Aesop's Fables And Corporate Tax Policy
Aesop, the legendary Greek author of many beloved children's stories, may actually have been an economist. He certainly had something relevant to say to today's Washington leadership about how to thaw our chilled business climate.
Remember Aesop's story about the contest between the sun and the wind? In the fable, the two heavenly forces are debating which of them is more powerful when they see a man walking down a lonely road. They decide to settle their dispute by seeing which of them can get the man's coat off the fastest. The wind tries first, blowing fiercely at the man's shoulders. But the man pulls the coat closer, and the wind cannot get it off. Then the sun takes its turn. It shines gently on the man, slowly warming him, until he decides to take the coat off himself.
I thought of this story the other day as I considered the tax policy debate, and the Obama administration's fervent desire to get corporations to start spending the trillions of dollars they have salted away. For economic recovery to take hold, businesses must be convinced to relax their grip on that cash.
Businesses have faced a blustery political climate since 2007, when Democrats took control of Congress, and things got downright icy after President Obama took office in 2009. There has been harsh rhetoric about tax rates and "speculators" and "fat cats," accompanied by a flurry of gusty policy action, ranging from union-friendly reinterpretations of existing labor law, to health care mandates and other payroll costs, to establishing (at some local levels, but not federally) "living wage" requirements. When all else fails, the playbook calls for hauling executives before Congress and grilling them on national television, often about trivia such as the use of corporate jets.
There has been the occasional ray of warmth, such as the administration's decision last week to allow BP to drill once again for oil in the Gulf of Mexico, that is supposed to send a signal that things are fine again. But it is no wonder business leaders continue to cling to their cash. They have no idea from one minute to the next which way the political winds are going to blow.
The debate on international tax policy illustrates this. Under the current system, American companies must pay taxes to the U.S. government, even when their income comes from sales made in other countries. However, the tax bill doesn't come due until the companies bring their profits back to the U.S. So if a corporation makes $1 million in India and uses that money to reinvest in India, it can defer its tax to the U.S. If, however, the corporation wants to reinvest the money stateside, it must hand over 35 percent to Uncle Sam.
Predictably, companies do everything they can to keep foreign-earned profits from returning home. The result is that less money makes it into the U.S. economy. Currently, American companies are keeping around $1 trillion in untaxed profits outside the U.S., according to Bloomberg. (1)
The Obama administration's proposed solution is to severely limit companies' ability to defer taxation of overseas profits. That way, the burden would be just as heavy whether companies reinvest abroad or in the U.S. The administration expects that this will prompt companies to bring more money back to the U.S. It won't; instead https://taxontario.ca, it will simply give a major economic boost to competing corporations organized anywhere in the world except here - because the U.S. stands virtually alone in this world-wide approach to corporate taxation. Right now, American companies can at least maintain their competitive position by investing foreign profits in research, production and marketing abroad, as other nations' companies do. The administration plan would just cut off the foreign profit stream, weakening American companies and resulting in even less tax revenue in the long run.
The sunshine approach comes from Rep. Dave Camp, chairman of the House Ways and Means Committee, who announced recently that he is working on legislation that would shift the U.S. to what is known as a "territorial tax system." In territorial systems, only income earned within a country's own borders is taxable there. Income earned abroad is exempt. This is how the rest of the world taxes corporate income.
The transition to a territorial system would lower overall corporate taxes, an important first step toward making the U.S. a friendlier place for businesses. By giving businesses incentives to grow, policies like the territorial tax system get companies to voluntarily release their cash reserves, putting money into the economy by purchasing new equipment and hiring new employees.
We've given Obama's windy, anti-corporate policies a fair shot. It hasn't gotten us anywhere; businesses have only pulled their coats closer. It's time now to give Camp's sunshine a chance to do its work.
Your partner, Uncle Sam, through the federal income tax and his State and Local Tax buddies (lovingly called your "Tax Partners") are excited about getting their share of your business profits (and salary income) right about now. If you are like most business owners you are focused on legally reducing your contribution through strategic tax planning and strategic planning to your Tax Partners this year. If you are like the exceptional few business owners, you are doing your best to look at how you will reduce your payments to your Tax Partners over your life and the life of your business through strategic exit planning and strategic tax planning.
Common reasons given for this lack of strategic tax planning and strategic exit planning is, "we need to make too many assumptions and guesses", "everything changes anyway", and often, "we are too busy and just never got to it".
Hence business owners who would never run their business with legacy software, put their crews in antique trucks, or run inefficient assembly lines often have old corporate elections and avoidable tax consequences because of strategic decisions made 20 years ago or more. (Just because you can't see it doesn't mean it isn't there.)
A recent example we saw was a meticulously run supplier of construction safety equipment. When the business was formed 25 years ago the owner elected C Corporation tax treatment. At the time there were many strategic tax benefits to that treatment and the election was the right thing to do. Yet somewhere between 12 and 15 years ago those benefits disappeared but no one ever looked forward to the long term strategic tax plan and strategic exit plan in order to foresee negative consequences.
The business had an estimated sales value of about $1,500,000 and because of the size and nature of the business buyers insist that the sale be structured as an asset sale. This scenario means the owner's Tax Partners are going to receive approximately an ADDITIONAL $300,000 from this transaction because of the old election. This is a huge price to pay for missing a change in tax status at the right time.
There are many other pitfalls and traps that can catch the small business owner. Because owners understand the day to day operations the traps tend to jump out and bite at times requiring major change and transition. Putting together the right team and asking the right questions periodically starting years in advance will help avoid these traps and produce superior results.
While long range transition, tax, and exit strategy planning and analysis seem expensive in the short run they are cheap in the long run. (Yes I mean cheap.) At the end of the day it is what you keep that counts. Keep more by planning.
Note: This is not tax advice but a sample case study based on similar situations. You are advised to seek professional assistance for your specific situation before taking any actions. No part of this is intended to be used to avoid tax penalties, or for promoting, marketing, or recommending to another any tax related action or activity.
Cryptocurrency for Beginners
In the early days of its launch in 2009, several thousand bitcoins were used to buy a pizza. Since then, the cryptocurrency's meteoric rise to US$65,000 in April 2021, after its heart-stopping drop in mid-2018 by about 70 percent to around US$6,000, boggles the mind of many people - cyptocurrency investors, traders or just the plain curious who missed the boat.
How it all began
Bear in mind that dissatisfaction with the current financial system gave rise to the development of the digital currency. The development of this cryptocurrency is based on blockchain technology by Satoshi Nakamoto, a pseudonym apparently used by a developer or group of developers.
Notwithstanding the many opinions predicting the death of cryptocurrency, bitcoin's performance has inspired many other digital currencies, especially in recent years. The success with crowdfunding brought on by the blockchain fever also attracted those out to scam the unsuspecting public and this has come to the attention of regulators.
Bitcoin has inspired the launching of many other digital currencies, There are currently more than 1,000 versions of digital coins or tokens. Not all of them are the same and their values vary greatly, as do their liquidity.
Coins, altcoins and tokens
It would suffice at this point to say there are fine distinctions between coins, altcoins and tokens. Altcoins or alternative coins generally describes other than the pioneering bitcoin, although altcoins like ethereum, litecoin, ripple, dogecoin and dash are regarded as in the 'main' category of coins, meaning they are traded in more cryptocurrency exchanges.
Coins serve as a currency or store of value whereas tokens offer asset or utility uses, an example being a blockchain service for supply chain management to validate and track wine products from winery to the consumer.
A point to note is that tokens or coins with low value offer upside opportunities but do not expect similar meteoric increases like bitcoin. Put simply, the lesser known tokens may be easy to buy but may be difficult to sell.
Before getting into a cryptocurrency, start by studying the value proposition and technological considerations viz-a-viz the commercial strategies outlined in the white paper accompanying each initial coin offering or ICO.
For those familiar with stocks and shares, it is not unlike initial public offering or IPO. However, IPOs are issued by companies with tangible assets and a business track record. It is all done within a regulated environment. On the other hand, an ICO is based purely on an idea proposed in a white paper by a business - yet to be in operation and without assets - that is looking for funds to start up.
Unregulated, so buyers beware
'One cannot regulated what is unknown' probably sums up the situation with digital currency. Regulators and regulations are still trying to catch up with cryptocurrencies which are continuously evolving. The golden rule in the crypto space is 'caveat emptor', let the buyer beware.
Some countries are keeping an open mind adopting a hands-off policy for cryptocurrencies and blockchain applications, while keeping an eye on outright scams. Yet there are regulators in other countries more concerned with the cons than pros of digital money. Regulators generally realise the need to strike a balance and some are looking at existing laws on securities to try to have a handle on the many flavours of cryptocurrencies globally.
Digital wallets: The first step
A wallet is essential to get started in cryptocurrency. Think e-banking but minus the protection of the law in the case of virtual currency https://www.mediasnet.net/, so security is the first and last thought in the crypto space.
Wallets are of the digital type. There are two types of wallets.
Hot wallets that are linked to the Internet which put users at risk of being hacked
Cold wallets that are not connected to the Internet and are deemed safer.
Apart from the two main types of wallets, it should be noted that there are wallets just for one cryptocurrency and others for multi-cryptocurrency. There is also an option to have a multi-signature wallet, somewhat similar to having joint account with a bank.
The choice of wallet depends on the user's preference whether the interest purely in bitcoin or ethereum, as each coin has its own wallet, or you can use a third-party wallet that include security features.
The cryptocurrency wallet has a public and private key with personal transaction records. The public key includes reference to the cryptocurrency account or address, not unlike the name required for one to receive a cheque payment.
The public key is available for all to see but transactions are confirmed only upon verification and validation based on the consensus mechanism relevant to each cryptocurrency.
The private key can be considered to be the PIN that is commonly used in e-financial transactions. It follows that the user should never divulge the private key to anyone and make back-ups of this data which should be stored offline.
It makes sense to have minimal cryptocurrency in a hot wallet while the bigger amount should be in a cold wallet. Losing the private key is as good as losing your cryptocurrency! The usual precautions about online financial dealings apply, from having strong passwords to being alert to malware and phishing.
Different types of wallets are available to suit individual preferences.
Hardware wallets made by third parties which have to be purchased. These devices work somewhat like a USB device which is deemed safe and only connected when required to the Internet.
Web-based wallets provided, for example, by crypto exchanges, are considered hot wallets which purt users at risk.
Software-based wallets for desktops or mobiles are mostly available for free and could be provided by coin issuers or third parties.
Paper-based wallets can be printed bearing the relevant data about the cryptocurrency owned with public and private keys in QR code format. These should kept in a safe place until required in the course of crypto transaction and copies should made in case of accidents such as water damage or printed data fading through passage of time.
Crypto exchanges and marketplaces
Crypto exchanges are trading platforms for those interested in virtual currencies. The other options include websites for direct trading between buyers and sellers as well as brokers where there is no 'market' price but it is based on compromise between parties to the transaction.
Hence, there are many crypto exchanges located in various countries but with differing standards of security practices and infrastructure. They range from ones allowing for anonymous registration requiring just email to open an account and start trading. Yet there are others that require users to comply with international identity confirmation, known as Know-Your-Customer, and anti-money laundering (AML) measures.
The choice of crypto exchange depends on the user's preference but anonymous ones may have limitations on the extent of trading allowed or could be subject to sudden new regulations in the country of domicile of the exchange. Minimal administrative procedures with anonymous registration let users start trading quickly while going through KYC and AML processes will take more time.
All crypto trades have to be duly processed and validated which can take from few minutes to few hours, depending on the coins or tokens being transacted and volume of trade. Scalability is known to be an issue with cryptocurrencies and developers are working on ways to find a solution.
Cryptocurrency exchanges are in two catergories.
Fiat-cryptocurrency Such exchanges provide for fiat-cryptocurrency purchase via direct transfers from bank or credit and debit cards, or via ATMs in some countries.
Cryptocurrency only.There crypto exchanges dealing in cryptocurrency only, meaning customers must already own a cryptocurrency - such as bitcoin or ethereum, - to be 'exchanged' for other coins or tokens, based on market rate
Fees are charged to facilitate the purchase and sale of crypto currencies. Users should do the research to be satisfied with the infrastructure and security measures as well as to determine the fees they are comfortable as different rates charged by various exchanges.
Do not expect a common market price for the same cryptocurrency with difference exchanges It may be worthwhile to spend time doing research on the best price for coins and tokens that are of interest to you.
Financial transactions online carry risks and users should factor in the caveats such as two factor authentication or 2-FA, keeping updated on the latest security measures and being aware of phishing scams. One golden rule on phishing is not to click on links provided, no matter how authentic a message or email is.