Large businesses savvy about avoiding tax, report says

Recent testimony before the House Ways and Means Committee by officials of the Treasury Department and various economists demonstrates that large corporations know a key tax-saving tool that has not yet been used by smaller businesses to any great extent. While much of the Congressional inquiry focused on companies that may have failed to act in accordance with the rules, the fact remains that companies that operate within the law have an opportunity to reduce their corporate income taxes.

At the hearing, the Joint Committee on Taxation released a study of taxes paid by six multinational corporations. The study found that these companies generally concentrated more profitable business activities in lower-tax foreign jurisdictions and placed less-profitable operations in countries with higher tax rates.

It is a well-established principle that companies are free to locate business operations as they choose. But most countries, the United States included, insist that reported taxable income should properly reflect the level of business activity conducted in the country. Companies that try to shift a disproportionate share of business profits to low-tax countries face sanctions from the high-tax country that loses tax revenues.

While your business may not operate on a worldwide scale, if you purchase products from or sell goods or services into other countries, there may be opportunities to lower your overall tax burden with some of the same strategies properly employed by large multinational corporations. Even if you are only considering a small expansion of your business in the United States, you should be aware of the differences in tax rates and policies from state to state. Do not hesitate to talk with your tax adviser about opportunities to save taxes at the state and local level, too.

Read the entire study here.