In an ideal world, taxes wouldn't drive business or investment
decisions at all. In reality, though, what a company pays or
doesn't pay in taxes can mean the difference between a profitable
business and a big loser.
-- both complicated and simple -- are so important to the bottom
line for many companies. Whether it's the company itself dodging
a tax bullet or helping its customers avoid paying, tax moves add
millions to profits, benefiting shareholders of many companies.
The three tax plays below are just a few of the many techniques
that have made investors richer over time.
Most people find taxes very complicated. But even among tax
professionals, foreign taxation is one of the hardest areas to
grasp, because rules and rates differ so much from country to
Behind those differences, though, are opportunities to cash in
on loopholes. For instance,
fellow Fool Morgan Housel pointed to a
New York Times
detailing how tech giants
(Nasdaq: AAPL) ,
use various foreign subsidiaries to shelter income from the U.S.
in its attempt to tax global income for U.S. multinationals.
Although those methods come with the downside of trapping money
in foreign subsidiaries, the prospects for a
tax holiday on repatriated profits
similar to the one that
) and several other pharmaceutical companies took advantage of in
2004 could prove to be the final step to help those tech
companies pay rock-bottom effective rates on their income.
Policymakers have floated various answers to the foreign
taxation question, such as cutting corporate tax rates or
changing the U.S. worldwide tax system to a more nationally
centered one. But you can count on multinationals using every
legal means at their disposal to minimize their total taxes, no
matter what tax system they have to follow.
Most people focus on federal taxes when they look for tax
savings, but arguably the best-known tax-avoidance facilitator
helps millions of customers get around state sales taxes.
uses a Supreme Court decision
as its basis for not collecting sales taxes in most states, and
although customers are responsible for paying equivalent use
taxes on the items they buy, it's much less efficient for states
to try to go after individual taxpayers than to collect for the
big businesses that sell to state residents. States have tried to
snare Amazon through its networks of affiliates, but Amazon has
in many cases closed those affiliates down rather than risking
State taxes go beyond sales tax, though. Big companies can
negotiate hugely favorable tax incentives in exchange for
job-creating investments in particular states, and so states end
up fighting each other tooth and nail for lucrative projects.
Especially as state finances are weak, the fight for high-paying,
tax-producing jobs will get tougher -- even if it costs millions
in business tax revenues in the long run.
Businesses complain about the high rates on corporate taxes.
But as a practical matter, paying corporate tax is largely a
voluntary act for most businesses. Simply by setting up shop as a
partnership or limited liability company, a business can avoid
double taxation and the complexities of corporate taxes.
Businesses of all types take advantage of various provisions
to save millions in taxes.
) has earned billions in income over the past several years, but
it didn't have to give 35% of those profits to Uncle Sam --
instead, most of that money went straight to taxpayers under the
rules governing real estate investment trusts. Similarly,
Kinder Morgan Energy Partners
) has cashed in on the boom in energy transportation, but its
unitholders get the benefit of untaxed distributions from the
master limited partnership, which they in turn pay their own
individual tax rates on.
Full-scale tax reform has bipartisan support, but the devil's
in the details, and it's exceedingly difficult to envision
compromise and agreement on any massive tax reform effort. As
long as loopholes exist, companies will exploit them -- and the
best players will keep earning millions in tax savings for their
You can use legal tax strategies to your advantage as well.
With tax-favored retirement accounts, the ball's in your court --
but you need smart investments for them. Let the Motley Fool's
special report on long-term investing give you some great ideas
on stocks that will serve you well over the years. Click here and
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Fool contributor Dan Caplinger doesn't know all the tricks,
but he likes learning from the best. He doesn't own shares of the
companies mentioned in this article. You can follow him on
Twitter here. The Motley Fool owns shares of Amazon.com,
Microsoft, Google, Apple, and Annaly Capital. Motley Fool
newsletter services have recommended buying shares of Apple,
Google, Microsoft, Amazon.com, Pfizer, and Annaly Capital, as
well as creating bull call spread positions on Microsoft and
Apple. Try any of our Foolish newsletter services free for 30
days. We Fools may not all hold the same opinions, but we all
believe that considering a diverse range of insights makes us
better investors. The Fool's disclosure policy is never
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