Thesis on "Use of Offshore Tax Havens by US Companies"

Thesis 12 pages (3756 words) Sources: 12

[EXCERPT] . . . .

offshore tax havens by U.S. companies

Tax Haven can be defined as a country/province/city where certain taxes are either not applied at all or applied with very little force or are levied at extremely low rates. Governments all over the world have been busy attracting global investors through these tax havens. Corporations, on the other hand, have been actively shifting their operations to such parts of the world where government regulations are minimal and can be overlooked easily. This in turn has pressurized the governments of the developed world to lower their tax rates, as well as, lower their standard protocols. In this paper we will review why U.S. companies are locating their activities or businesses in those tax haven countries? And what could change in the U.S. tax law from a tax policy perspective to make this less attractive tax shelter.

Financial Savings:

One of the primary reasons that the U.S. companies locate their business in other tax haven countries is the percentage of savings that the can make on their finances. The developing countries throughout the world have one of the cheapest labor rates and the cost savings that companies can make by launching businesses in these countries is up to 90% with the individual costs of hiring being 4 times less then what they have to pay in internally. This difference in salaries alone can save up to 75% of the finance for these companies. OXFAM (2000) writes, "Tax havens, and tax competition in general, can provide big business and wealthy individuals with opportunities to escape their tax obligations. This limits the capacity of countries to raise revenue through taxation on both their own residents and foreign owned capital. Tax competition and the implied threat of relocation has forced developing countries to progressively lower corporate tax rates on foreign investors. Ten years ago, these rates were typically in the range of 30 to 35 per cent - broadly equivalent to the prevailing rate in most OECD countries' Today, few developing countries apply corporate tax rates in excess of 20 per cent. Tax competition also extends to efforts to attract foreign portfolio investment. Earlier this year, India was forced to reverse efforts to clamp down on the use of tax havens by foreign institutional investors for channelling funds into the country for fear that future foreign investment would stay away."

The reason behind such a vast presence of cheap labor in such countries is because of the abundant and rising level of population of these countries. Furthermore, high poverty levels result in a decreased standard of living. This decreased standard of living allows the U.S.-based companies to have lower salary rates for all of the labor that they employ in their outsourced franchises and use the percentage of costs saved on resources and infrastructure. It is important to note here that the costs savings are different as per country and as per vocation (the Economist, 2004). This simply means that the costs for hiring an accountant in, let's say India, will be different from hiring an engineer in India. Similarly, the costs for hiring an accountant in India will be different from hiring an accountant in Pakistan.

There is of course one downside when outsourcing businesses in the developing countries: semantics. The communication barrier is a major one as the laborers in the developing countries have little to no command on the English language medium. Even though, this problem is a major one, it can be solved if a little more investment is done by the companies. This decreases the overall costs saving by at least 30%, hence considering that, the overall savings made are not as significant but are still enough to attract companies to invest in these tax haven countries (the Economist, 2004).

Tactical Outsourcing:

One of the major reasons that companies invest in these tax-haven or developing countries is because of the age-old tactic of having different sources and suppliers. This simply means that companies believe that it is always better to have suppliers who provide one with the resources and the infrastructure that they need instead of building the infrastructure themselves. This was mainly done so that the company could direct all the internal focus on the strategies that would help them move forward and upward within the market structure. However, this is not always true in all the cases, as Duncan (2007) writes "Billions of pounds, enough to pay for the entire primary health and education needs of the world's developing countries, are being siphoned off through offshore companies and tax havens, according to a body formed to expose the offenders. Aid organizations are alarmed that money which should be used for building the infrastructure of the poorest countries is being hidden in havens by corrupt politicians and multinationals exploiting tax loopholes. Offshore companies are being formed at the rate of about 150,000 a year. While in the 70s there were just 25 tax havens, there are at least 63 now, about half of them British protectorates or former colonies. Tax avoidance in Britain alone is estimated at between £25bn and £85bn."

In addition, there are multiple reasons behind the use of tactical outsourcing that differ form one country or industry to another. For example, the automation industries outsource their suppliers because they are secure in the fact that most of their suppliers are smaller companies and won't be able to pose any market threat to their manufactured product. For other industries, it was more important to increase the overall quality of the production so the outsourcing was an effort to increase eth overall competition amongst the smaller companies (Mark, 2004).

Again the overall costs decrease considerably when outsourcing, domestic or international, is conducted. The concept of specialization aids this decrease in costs on outsourcing. This is so because a specialized company would probably do a certain task at a much lower level as opposed to a team of employees that is hired to do the same task for the company internally. Furthermore, another reason behind using outsourcing as a strategy is to decrease the overall level of staff employed within the company. Many advertising agencies today do so because they feel that it decreases their overall costs significantly and increases the competition between the smaller companies. One of the most popular and obvious examples of outsourcing is the sector of government or civil jobs. The government outsources some of the common and district tasks to companies and civil servants who enjoy the added-advantages of pensions, medical and health insurances, government grants, etc. offered by the government to them under the umbrella of working in government-owned company (Mark, 2004).

The spectrum of overseas talent:

One of the biggest motivators for the U.S.-based companies to outsource overseas is the lack of technically proficient domestic laborers. It is believed that most of the local labor force is more interested in the management sector as opposed to the technical side of the business. Even though, the it sector has increased the overall ratio of the laborers tremendously within a span of 5 years, there are still many companies who seek employees in the tax haven countries because there the technically proficient labor force is present in much higher numbers then within the U.S. (Paul, 2003).

Countries like India and China are the main targets of the U.S.-based companies when they want to outsource or establish franchises that need technical assistance. This is so because of the high number of graduates that both countries have annually in the industrial and technical sectors. Furthermore, engineers and it professionals in these countries prefer working in the U.S. based companies because most of the time they feel that they are being under-utilized and un-appreciated by their own domestic companies. This of course makes the hiring process smoother for the U.S.-based companies. Plus the hard work that the workers from the developing countries put into doing their jobs is no where near matched by the domestic workers (Paul, 2003).

Rights of the U.S. employers:

The rights of the employers within the U.S. is that the employees hired can be disposed at the will of the employers. This can allow the employers to hire and fire the employees for whatever reason they see fit. Of course, the reasoning for firing the employees has to be valid and logical. But with the passage of time, the U.S.-based companies have been able to design and structure their policies in such a way that the have been able to reduce their domestic company size, in term of the employees working within the company, and have managed to outsource most of their work (Paul, 2004).

This has allowed the companies to manipulate their power and authority on the hiring and firing polices and has allowed them to increase the costs benefits that they are able to retain. As aforementioned, the costs of laborers in tax haven counties is far less then the domestic workers which has been the main incentive for the American employers… READ MORE

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