a reduced 5% tax rate, this has merely reduced corporate income taxes to 5%, but only for those companies large enough to play this game.

If you want to reduce the Corporate Income Tax to 5%, you should lower it to 5% for everyone, not just multinational firms set up to use this tax dodge.