Indonesia just announced its intent to collect $418 million in taxes and penalties from Google. This comes on the heels of the European Union’s intent to collect $14.5 billion from Apple.
These events are real-life evidence of the risks international companies are willing to face in order to minimize their overall tax bill and they create support for the ideal, which would be a unified international tax policy agreed to by all the countries of the world, including the United States. Since that is not going to happen, at least not now, let’s focus on how to help the United States’ budget deficit.
The fallout from Apple and Google’s woes will help encourage United States firms to bring more profits home. Recent history suggests the government can do something to help make this happen.
In 2005, George W. Bush’s Homeland Investment Act (HIA) dramatically reduced the amount of taxes paid on repatriated funds. This act aided in bringing back into the United States roughly $300 billion dollars. Yes…. $300 billion!
I still remember the day my finance professor asked the class to identify the single most important factor influencing top level business decisions. The students’ answers included things like cost, reputation of the supplier, market analysis, etc. He just kept shaking his head rather disappointingly. Finally, he said, “the answer is tax. The one factor that most influences top level business decisions is tax.”
Everything I have witnessed in the ensuing thirty years of my career has confirmed the truth of my professor’s words. During elections, as I see the campaigns unfold, I hear his words in the back of my mind as candidates lay out their plans. As elections finish and government ensues, they pass and change tax law. Companies make strategic decisions based not only on current tax law but also what they perceive will happen to those laws in the future. Their objective is to pay the least amount of tax as possible, while keeping another eye on the risks of tax based decisions.
Here is the bottom line. If you want money to stay in the United States, make it advantageous to keep it there. And if it isn’t there, follow George W. Bush’s plan, and make it advantageous to bring it here.
Then, if you are really smart, take some prudent positions in the FX market and make some money with the transfer process.