Several of the U.S. companies are finding different ways to reduce their tax bill or paid effective tax rates of 0%. Now, you must be guessing what is effective tax rate? Well, it is a method which is used by investors to compare how much firms pay taxes in relation to profit they earn.
In year 2014, many corporate giants have reported effective tax rates of 0%. Through research and findings, it has been revealed that several companies bellyache the federal income tax rate of 35%, which is just in books, but in actual, they pay much less than what is required.
There are many ways companies opt for driving their effective tax rate to zero:
Offshore transfer payments: This is one of the most popular among companies to get rid of their tax bills. Here, companies set up their foreign subsidiaries to make raw materials in countries with low tax rates. They purchase parts from foreign lands at above cost and ultimately get escapes from US taxes.
Accounting rules: This is the other method companies opt to slash their income tax.To push their corporate and federal taxes down, the companies follow a practice of increasing depreciation amount, severance pay and pension costs. Also, the real estate investment trusts have low effective tax rates as they pass profit to shareholders.
Harvesting losses:Most of the companies with effective tax rates of zero/negative are money losers. It means that big companies that lose money in the past add credits that they use to counterbalance their tax bills in the coming years.
Now, the main question that comes in front of investors before they invest in a particular company is, whether or not firms that are paying low effective tax rates might get the attention of regulators and become suspicious in front of them.