Problem: Choice of Nationality?
In today's world, a corporation is generally free to choose its "nationality"-that is, its home country, the country in which it will establish its legal existence or, using U.S. terminology, the country in which it will incorporate. That nation's laws will govern the relationship between the entity and its owners-that is, the corporate governance rules it must follow-as well as the accounting standards with which it must comply. If incorporated outside of the United States, it will only become subject to U.S. securities laws if it chooses to list its securities on a U.S. exchange. Unlike other countries, the United States taxes U.S. corporations on their worldwide income, not just the income earned in the United States. Thus, if a business incorporates outside the country, it may avoid significant U.S. taxes, substantial U.S. regulation, and the extraterritorial application of U.S. laws. Consider Michael Kors Holdings: its corporate headquarters are in Hong Kong; its clothes are manufactured primarily in Asia; its largest office is in New York; it receives about 95 percent of its revenues from U.S. and Canadian sales. But it is incorporated in the British Virgin Islands, where it had no operations.
Although it launched its initial public offering (IPO) of stock in the United States, as a foreign corporation its financial reporting requirements are much less than those discussed in Chapter 9. Financial reporting for foreign corporations has been deliberately lessened, precisely to make listing securities more attractive to foreign businesses. Although much of its income is currently taxed in the United States, if it grows its international sales, those sales will not be so taxed.56 Consider too a company's choice of place of incorporation for its subsidiaries. For some businesses, a significant source of profits derives from royalty and licensing fees generated by its intellectual property. Thus, a common tax strategy is to incorporate subsidiaries to hold valuable intellectual properties, like patents, in low-tax jurisdictions. Thus, Apple has subsidiaries in Ireland, the Netherlands, Luxembourg, and the British Virgin Islands. "When customers across Europe, Africa or the Middle East download a song, television show or app, the sale is recorded" in Luxembourg.57 Quite legally, 70 percent of Apple's profits are allocated to its non-U.S. entities. "Although technology is now one of the [United States'] largest and most valued industries, many tech companies are among the least taxed."58
Question: Michael Kors and Apple are acting legally and advantageously by moving some of their income tax liabilities out of the United States. Is this a good trend? Is it equitable? Consider smaller companies without the resources for such sophisticated tax advice. What about profit-comparable companies which suffer higher taxes because their revenues come from physical sales? Is it equitable to countries which provide the infrastructure for high tech development? What about the countries that now can collect taxes from businesses that have little physical presence other than an office with a mailing address? If there are inequities, what might bring them back into balance?