Question: why have overseas subsidiaries at all if you are a US business? Why not just hive off any non-US based businesses into actual, and not just nominal, separate businesses? As other nations do not try to tax and regulate non-domicile activities in the way the US does, surely it make more sense to simply do business elsewhere, have your HQ elsewhere and just make deals to sell your stuff to US only based companies if you want to access the US market (i.e. do it indirectly)?
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So why have overseas subsidiaries at all if you are a US business?February 1st, 2015 |
 41 comments to So why have overseas subsidiaries at all if you are a US business? |
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Simple fact is that with a corporate income tax rate of 35% (although marginal rates tend to be about 28%), the US is just way out of line in comparison to other advanced economies.
This is just bluster so that Obama can claim to be doing something about the number of US domiciled companies that do this.
Obama is a lame duck and he’d never get any support for this from Congress.
It’s just putting glitter on a turd.
Taking a bite at the golden Apple?
In answer to Perry’s basic question, it’s not as simple as that. US multinationals are multinational because there are commercial advantages in operating multinationally. To take the most obvious and simplest example, how would Coca Cola separate its US business from its non US businesses ? It’s trying to sell the same slime around the world. Both US and non US businesses use the same “secret formula” and although there will be local marketing campaigns, a lot of the marketing will be multinational. It’s not practical to retreat behind national barriers. Likewise, foreign multinationals find it advantageous to operate in the US – it’s a very big market – despite thereby exposing themselves to the horrors of US tax, regulation and tort shakedowns.
And although nowhere else taxes foreign subsidiaries in the precisely the same way as the US does, most developed countries do tax “naughty” foreign subsidiaries. The main difference between the US and its competitors is that the US taxes dividends from “nice” foreign subsidiaries. A lot of other countries don’t, or grant lower rates.
Obama’s Budget proposals are not intended to be taken seriously as they won’t be enacted. It’s just that for political purposes he wishes to make certain promises of gravy to voters (which will also not be enacted) and so it is necessary to pretend to have some revenue measures.
The serious point in all this is that because of its dominance in the world economy, the US has had a free ride on the horrors of its tax system. People couldn’t afford to opt out. But as the US becomes less dominant, at the margin, foreigners will find it cheaper to do business with the US at arms length more along the line that Perry suggests. Starting with a few, and then gathering pace. But the US tax system’s free ride will probably last for a good while yet.
God, I hate all the US tax bullshit. It’s designed to stick it to corporations (which is bad enough in-and-of itself) but it also causes a huge and disproportionate impact on individuals who fall slightly outside of the cookie-cutter US worker mold. It’s no wonder so many are renouncing their citizenships.
You think you Seppos have problems?
The ECB is going to inject 60 billion Euros a month through Quantitative Easing into the E.U. for 12 months.
Short version:
Most of these companies historically were started as US companies, with US investments and capital. There is a huge portion of the US investor community that simply won’t put any money into an overseas company, as a perceived risk. A large of the American retirement investor groups follow this ‘rule’.
There are of course exceptions to this, but like I said, short version.
Why is the word “overseas” in the question?
ed, I was really thinking of the many US companies with entirely self supporting and very profitable overseas subsidiaries which really do not need a whole lot from the US investor community.
Personally I would not dare risk investing in anything that generated US based income myself for fear of triggering IRS related hassles 😀 Having to deal with tax authorities in the UK is bad enough, but they seem to be paragons of restraint by comparison.
Because that is what is being discussed?
Well, I wouldn’t be too quick to conclude that comparable ideas won’t get serious consideration in a “Republican” controlled House (and then Senate). Go back and look at the means considered by Dave Camp!
Many of the “Republicans” may quickly become “New Democrats” on these issues.
Harking back to when I was dealing with similar issues (sheez) 40+ years ago (CFCs anyone?); there are escapes that can be contrived.
The corporate form of holding business activities may shift to partnerships or even back to business trusts. There are only 535 Congress-people, with perhaps a further 2,500 staff concerned with these issues. There are a hell of a lot more lawyers and accountants engaged in “tax practice & planning.”
This may even get businesses behind the concept of VAT only for business associations and out of the “income syndrome.” Early days.
The shifts in the modes of asset exchanging (stock exchanges, “investing,” etc.) will accelerate to accommodate problems created by political ineptitude.
I said: “Why is the word “overseas” in the question?
Mr. de Havilland (oddly, the name of the street I lived on in Australia) responded: Because that is what is being discussed?
Lesse if this illustrates my point better:
Question: why have overseas subsidiaries at all
v.s.
Question: why have subsidiaries at all
It’s really the same question.
You know what? I’m a moron.
I scanned that as subsidies.
Never mind.
Let us be very clear here. Corporations do not pay taxes. Their customers do. Corporate taxes are just a way of converting a tax burden to invisible through higher prices.
As I understand it overseas subsidiaries’ profits are taxed as US profits when they are repatriated to the US (less overseas corporation tax already paid in host country). The tax isn’t avoided, it is merely delayed.
Therefore two reasons for delaying repatriation are that you intend to reinvest the money overseas, or that you hope a future government will reduce the corporation tax rate.
“Why not just hive off any non-US based businesses into actual, and not just nominal, separate businesses?”
Because SOME “overseas” (let’s just say foreign to the US, shall we?) have a nasty habit of “Nationalizing” (or suddenly inventing new “fair” taxation “special” schedules)ALL the assets of successful economic innovation that the “locals” want for their shiny new palaces? (Or…maybe…uh….Moat maintenance?)
Somehow, “It’s for the children.”, or the poor, or the women, or well….you get the idea!
“Modular” is kinda’ key in “new” international economics.
Eggs in one basket…or something?
Well having an overseas subsidiary rather than a separate entity does not protect against the subsidiary being nationalised either. As for modularity, well that that is exactly what I am suggesting as an alternative to making it so easy for the US government simply help itself to money earned outside the USA.
Isn’t the US Congress the greatest ‘engine’ in value terms for the appropriation of private property that has ever existed in all of history? Although far more is left in private hands than under any of the vampire/cannibal/socialist regimes that have ruled, in these days the US is a hungry beast indeed, and now, instead of being a beacon of private property and the rule of law, the US is falling like a fat bloke with a tangled parachute towards Earth, past slimmer, lighter governments but not as fast as the stone trolls of Russia, Argentina etc.
“Well having an overseas subsidiary rather than a separate entity does not protect against the subsidiary being nationalised either.”
Well the advantage here is that the US government will use political (and sometimes *military*) might to oppose nationalization of an ‘American’ company.
And of course, there will be political repercussions for the company inside the US if they calve off subsidiaries. You’ve seen what my government tries to do to anyone who off-shores, inverts, or simply changes their citizenship.
No, Mr. Ed, it is not the U S Congress, but the Federal Administrative State (bureaucracy, if you prefer)which is the greatest intervenor in the relationship known as private property and in other relationships as well.
Federal Expropriation (so far)is mild. Regionally local expropriations (bike paths, use constraints and crony deals)had been on the rise, slowed by the events of 2006 et seq. See, Eminent Domain, et al.
An issue with the kind of current executive proposal on accrued “Foreign Earnings” is that it is a taking of existing assets, rather than a levy on current or future earnings (tho’ those are to be taxed as well).
If one was setting up a new business and looking at places to set it up – New York City would be the last place in the United States to go in terms of taxes and regulations.
So why do new business enterprises get created their?
Because so many business enterprises, and a vast population of people are already there.
New York City would not have grown up under present taxes and regulations – but it is there now, so it carries on (sort of).
The same is true for the United States itself.
Under present taxes and regulations there is no way that the United States could possibly have developed into a great economy – the largest or second largest on Earth (depending on whether one believed the Chinese figures or not).
But the United States, like New York City, used to have very low taxes and regulations – so it carries on and business enterprises do not want to be cut off from such a huge market (and the American authorities can be utterly vicious with anyone who irritates them, regardless of whether they are American or not).
But how long can this continue?
How long can a nation live off past glories?
New York City (that vast city utterly dependent on the funny money flow from the New York Federal Reserve) will be the canary in the coal mine.
When New York City collapses – the United States of America will not be far behind.
After all reason can not be cheated for ever – what does not make sense can not carry on for ever because it “used to make sense – so we are still here”.
Where in America does sort-of still make sense?
The biggest example of somewhere that (at least sort-of) make sense is Texas.
Not the smallest government State – places such as South Dakota have much smaller governments (even in proportion to their economies) than Texas does. But a place of REAL IMPORTANCE that has a relatively sane government.
This is not the Texas of 1861 – and not just because it is not a slave state.
Modern Texas is a place of tens of millions of people – and vast cities.
Many other places that had tiny populations in 1861 (for example Florida) now have vast populations.
One day, and I think it will be soon, the American elite are going to a shock.
“Those people” (Southerners and Westerners – but not “left coast” Westerners) do not need you any more – in fact you are a vast weight round their necks.
And there are huge numbers of them.
The last hope of the establishment left is the “race card” – but I do not think this is going to carry on working for them.
There is a massive assimilation in Texas (in ways that there is not in California) – Hispanics in Texas increasingly think of themselves as “Texan” and intermarriage (for example Governor Abbot is married to an Hispanic) does not raise eyebrows.
The rest of the South and West?
South Carolina has an Indian (family from India) Governor and a black Senator.
And conservatives are not shocked – because the Governor and the Senator ARE CONSERVATIVES.
Also the struggle in the West has not gone the way the left wanted – for example they flung everything (absolutely everything) to drive out Governor Brownback from Kansas – and failed.
The left could not even win in Wisconsin (the birth place of the Progressive movement) – making Governor Scott Walker stand for election again-and-again just led to him WINNING again-and-again.
The ordinary people (civil society) do not need the establishment elite of the universities – and their vile bloated unconstitutional mess of a Federal government.
If the Federal government is not reformed – then to Hell with it (and its vast national debt and unfunded entitlement program liabilities).
Let the States and civil society (such as the Churches – such as the LDS Church in Utah) look after their own affairs.
Defence?
A new alliance could handle defence. The United States armed forces are being cut to pieces anyway.
What does Texas need of Washington D.C.?
The military people who defend Texas do not come from Washington D.C. – they come from Texas.
The military culture, the culture of “Sole Survivor” and “American Sniper”, it not from the establishment elite – it is from their enemies.
From Texas and States like it.
Paul,
This is a great post! It reminds me very much of the Adam Smith quote: there is a “great deal of ruin in a nation.”
I think Lee Moore and Ed in Texas have it about right*. There are distinct commercial advantages to having international operations (I think that’s pretty obvious to most people), and issues such as maintaining consistent product quality could be handled through licensing arrangement and similar means. So the only real question is why retain those businesses as subsidiaries rather than spin them off into independent companies? Ed in Texas has shown the reason: the US capital markets. Independent foreign companies would be severely constrained in their access to US investment, and while that can be overcome to some extent through listing American Depositary Receipts on the NYSE that’s expensive, difficult, and all-in-all a suboptimal solution. Many of the stockholders of those spinoffs would sell immediately, putting severe pressure on stock prices. The sum of the parts will be less than the whole (contrary to the AT&T breakup in the 1980s, which was wholly intra-country and generally positive for stock prices). Better to keep them as subsidiaries unless and until the US tax law changes.
As others have observed, Obama’s proposal is wholly political and is a non-starter as long as he remains in office. It is entirely possible, of course, that with a Republican president and Congress something along those lines could be adopted; there are plenty of Republicans who view all those overseas earnings as an untapped honey pot (they just don’t want Obama to get his hands on it). Even then I don’t think it would happen without some sort of “sweetener”, such as a period of amnesty in which foreign earnings could be repatriated tax-free. But the companies which hold all those foreign earnings are immense entities with significant political clout, so I think it’s unlikely that anything like this proposal will be adopted in the foreseeable future regardless of who is in the White House.
* Although Lee’s example of Coca Cola was poorly chosen. Coca Cola does not “sell the same slime around the world”; there are significant regional differences in the formula. In addition, it sells a remarkable variety of different non-cola products in different countries. Visit the Coke Museum in Atlanta to sample a few; some are grossly unpalatable to American tastes, but clearly they sell somewhere.
what is an “unfunded liability ??
last I heard SS was called one..
when they were gonna run out of money(gov bonds)
they raised th tax rate in or about 1981..
and it now sitting on a 3 trillion dollar bond holding..
but not “left coast” Westerners
They are incensed. But for different reasons. An objective look at America finds us with two socialist parties. The economic socialist party and the moral socialist party. Now they are not strict about it. But that is mostly how they fall. The tell? Neither repeals the work of the other, meaning we have a one party state with two factions. And the factions vie for the title of “currently most important”.
The race card? It will work for a while longer.
“Look, we understood we couldn’t make it illegal to be young or poor or black in the United States, but we could criminalize their common pleasure. We understood that drugs were not the health problem we were making them out to be, but it was such a perfect issue…that we couldn’t resist it.” – John Ehrlichman, White House counsel to President Nixon on the rationale of the War on Drugs.
“[Nixon] emphasized that you have to face the fact that the whole problem is really the blacks” Haldeman, his Chief of Staff wrote, “The key is to devise a system that recognizes this while not appearing to.”
Modern Prohibition/War on Drugs is the most destructive, dysfunctional and immoral policy since slavery & Jim Crow – Retired Police Detective Howard Wooldridge
And to whom currently do we owe that little present? The folks most sensible on economics.
RRS,
Well they are the monkeys, but the organ grinders are on the Capitol, with all the power and none of the inclination to do anything about it.
As for Texas and defence, it appears to have a State Defense Force, which unlike the National Guard, cannot be federalised.
It seems that many US States have State Defense Forces, but the Achilles Heel of State Defense Forces is that the individual members can be drafted into the Federal Armed Forces of the USA, even if their units cannot be subjected to Federal control. It all sounds a bit like Slovenia in 1991, but perhaps 1980, and ‘Tito’* still lives.
* i.e. the idea of the nation is still very much alive ideologically, even though the end is in sight, but in economic rather than physical terms.
There’s at least a little ideological justfication in the fact that since 1945 the United States has preserved the freedom of the seas and the general peace of the world which are required for international trade. U. S. taxes support the muscle that allows overseas subs to even do business.
staghounds that has to be one of the weakest justification for the USA’s economic Imperial overreach I have seen in a while.
Error 404 World Not Found
February 2, 2015 at 9:38 pm
Well actually that was the original justification for the US Navy. It was supposed to be supported with import taxes.
You never got a visit from the Soviet Navy, did you? If the Soviet Naval Spetznaz wanted information from you, it might have involved banging a 6 inch nail into the head of a relative of yours in front of you.
staghounds was not providing a justification for US Imperial overreach, he was making an observation.
You have fallen into error by extrapolation, misreading or misconstruing what was written.
30 comments and nobody has mentioned “intellectual property”.
I’m not an expert in this field, but I think that the U.S. has some of the strongest IP laws in the world, which is a good thing if you are trying to protect a brand or a patent. For this reason alone, having your corporate headquarters in the U.S. is a good thing.
I have never really thought that the Soviets were super-expansionists. Whilst they had an Empire in Eastern Europe, I think they really were more defensive than offensive, except for Afghanistan, where they learned how much they had to learn about keeping people down.
i think their subs were an attempt to keep up with the West.
Except that doesn’t actually help as much as you think elsewhere.
If the Republicans had any brains they would quite simply sit back and let this pass.
They couldnt buy the sort of advertising that this tax will get from the likes of Apple/facebook/Amazon etc. Let some of the “sacred cow” companies be stabbed by the Democrats.
As one bloke says, “give them a Hollywood tax” and let some of Obamas supporters get screwed for a change.
A better question would be “Why be a US company?”. Were I running a company I’d move my headquarters to Ireland and learn to drink Guinness.
Eric has a point, it can’t be any wetter than Seattle in Ireland.
Any Hollywood tax would be the fault of the GOP.
As Stalin reportedly said when asked if a particular atrocity might cause problems for his Western sympathisers “Never mind, they’ll swallow it.“. No matter what the Democrats do, the natural baseness of their natural base will remain, impervious to reason, example, decency or any other possible consideration. What puts flies off cowpats?
Interesting that Coca Cola was mentioned above, and yet it does have separate operations overseas which aren’t owned by the parent, and which bottle Coke under license. For an example, google coca cola hellenic.
Laird is absolutely correct about the coke museum. They have a large hall with with a stand for each continent (except for the obvious one) each dispensing a number of their products that they sell there. I think my favourite was a mint-flavoured soda. Definitely worth a visit.
Here’s a pictogram map of the World according to population of countries, it puts some perspective on where to go for mass market products, then look at the regulatory issues.
http://i.imgur.com/JHUmTCb.png
Paul Marks,
“The left could not even win in Wisconsin (the birth place of the Progressive movement)”
I guess you mean the where the U.S. iteration of “the movement” most recently “relabeled” the old bottle of wine as, Progressive.
I dare say that Communism, Socialism, (Asian something or other)ism, or a rose by any other name, was “born” in “conquered” countries with populations concentrated enough to afford anonymity, well before Wisconsin was given Statehood “credentials”.
As in “…you can fool SOME of the people ALL of the time…but it just hasn’t been done RIGHT yet.”
*sigh* or something.
Otherwise, well said, IMHO.
In the case of Sega, the subsidiary thing has gone very badly, with them all hating each other, the Japanese throwing their toys out of the pram when Kalinske was too successful for their liking, and them now being owned by Japanese Yakuza (hence coincidentally making a game series that glamourizes Yakuza).
Seriously, who’d want to be the Gaijin slave bitch of racist Japanese gangsters?