Really? That was my first reaction to the news that federal agents including the IRS had raided the offices of Caterpillar, one of America’s greatest traditional companies. My next reaction was a bit more harsh, trending toward disgust. Is this a sign of where corporate tax battles are really headed?
How can the US expect companies like Caterpillar to build some of the largest and most complex machinery in the world and repatriate all of that income to the United States for taxation purposes? This is the battle all companies who conduct international business will ultimately face with the IRS. The agency basically deemed Caterpillar had under-reported income by using foreign corporate entities to “shelter” income which “should” have come in through its US entities resulting in an additional $2 Billion in corporate tax revenue. This isn’t a tax scheme – this is business.
Lets take a quick look at how this business is structured. Does Caterpillar construct these massive machines here in the United States and then ship them around the world? Of course not! The realities of transportation alone rule this out, let alone the realities of the business itself. So how do you conduct business in the far east, middle east and other rapidly developing areas purchasing this type of heavy equipment? You establish business entities where the business will be conducted. You import (or locally manufacture) the parts necessary to construct the vehicles in the countries where they will be needed, using local labor at the local labor rate. In this model income is realized in a foreign sovereignty by a foreign company. It would historically be taxed in that jurisdiction, and many companies are moving operations to sovereignties offering more favorable corporate tax rates. It is simply good business to structure the entities and organizational structure of your international operations with taxation in mind.
Where are the corporate tax battles headed, and what impact will this have upon international business and tax planning in 2017 and beyond? Corporate taxation is simply one factor. The business realities of demand, raw materials, manufacturing, assembly, labor and local laws and regulatory complications must be considered as well as the related entities who may exist to supply or support one or more aspects of this complex process. Joint ventures for supply chain management as well as sales and distribution are much more commonplace.
We all understand the US is the only sovereign nation in the world who taxes its people on worldwide income. The battle with Caterpillar, as well as looming legal battles with Apple, Microsoft and other US corporations have yet to play out. The pending restructuring of corporate taxes and tax laws on every aspect of international business from transfer pricing to the realization of profit will have profound implications for US trade and international businesses.
Allen Barron is uniquely positioned to help you to properly structure international business, accounting systems and tax strategies to prepare for the coming US corporate tax battles and their impact upon international business. If you are a San Diego business with international or affiliated corporate entities we invite you to contact us for a free consultation at 866-631-3470. Learn what we can do to help structure your business and strategically organize to comply with tax laws and jurisdictions here and around the world while retaining higher profitability and lower associated overhead.