To: Chief Executive Officer, Steve Clarke
From: Chief Financial Officer
Date: 1 st May 2020
Re: US Export Income Tax Rules and Regulations
US Tax Export Income Tax Regulations and Regulations
The Federal Income Tax Rules for income earned by US Corporations apply the same principle as the ones applied when taxing business income from revenue sales of the domestic taxes. The Tax Cuts and Jobs Act (TCJA) assign a 35 % export earning threshold as pointed out in your previous memo. However, albeit the similar treatment of the export earnings in a similar way as the earnings made from domestic revenue sale, it is very distinct in application because the taxable income must indicate a profit margin from the sale (Slemrod, 2004). Thus, any purchases that result in lower revenue income brackets do not qualify for tax. Form 1120 helps the companies file special cases for international transactions that make them qualify for a deduction of losses made as a result of the international sales. However, for subsidiary companies registered in foreign countries do not fall under this category and the IRS rules do not apply to these corporate entities as pointed out in your earlier memo.
Earnings of the independent subsidiaries are thus only subject to the local tax rate. The question, therefore, arises whether the proposition is workable by selling the product to a subsidiary company and subsequent redistribution. The proposition’s legal term, “Offshore tax sheltering” though a lucrative prospect in the short term may have an adverse long term impact on the company. The practice is one of the ways that corporations reduce their tax liability legally. However, the subsidiary entity created for such purposes under these IRS is a foreign entity thus can enjoy the benefits of a domestic US company (Li & Ma, 2018). In light of this observation, it therefore impossible for the company to utilize the funds for purposes financing its operations without attracting some form of taxation issues with the IRS.
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Significant Associated Risks to the Plan
In retrospect, the proposition that the paper makes, from a legal point of view has no such ramifications that may affect the operational capacity of our company. However, it poses a substantial financial risk for the company because it separates the CLC, as the mother country from access to the gains from any of the revenue sales in the UK market. In the short term and the long term, it is utterly impossible to implement the proposition without creating cash flow problems (Slemrod, 2004). First, all the sale returns for products in the UK market act as a Subsidiary in the UK market. Thus, in the long term because of the deficit of actual sales, the company may be forced to seek financing models to meet the cost of the production of the goods for the UK market (Given changing nature of the market dynamics) (Slemrod, 2004). The plan is only viable when there is a constant flow of surplus income which is not the case with the company. The Roanoke plant would suffer significantly from the plan. Until a careful strategy is formulated, the company remains exposed to the risk of substantial financial risk as the above discussions indicate.
Recommendation of Best Course of Action
Considering all the facts of the possible outcomes, in my opinion, I believe that the best course of action will be shelving the idea until the plan of the Scotland plant materializes. The fact that the funds will remain indefinitely in the UK economy and is vulnerable to the risks like currency depreciation and the changing of the tax laws in the domestic market (Bryan et al., 2017). In my view, the margin though lucrative, may lead to unnecessary risks that may affect the financial health of the company by interfering with its present status. However, I believe once the Scotland plant becomes operational, then it will be a viable option. But, at the moment, offshore tax sheltering will not work in our favor; rather, it will adversely affect our financial stability.
References
Bryan, D., Rafferty, M., & Wigan, D. (2017). undefined. Review of International Political Economy , 24 (1), 56-86. https://doi.org/10.1080/09692290.2016.1262446
Gardner, M., McIntyre, R. S., & Phillips, R. (2017). The 35 Percent Corporate Tax Myth. Institute on Taxation and Economic Policy , 9 .
Li, O. Z., & Ma, G. (2018). Offshore leaks, taxes and capital structure. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.3271520
Slemrod, J. (2004). The economics of corporate taxselfishness. https://doi.org/10.3386/w10858
