Last Updated on
How much do you think of the world’s wealth is hidden offshore? Take a guess! Millions of dollars? Billions? How about hundreds of billions of dollars?
Economists estimated that the wealth hidden in tax havens is equal to about 10 percent of the global GDP (80 trillion dollars), that is more than 8 trillion dollars.
But why on earth people would hide their money in the first place, don’t they want to brag about it? Why hide it when you can spend it to have an incredibly lavish life?
Let me just make it clear, it’s not the criminals who are hiding their money, but the world’s largest corporation, Apple, Microsoft, Google, you name it, and the people who are running these corporations!
This is legal
It’s a common practice and it’s 100 percent legal! The question remains, how do they do it? Isn’t tax avoidance illegal? Well, let me explain.
Let’s say you start up a company (in the USA) and everything is just perfect. Just in your first year, you have made an incredible profit of a hundred million dollars! Congratulations! You are a genius! Before you celebrate your success! IRS is going to knock on your door and take 21 million dollars out of it because the corporate tax in the United States is 21 percent!
That’s a lot of money! Why would you pay so much to the government when you made that money with your blood and sweat. To be honest, that’s still low because before Trump (during Obama) the corporate tax rate was 35 percent, which means you would have paid 35 million dollars in taxes and would be left with only 65 million dollars.
But that’s not the only bad news! Even if you decide to go abroad and sell your product elsewhere (Europe), where the tax rate is lower than in the United States, Uncle Sam will still come after you for its share of your profit on the top of the taxes you will be paying in that country.
Whether that’s fair or unfair, it depends on whom you are asking. You can write down what do you think! However, things are not as bad as they seem.
There is a way for you to avoid those taxes legally. Instead of declaring 100 million dollars in profit, be smart about it! How about you lower your profit to just 30 million dollars and now suddenly you only have to pay only 6.3 Million dollars (21% out of 30M) instead of 21 million dollars.
It’s not as difficult as it seems. Get on a plane and travel to the little island of Bermuda and set up a new company there, it’s easy, fast and would cost almost nothing, because you wouldn’t have stuff, building or anything else, except an address to a small office in the middle of nowhere!
New company in Bermuda
Then simply give all of your patents, trademarks and intellectual property of any kind from your real company that is in the united states to your new company in Bermuda.
So when uncle Sam comes to collect 21 million dollars out of your hundred million dollars! You say sorry! We have licensed this technology from this company in Bermuda, so we have to pay 70 million dollars to them.
So we are just left with 30 million dollars, so now you only have to pay 6.3 million dollars.
Your 70 million dollars in Bermuda are not taxed because the corporate tax rate in Bermuda is 0 percent. Congratulations, you have saved 14.7 million dollars.
The European way
But how about the profit you earned in Europe, it will be taxed right? You set up a new company in Ireland that’s going to make another hundred million dollars. Instead of paying 12.5 percent corporate tax in Ireland and the remaining 7.5 percent to the United States. You transfer that hundred million dollars to a new company you set up in the Netherlands at 0 percent taxes through a little tax loop.
Your Dutch (Netherlands) company immediately sends it back to your first Irish company that’s simply a subsidiary of your Bermuda company, So the money ends up back at Bermuda where the tax rate is 0 percent.
Congratulations you have saved millions of dollars! That’s how Apple, Google, and many other giant corporations avoid taxes and hide their money! It might not make a huge difference when you are earning millions of dollars, but when you are earning billions of dollars, saving even a billion dollars would make a huge difference.
So when politicians increase or decrease the corporate tax rate, it doesn’t really make a big difference because why pay even a 10 percent tax rate in the united states when you can pay 0 taxes in Bermuda. And you can’t really blame them for that because the ultimate goal of any company is to maximize profit and not pay more taxes.
Money you can’t use
The problem with this method however is that, every strategy has its flows, including this one. Having billions of dollars offshore is great, but what is the point of that if you can’t use it!
Because if you bring it back to the US, you still have to pay taxes on it, which makes all that scheme useless. But regardless, it still makes sense. When the United States lowers its tax rates, you bring that money back and invest it. US tax rate was 35 percent, but when trump lowered it down to 21 percent in December 2017, companies such as Apple aggressively started bringing back all the cash they had been hiding in offshore accounts for years.
If you are watching the news, lately Apple started aggressively buying back its stock, because you gotta do something with hundreds of billions of dollars that you suddenly got. That’s why corporations started taking a different approach to avoid taxes, without an offshore account and in a much more sneaky way.
Other awseome articles:
Taxes of huge companies
Largest US companies such as Boeing, Netflix, Amazon, General Electric, either pay 0 taxes or an extremely small percentage. From 2008 to 2017, Boeing paid only 8.4 percent on 54.7 billion dollars in profit.
In 2018, Netflix reported 845 million dollars in profit but paid absolutely no taxes at all. The company can make a big investment and dramatically expand itself and gain market share, in fact, they might have to borrow money and at the end of the year report a loss, and when you are reporting a loss, you are not only not paying any taxes for that year, but you can forward it to future years.
If you are going to make a significant profit next year because last year you gained such a huge market share, you still can deduct your last year’s loss and significantly reduce your tax bill, if not avoid it at all. And its a common practice among the companies. The tax code has many loopholes that companies frequently use such as tax credits on depreciation or research and development. Some go as far as paying their employees with stocks, so they are not only deducting it from their tax bill but the company can create stocks out of thin air.
The company might not be making any profit, in fact, some companies keep on reporting loss year after year. Uber has a market cap of over 50 billion dollars and it’s making revenue of a few billion dollars but the company has not reported even a penny of profit. In other words, it hasn’t paid a single dime in taxes yet.
Even if Uber’s valuation crosses 100 billion dollars, it still doesn’t have to pay taxes unless it reports a profit. That’s why billionaires hide their wealth in stocks. Jeff Bezos started 2018, with a net worth of a hundred billion dollars and made another 40 billion dollars by the end of the year and paid absolutely zero in taxes on those additional 40 billion dollars. Because his wealth isn’t liquid and consists entirely from amazon shares and he only has to pay taxes if he liquidates his shares by selling them, but as long as he doesn’t, he doesn’t have to pay taxes.
But what is the point of all of that wealth if you can’t use it? This wealth is just on paper! Well, it’s one way to think about it, but from an opposite point of view, what would you do with a 140 billion dollars in cash? As long as your company keeps growing, your wealth keeps growing. And if you want to drive a bently, fly private jet or travel across the world and stay in the most expensive hotels. Just use the company’s money and then deduct as a business expense and lower your tax bill even further. When politicians talk about raising taxes on the rich, they mean the doctors, lawyers, and engineers who work super hard to make hundreds of thousands of dollars if not millions and not the real rich people who will always find loopholes in these tax codes to avoid all of this taxes.