Acme Widget Company is an American Corporation that was founded in NY 55 years ago. It is very successful, earning $800 million a year in Net Income before taxes. Due to the 35% Federal Corp Tax there is a $280 million tax each year. Counting net state and local tax and it's another $96 million or $376 million.
The CFO looks for a way to save that tax and he decides to open a alleged unconnected sales subsidiary in a country with a much lower or no Corp Tax.
According to this Wiki site the Grand Caymen Islands have no individual, Corp or Capital Gains tax. http://en.wikipedia.org/...
"The government's primary source of income is indirect taxation: there is no income tax, capital gains tax or corporation tax."
So, this new Caymen Islands sales corp. has to make a lot of money for this reorganization to make sense so the CFO and the CEO determine they will make sure Acme Cayman has profit. They decide to sell Acme Cayman widgets at $100 each, even though they cost $600 to make. Acme Cayman then sells them for $1,000 each, making $900 per widget sold.
At the end of the year Acme Cayman couldn't lose and they began earning $1 trillion a year while Acme (Parent)in NY began losing $800 Billion a year.
So, let's see what happens. Acme files for a $800 million Corporate Net Operating Loss where it can carry back for three, four or five years. So, the 2011 loss will be carried back to 2006 agaisnt the $800 billion profit it had that year and they can ask for a refund ( a quick refund too). So by doing nothing other than shifting income to the Caymen Islands Corp, Acme can get back almost all the taxes they paid from 2006 to 2010 and not be taxed in the Caymen Islands.
Now the CEO talks to people in Congress saying he'd like to bring back that extra money sitting in the Caymen Islands banks but to only pay 5% tax on it. It looks like a windfall for the US but this is a swindle on the level of what Madoff did because they are fraudulently creating losses in the US Corp and having excessive and overstated profits in the untaxed Cayman Islands Corp.
So, what do you all think? Do we charge the corps with fraud and sieze their assets or take them over like we did with GM. Do we penalize them and arrest their officers? Do we allow Acme to bring the money back and pay a 5% tax, which will hopefully create more jobs here? If we audit these companies we will need more IRS agents but I think they'll pay for themselves in no time.
cpa3