Tax Saving Methods Of Overseas Corporation
While we're discussing possible ways to reduce the amount of money you pay out to the government in the form of taxes, it's important to specify that tax reduction is legal, but tax evasion is not. Unfortunately, there are many people in the world who will try and convince you to follow their advice to help eliminate the need for you to pay taxes.
Hedge funds organized outside the United States are frequently organized in locations that have little or no business tax. In these locations, hedge funds are not organized to get flow-through tax treatment. Instead, these funds are organized as corporations that do not require investors to include the annual hedge fund income and expenses on investor tax returns.
Do we simply create a static Web site with nice graphics, text explaining what we do, and perhaps a nice little map showing where we are located and the hours of availability, and get fired Do we perhaps go a little further and provide traditional banking services on the Web Perhaps a way for our customers to access their accounts, pay bills, trade stocks, apply for loans, and perhaps get some free stock advice or free giveaways and pop-up ads to divert traffic on the Web Perhaps we can take it to the extreme and use state-of-the-art technology to enable items like digital television access, live continuous streaming technology, equity trading on personal digital assistants and cellular phones, interaction with and direct access to floor specialists and traders on the New York Stock Exchange for the larger clients, and all the while using servers in Enron-like offshore tax havens. The potentials are endless.
The third way is to differentiate between pre-tax and after-tax cash flows. The cash flows to the firm and equity that we defined above are after corporate taxes but before investor taxes stockholders have to pay taxes on dividends and capital gains and bondholders on interest received. These cash flows could have been defined before corporate taxes, in which case the discount rate used should have been a pre-corporate tax discount rate as well.
Assume the market capitalization of a firm's stock is 6,500,000 and there is 10,000,000 of debt outstanding. How much additional debt can be issued if the 6,500,000 is accepted as being reasonable There is a .35 corporate tax rate. 2e. Now assume a .35 tax rate. Compute the value at time 4 from reinvesting the tax savings to earn .08 before tax and .08(1-.35) .052 after tax. 2f. What IRR is earned on the equity capital of 1,000,000 Assume the 12,243,000 from (2c.) is after tax except for the tax savings from the debt.
Valuation of The owner of a preferred stock receives a promise to pay a stated dividend, usually each quarter, Preferred Stock for an infinite period. Preferred stock is a perpetuity because it has no maturity. As was true with a bond, stated payments are made on specified dates although the issuer of this stock does not have the same legal obligation to pay investors as do issuers of bonds. Payments are made only after the firm meets its bond interest payments. Because this reduced legal obligation increases the uncertainty of returns, investors should require a higher rate of return on a firm's preferred stock than on its bonds. Although this differential in required return should exist in theory, it generally does not exist in practice because of the tax treatment accorded dividends paid to corporations. As described in Chapter 3, 80 percent of intercompany preferred dividends are tax-exempt, making the effective tax rate on them about 6.8 percent, assuming a corporate tax rate of...
The advantage of the retention strategy is highlighted by the fact that in a situation where the corporation can earn only .10 (after corporate tax and before investor tax), the investor earns .164 from the corporation after all taxes following a retention strategy rather than a dividend strategy.
In the United States, a hedge fund manager who outwardly advertises to manage only a single fund will usually have at least two hedge funds, or sub-funds, within the fund. One of the sub-funds will be offshore, and the other will be onshore. Foreign investors will be clients in the offshore sub-fund, which usually serves as a tax haven. The onshore sub-fund is generally a limited partnership so the gains and losses flow through to investors, and there is no taxation at the fund level.
The second reason for using debt is based on the tax law that allows debt interest to be tax deductions, but recognizes no tax deduction for the return on an equity security. We shall see that the tax deductibility of interest can add significantly to the value of a firm with the amount of value added depending on the corporate income before tax, the corporate tax rate, and the amount of new debt. The investor tax rates also affect the analysis. is no reason to conclude value has been added by the substitution of debt for equity. To add value for the stockholders, we must consider corporate taxes.
Foreign investors enjoy favorable tax treatment and other benefits if they own at least 25 percent in a Chinese company. This can take the form of a joint venture or wholly foreign-owned enterprise (WFOE). By regulation, a WFOE is wholly foreign owned and may not have any ownership by Chinese domestic residents. The tax benefits granted to a foreign invested enterprise (FIE) include a corporate tax holiday for the first two years of profitable operation and a 50-percent tax holiday for the next three years. Another benefit to the FIE is the ability to import manufacturing equipment duty-free. Of course, it is helpful to check with appropriate agencies for updates as there might be changes to current regulations.
While there is a lack of automatic expenditures on goods and services that are counted as government spending in GDP, the government has automatic mechanisms in place that move counter to the business cycle. These automatic stabilizers work on the income side as well as the expenditure side of the federal government budget. The expenditures are not those counted in GDP because they are transfer payments. For example, when the economy slides into recession, the government pays more unemployment compensation or gives more subsidies such as food stamps to those in need. At the same time, federal government coffers also suffer from a decline in revenues stemming from lower income and corporate taxes. The U.S. tax system is such that those individuals in lower income brackets pay fewer taxes. When workers earn less money by working fewer hours during a week, or fewer weeks in a year, they also have a smaller tax bill.
The existence of a partnership structure in one form or another is commonplace for alternative investment private funds. Although there are certain registered investment funds, separate accounts, onshore limited liability companies (LLCs) domiciled in the United States, and offshore investment companies domiciled in various tax havens across the globe, the basic structure for most alternative investments is a private partnership. Limited partners invest in entities that are managed by general partners, who control the partnerships and are responsible for their operation. For simplicity's sake, investors are referred to as limited partners and the investment managers are referred to as general partners, even though they may often be represented as LLC members and managing members, respectively.
Both the expected value of the tax savings and the expected costs of financial distress fit nicely conceptually into a marginal analysis. Managers should compare the expected incremental tax saving value increase from substituting debt for equity and the increase in the expected present value of the costs of financial distress. The costs of financial distress include the effects of financial distress on operations as well as the explicit legal costs of bankruptcy. Assume t .35, and the present value of the costs of financial distress is 30,000,000. For debt of 11,000,000 and 10,000,000 if there is probability one of the tax savings and the costs of financial distress being realized we have Table 5.5. The use of 11,000,000 of debt is better than 10,000,000 with the given assumptions since the tax savings are larger. But the above analysis must be modified if the probabilities of being able to use the tax deductions (thus realize the tax savings) and the probabilities of incurring...
Under the 2003 Tax Act, dividends can be affected by a similar distinction between actual or passed-through dividends and payments in lieu of dividends. Corporations have had to exercise care that the dividends they have received on common and preferred stocks have qualified for the tax code's corporate tax dividend-received deduction by being actual dividend payments or pass-throughs rather than payments in lieu. Most individual investors have not had to worry about the character of such payments until now. For 2003, the new tax act provides that as long as an individual investor has no reason to believe that what he or she is receiving is a payment in lieu, the taxpayer can assume dividend payments from a brokerage firm or other custodian that holds the taxpayer's stocks, equity mutual funds or equity ETF shares are qualified dividends. New Treasury rules dictate that financial intermediaries report dividend
As in many developing countries, the lack of depth of the tax base limits growth and results in inefficiencies. There is little corporate tax, little income tax, though collection rates have increased and the most major are export and value-added taxes. With the new exchange rate, prices remain competitive even with taxes of as high as 22 on soybeans.
Iceland presents a remarkable economic growth story which includes a 250 increase in the stock market index from December 2001 to July 2006. A small, open economy like Iceland is challenged to retain independent policies (including social programs). Yet this small country just northwest of Ireland and Scotland, with a population of less than 300000 people, has been able to maintain a set of extremely favorable social policies while providing an environment friendly to business, which allows Icelandic companies to make extensive investments overseas, from which they derive much of their profits. Iceland has low corporate tax rates and derives much of its revenue from value added taxes. A key driver of growth was Iceland's rapid shift to outward economic orientation, This came about as part of a 20-year process in which the economy evolved from a very closed economy, protected by those seeking to maintain the status quo to one in which many of Iceland's successful and growing companies...
America grew rapidly from the 1800s to the 1900s simply because we were a low-tax country. Being a low tax haven, the United States attracted entrepreneurs from all over the world who wanted to get rich quickly. In 1913, however, we passed the 16th Amendment, which made taxation of the rich possible, and that was the end of the low-tax state. Yet, the rich have always found a way out of the trap, which is why the laws are different for the different quadrants, especially favoring the B quadrant, the quadrant of the ultra-rich of America.
It is natural to want to avoid paying more tax than necessary. A loophole to someone may be a provision providing greater tax equity to someone else. Whether everyone agrees with the state of the U.S. tax law, it is important to emphasize that this chapter will be talking about legal tax strategies, not (illegal) tax evasion. In fact, the courts are clear that it is permissible to make decisions that result in lower taxation. Hedge funds are generally structured to minimize the tax burden on the investors.
The final adjustment to be made to the cost of debt is to take into account the effect of income taxes. Since interest payments (and interest accruals) are tax deductible for the company, an adjustment to the WACC is made to reflect this corporate tax saving. The higher the corporate income tax rate, the greater is the tax savings from issuing debt, and the lower is the after-tax cost of debt. The deductibility of interest payments reduces the cost of debt financing for the corporation. The equation that represents this deductibility is After-Tax Cost of Debt Pretax Cost of Debt * (1 - Corporate Tax Rate)
In emerging markets, an accurate assessment of cash taxes can be quite challenging. An example is Brazil, which has had large and frequent changes to the tax code. In 1996, Brazil eliminated inflation accounting and reduced the corporate tax rate to 30.5 percent. In 1997, the government disallowed the deductibility of the social contribution tax, effectively increasing the tax rate to 33 percent. To make up for the loss of the tax shields that inflation accounting had generated, the government allowed companies to deduct interest on equity net of a withholding tax of 15 percent. Many other emerging markets have significant cash tax adjustments that need to be understood before you start a valuation.
Before the play begins and 224,000,000 shares outstanding. The market capitalization was 11.2 billion. The corporate tax rate was .34. A reasonable debt rate for a highly levered firm was .12. For 1988 RJR's cash flows from operations were 1,480 million. The income taxes paid were 682 million and interest paid was 486 million (long-term debt was 4,975 million). The net income applicable to common stock was 1.378 billion and income to its total equity was 1.393 billion. Cash dividends on common stock were 475 million.
The Internal Revenue Service will contest certain insurance transactions if the transactions are deemed to be a sham to reduce or avoid taxes. If the investment products tied to the insurance policies can be purchased only via insurance products, the courts have generally held that the insurance policy is not a sham. As a result, hedge funds must create unique products that are not offered to investors except through the separate account of life insurance policies. It appears that a hedge fund manager can create a separate fund and run it substantially the same as a hedge fund offered to investors directly. It also appears that a fund of funds that accepts investments only from insurance investors can invest in hedge funds available to direct hedge fund investors.
Most countries tax their citizens and business units on investment returns regardless of where the returns occurred. Locating the hedge fund in a tax haven prevents the return from being taxed twice. Failure to report offshore income constitutes tax evasion in most countries.
The second bucket of cash includes the tax savings from deducting interest expense. In any year, these savings are equal to annual interest expense ( I in Exhibit B.l) multiplied by the marginal corporate tax rate (t). If the tax rate is fixed, then any variation in these cash flows over time must be due to changes in interest expense. Thus, under the APV method these cash flows are discounted at the expected rate of return on the firm's debt, Rd, which captures the risk inherent in the firm's interest expense. The third bucket of cash includes the tax savings from using NOLs. For companies that have to restructure because of poor operating performance, NOLs can be very large, and a potentially important source of value.5 Tax rules in the United States and many other countries impose limits on how much of a company's NOLs can be used to shield income in a given year, however. In the United States, Section 382 of the Internal Revenue Code imposes a severe annual cap on NOLs in...
10.2 The investors would prefer to pay the manager with a management fee because any long-term gain distributed to the manager is income taxed at a lower rate that wouldn't be available to distribute to investors. For most hedge funds, the management fee is a deductible expense, so the after-tax cost of the fee is less than the amount paid. Structuring the management fee as a fee may also reduce other taxes. For example, the fee may escape self-employment tax and some state taxes such as the New York unincorporated business tax. Partnerships have considerable leeway to determine the particular rules used to allocate a loss. Hedge funds typically allocate the loss to all the partners based on the percentage of the fund owned by each partner. This will make the negative memo balances still more negative. Similarly, the total of unrecognized losses on the securities still held by the partnership will exceed the net economic loss experienced by the partners. As a result, the partners...
An analyst interpreting the past behavior of a firm's ROE or forecasting its future value must pay careful attention to the firm's debt-equity mix and to the interest rate on its debt. An example will show why. Suppose Nodett is a firm that is all-equity financed and has total assets of 100 million. Assume it pays corporate taxes at the rate of 40 of taxable earnings.
Preferred shares are a worst-of-both-worlds investment. They are less secure than bonds, since they have only a secondary claim on a company's assets if it goes bankrupt. And they offer less profit potential than common stocks do, since companies typically call (or forcibly buy back) their preferred shares when interest rates drop or their credit rating improves. Unlike the interest payments on most of its bonds, an issuing company cannot deduct preferred dividend payments from its corporate tax bill. Ask yourself If this company is healthy enough to deserve my investment, why is it paying a fat dividend on its preferred stock instead of issuing bonds and getting a tax break The likely answer is that the company is not healthy, the market for its bonds is glutted, and you should approach its preferred shares as you would approach an unrefrigerated dead fish.
Ou can't evade taxes without going to jail, and you can't avoid taxes without a clever sheltering strategy, but you can help to delay taxes with index funds. Tax-sheltered accounts, from IRAs to 401-k to pension plans, all make the issue irrelevant for many assets. But for those assets that are not covered by such plans, and inevitably every investor has a substantial amount of such vulnerable assets, careful attention should be paid.
There are many ways to structure the set up of your properties. You can have a corporation, partnership, an LLC, trust, and so on. A good accountant will advise you based on your situation. For example, if your rental property is run as a corporation, your accountant may advise you not to have any income in your account at the end of each year to avoid paying a high rate of corporate tax. (You don't want your corporation to be double-taxed.) You can withdraw the money as income, spend it on improvements to your building, or pay bills. Your accountant knows what is the best for your business.
The second choice on tax rates is the marginal tax rate, which is the tax rate the firm faces on its last dollar of income. This rate depends on the tax code and reflects what firms have to pay as taxes on their marginal income. In the United States, for instance, the federal corporate tax rate on marginal income is 35 with the addition of state and local taxes, most firms face a marginal corporate tax rate of 40 or higher. The marginal federal corporate tax rate is 35 in the United States with state and local taxes this rate will rise to roughly 40 . The marginal tax rates vary across countries, though there is much less divergence than there used to be in earlier periods.14 14 The marginal corporate tax rates for different countries are on my web site under updated data.
Furthermore your corporation can pay for some nice things for you, such as medical life insurance, buying you a new computer (for trading purposes P ), computer software, office supplies & equipment, telephone, Internet, cell phone, percentage of your rent mortgage (since your office is in your home), investment related books & magazines (you can even write off what you paid for my eBooks), seminars & training, travels to exotic destinations like Hawaii (to investigate investment opportunities P ), and even some possible fringe benefits (you the employee president need to be pampered from time to time - maybe a nice Mercedes for a job well done , leased for tax deductibility). All these things (and more) that you would normally pay for out of your own pockets (AFTER tax) can be paid for through your corporation (BEFORE tax). For this reason alone you want to have a corporation to handle your legitimate expenses, as it adds up to HUGE TAX SAVINGS When you go to form a corporation...
When a hedge fund has investors from many different countries, it is usually efficient to organize the fund in a low-tax or no-tax domicile. This is a tax avoidance strategy but it is not a tax evasion strategy. The difference is important. By structuring a hedge fund offshore, a French investor avoids paying taxes to the United States but does not avoid paying taxes to the French government.
T the corporate tax rate B the amount of debt that is added The assumptions are that the debt added in substitution for stock is outstanding for perpetuity and that there are no costs of financial distress. The term tB is equal to the present value of the tax savings from the debt interest deductions. Assume a firm earns 153.85 per year before corporate tax and 100 after corporate tax (t .35). There is no growth and the stockholders use a .08 discount rate. Assume stockholders want to earn the same return as that earned by the stock if the firm were unleveraged, and to achieve this goal they buy .65 of the debt and 1.00 of the stock. The amount of debt being purchased is equal to (1 - t) of the outstanding debt where t is the corporate tax rate. The investors following this strategy would earn Assume the common stock of the unleveraged firm earns X before tax and with a .35 corporate tax (1 - t)X .65X after tax. Buying .65 of the debt and 1.00 of the stock of the leveraged firm the...
The fourth and final component of return is tax-sheltered benefits. These benefits are the paper losses you can deduct from the taxable income you receive from the property. Because you are the owner of an investment property, the Internal Revenue Service allots you an annual depreciation allowance to deduct against your income. The premise is that this deduction will be saved up and used to replace the property at the end of its useful life. For most businesses, this is a necessary deduction because equipment like fax machines and computers wears out after time. But when it comes to real estate, most property owners don't live long enough, or keep their buildings long enough, for them to wear out. Therefore, the tax saving from the deduction is a profit that is added to your overall financial return.
Kt Q) the cost of equity capital of an unlevered firm t the corporate tax rate Assume the cost of capital with zero debt &.,(0) is .15 and that debt is substituted for stock so that .5. If the corporate tax rate is .35 then the cost of capital is reduced from .15 to ,12375.
Pollsters need to constantly keep in mind the following when taking opinion polls. It is not just the questions that are asked, but the order in which they are asked, that will influence the results. Consider the question poll that asks Are you confident in our local treasurer It is different from the two-question poll that asks Are you aware that our local treasurer was indicted for tax evasion Are you confident in our local treasurer
Now assume 800 of .08 zero coupon debt with a life of five years is used to finance 800 of the initial 833 purchase price. The equity component of the investment is 33. The corporate tax rate is .35. TABLE 6.1 Interest Tax Savings Time Debt Interest (.08) Tax Saving Period If the debtholders are not taxed, they net 1,175 at time 5. The tax savings on the debt interest, reinvested by the corporation to earn .12, will have a future value of 182.
C corporations pay U.S. federal corporate income tax at a maximum rate of 35 percent. In addition, most states tax the income of the corporation. Investors may not deduct these corporate taxes or use the taxes paid by the corporation to reduce their tax liabilities in any way. However, investors do not include this corporate income on any tax form, and a corporation can usually postpone taxation at the investor level indefinitely by retaining all of the after-tax profits. When the corporation makes a dividend payment to investors, the investors must include this payment as income if they are taxable investors.
Over the 10 year period 1973 to 1983 net revenues grew at 15.7 percent per year and earnings by 26.3 percent. During 1983 the stock price hit a high of 56 and a low of 20.375. During the years 1982 and 1983 the number of shares of common stock were reduced from 37,200,000 to 29,600,000. At the end of 1983 long-term debt was 572.7 million and the book value of stockholders' equity was 198.5 million. A .745 per share dividend was declared in 1983, up from .550 in 1982 ( 21.4 million in total, up from 18.3 million in 1982). During this time period the corporate tax rate was .46.
Assuming a fixed production profile, the uncertainty of the yearly cash flows of the field is driven by the prices, not the quantity produced, of Brent crude oil. For each state (potential) oil price, S, the net operating cash inflow is estimated from the reserves produced yearly, Qt, times the current spot price, St, minus the operating costs, the state participation, royalties, profit share, and corporate taxes.
Not all wealthy people understand the tradeoff between wealth and well-being and not all accept that society doesn't owe them admiration, or even respect, just because they're wealthy. Well represented in this group are the angry affluents, people who conclude that as rich as I am, I'm not rich enough. Some angry affluents have been stung by insurance schemes or phony trusts set up to avoid taxes. The outcome of such schemes is rarely positive for either their wealth or their well-being. Financial advisers can point out to this group that they can reduce both their anger and their taxes by donating money to a cause they want to support. They'll lose some wealth, but they'll gain well-being.
Hedge fund private partnerships and separate accounts can be domiciled onshore in the United States or in an offshore tax haven such as the Cayman Islands or the British Virgin Islands. Nontaxable investors in the United States take advantage of offshore funds and separate accounts. For instance, endowments, foundations, and ERISA (Employee Retirement Income Security Act of 1974) corporate pension plans that are subject to unrelated business taxable income (UBTI) liabilities utilize offshore funds. Offshore tax havens also are suitable for non-U.S. investors seeking safe harbor from their domestic tax laws. Whether onshore or offshore, the
Get All The Support And Guidance You Need To Permanently Get A Handle On Your Taxes. This Book Is One Of The Most Valuable Resources In The World When It Comes To A Guide To Home Business Taxes.