Spotted by Joe M in the NY Times:
A small but growing number of American corporations, operating in businesses as diverse as private prisons, billboards and casinos, are making an aggressive move to reduce — or even eliminate — their federal tax bills. They are declaring that they are not ordinary corporations at all. Instead, they say, they are something else: [Real Estate Investment Trusts] that are typically exempt from paying federal taxes.
This is wildly misleading at best. As Randy from Colorado explains in the comments:
The conversion from a corporation to a real estate investment trust, does not create a windfall profit for anyone, it merely shifts the profit, and the taxation of that profit, from the corporation to the shareholders/taxpayers. The amount of income taxes paid to the government is not reduced either. This is the same way that subchapter s corporations, partnerships, limited liability companies, and sole proprietors are taxed; their owners are the ones who receive all the profits, and pay all the taxes.
This must be one of the most dishonest articles I have ever read. Any freshmen level introductory business or accounting course will teach you this, or any of the thousands of books ever written on the types of business entities, or how to start your own business. It is a disservice to the readers. This article seems to be just another brick in the wall of envy placed by those who want to perpetuate this awful class warfare between the presumed haves and those who think they have not.
It appears that instead of taking this line of defence, these corporations themselves are giving the game away:
One of the bedrock principles — and the reason for the tax exemption — was that the trusts do not do any business other than owning real estate. But bit by bit, especially in recent years, that has changed as the I.R.S., in a number of low-profile decisions, has broadened the definition of real estate, and allowed companies to split off parts of their business that are unrelated to real estate.
For example, prison companies like the Corrections Corporation and the Geo Group successfully argued that the money they collect from governments for holding prisoners is essentially rent. Companies that operate cellphone towers have said that the towers themselves are real estate... The I.R.S. released its latest decision, allowing a data and document storage company to convert, on April 5. The letter did not include the name of the company, but several data storage companies, including Iron Mountain and Equinix, are in the process of converting.
A few days later, a strategist at the Wall Street firm Jefferies wrote in a report: “It is not a far stretch to envision REITs concentrated in railroads, highways, mines, landfills, vineyards, farmland or any other ‘immovable’ structure that generates revenues.”
Exactly.
To a large part their income is just rent (in the literal or economic sense), which in any sane world would be taxed at higher rates than earned income from a business or employment. We live in an insane world where rental income is taxed at lower rates than earned income (that certainly applies in the UK). In a sane world, these corporations would be desperately arguing that their income is not rental income at all.
Forbidden Bible Verses — Genesis 10:21-32
1 hour ago
14 comments:
Randy from Colorado misses a key case I think. Imagine someone holds a prison company in their pension. They receive dividends tax free but the corp pays corp tax. Once it's converted to a REIT though, it pays no corp tax AND the pension holder pays no tax on the dividends. They will pay more tax when they take it out of the pension way down the road but the tax deferral I'm sure is hugely valuable and dwarfs the increased tax on the way out. I'm sure you'll also argue that the pension industry will swallow a chunk of the extra dividends in fees
M, yes, good point.
There is a lot of skullduggery that goes on with pension funds. For some reason, dividends paid to them are taxed (at company level) but rental income (and interest) is entirely tax free. It ought to be the other way round.
Randy from Colorado is obviously far more wrong than the NYT, as is clear without any specific knowledge of US tax laws at all. If there were no tax benefit in doing this, since there's clearly no benefit of any other kind, then nobody would do it. They are. QED.
JB, it appears that the US rules are the same as the UK rules (we just copied them).
Yes, there is a small tax advantage because the REIT's income is taxed as income of the shareholders (some of whom are non-taxpayers).
But it is not a huge massive complete tax exemption as the article makes out. It's like the much over-blown myth that there is a massive tax advantage to debt finance as against share capital.
MW, I'd be interested to see how the debt vs equity wheeze isn't such a massive tax advantage? Take Boots - they loaded the company up with debt paid to an entity in Switzerland I think, just about wiping out their corporate tax liability. The interest payments in Switzerland are then very lightly taxed. Or have I got it wrong?
M,
a) the hedge funds are doing leveraged speculation, it is not tax driven. They'd still be doing it in the absence of any taxes (or any tax distortions) whatsoever.
b) I dunno how high the tax in Switzerland will be. It's not much lower than here AFAIAA.
c) See second part of this post for fuller explanations.
MW, it's not not immediately clear to me what the tax rate on foreign interest income in Switzerland is but it is zero in the Cayman Islands (http://en.wikipedia.org/wiki/Cayman_Islands#Taxation). So you can easily save 20% tax by miracling up a company in the Caymans to pay your interest too. No?
PS I remember you said somewhere that there is *meant* to be a 20% withholding tax on interest payments made by companies but for some reason it's been ignored...
M, yes of course the tax rate in many tax havens is zero%, you didn't mention those you said "Switzerland". I'm trying to answer the questions I'm asked.
Take it from me, if a UK company pays interest to a lender in a tax haven, then they have to deduct 20% withholding tax.
Sure, there are loopholes and so on, but so what? If and when the individuals behind the tax haven company take the money out again back into the real world to spend, in theory that income is then taxed again in the real world.
It's a deferral rather than an absolute saving.
The issue with Starbucks is that although the UK has 20% withholding tax on interest, it doesn't usually have withholding tax on "management fees" while giving a full tax deduction in many cases.
But that's the UK's own fucking stupid fault, you can't blame tax havens for this.
Thanks for the clarification - I was under the impression that interest payments just got paid and deducted from income. The non withholding on management fees and royalties is a much bigger opportunity for sure. Also a lot harder to have a blanket policy on though? Say a theatre buys a film - should they hand over a portion of the royalty to the gvmt? If a pharmacy imports some drugs, withhold some of the payment? I'm by not nearly as knowledgeable as you on tax matters so hopefully my questions are not too simple :-)
Of course bring in LVT and the incentive to shift numbers around disappears.
M, there are different rules and rates for different types of payment and all are subject to double tax treaties. So I can't give a general sort of answer to that.
MW, enough said - lots of different rules and rates = field day for tax accountants and lawyers to find ways to avoid tax! LVT would put them all out of work of course and let business get on with creating wealth
Trouble is EVERYONE votes against LVT implicitly. So EVERYONE is complicit actually. LVT is dead. 10,000 years of failure prove it.
Does anyone want to explore more innovative channels on this one.
How many times do you want entire civilisations to say NO before you will hear them? Theres a lot of denial going on here. All rooted in LVT beliefs and religion. Blinding you to something bewilderingly simple.
Excellent post. The jealousy of wealth by the poorest class of rent seeking players comes out strongly. Notice how quickly tax payers 'understood' the tax avoidance agenda and got behind it. It supports and bolsters everything perfectly.
I have so much fun in pubs asking people how much tax they avoid and why its ok for them to but not others. Loads of angry rows. I'm sitting there 'Shakin The Matrix'.
"For some reason, dividends paid to them are taxed (at company level) but rental income (and interest) is entirely tax free. It ought to be the other way round."
How so "ought". You have said so yourself that the one of the main purposes of a state is to defend landowners' title to their land and hence their title to the receipt of rents therefrom. Thus states are, at least partially, set up by landowners for the benefit of landowners. Why on earth should they set up a system where they are not at least favoured by the mechanism of financing that system, if not exempt?
B, fair point. But what would happen if "all the people" as opposed to just "land owners and those who wish to be land owners" set up their own states for their own benefit?
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