Golfer Phil Mickelson makes a lot of money. He’d like to keep as much of it as possible, just like anyone would. But he got in trouble when he off-handily commented that he might have to make some life changes to avoid paying what he claimed would be 62% of his earnings to the tax man. He isn’t the only entity looking to save on taxes, companies have been making changes to avoid taxes for years. It’s a good business decision no matter what the public thinks.
Golf and Taxes
Part of Mickelson’s problem is that he lives in the high-tax state of California. So, basically, he was suggesting a move to a state without a state income tax, like Florida. Which, it so happens, is where Tiger Woods lives for the same reason. This is clear evidence that tax policy can materially effect what people do. While Mickelson has taken a lot of heat and apologized for his comments, there’s nothing wrong with what he said.
Avoiding the Tax Man
Tax havens have been around for years and have been a favorite tax avoidance tool for companies for just as long. For example, moving to Bermuda at the turn of the century was a big public issue. Insurance companies like ACE Limited (NYSE:ACE) were able to protect their earnings by locating in Bermuda because of the country’s lax tax rules. Nobody seemed to care about the tax advantage so long as the insurers didn’t compete directly with U.S. based ones.
However, ACE and XL Group plc (NYSE:XL), both growing via acquisition at the time, were becoming increasingly competitive stateside. Insurers located in the United States quickly got on the phone to their friends in the government and, well, all heck broke loose. That said, neither ACE nor XL found themselves relocating back to the United States. In fact, they have since headed further afield and both are now calling Europe home.
Not the Only Ones
Insurance companies and golfers aren’t the only ones avoiding domestic taxes. As if on cue to paint corporate America as the bad guy, the media has recently dug up such notable companies as Yahoo! Inc. (NASDAQ:YHOO) and Google Inc (NASDAQ:GOOG), which are using lax overseas rules to avoid taxes.
While complicated, these companies don’t actually relocate, but have subsidiaries in tax-light countries like the Netherlands. As much revenue is then passed through the subsidiary as possible to avoid U.S. taxes. Another recent favorite is Ireland. While on the surface this may look like a horrible thing, it’s important to remember that the vast majority of companies are just following the rules, or at least trying to follow them.
Complications
Of course tax avoidance doesn’t come without a cost. For example, some technology companies, such as Microsoft Corporation (NASDAQ:MSFT), have massive cash hoards. A large portion of the money lives overseas. If Microsoft were to bring that money to the United States it would have to pay taxes on it. Needless to say, it leaves as much of that money overseas as possible.
