How Corporate Tax Offshoring is Putting an Audit Target on U.S. Businesses
As offshoring reduces the number of dollars available in the potential audit pool, it becomes evident why large corporations need to keep their defenses up.
At 39.1 percent, the United States has the highest corporate tax rate in the developed world. This overall rate is a combination of a 35 percent federal rate and the average 4.1 percent rate levied by states. In contrast, corporations headquartered in the top 33 industrialized countries pay an average of 25 percent. Even countries known for their high taxes, such as Belgium (34 percent), France (34.4 percent), and Sweden (22 percent) pay much lower rates than their business counterparts here in the U.S.
Consequently, American companies are moving their operations in droves to countries with more competitive rates. The result: $2.1 trillion in American company profits are sitting offshore. If your corporation does most of its business in the U.S., the mass offshoring trend has little or no impact. Or does it? Even for U.S. based businesses, the trickle-down effect will eventually rear its ugly head.
Consider when a company needs to raise revenue, they cut expenses, generate new sources of revenue, or come up with ways to get more revenue out of their existing customer base. The federal government is no different. Like a business, the federal government also makes up for lost revenue resulting from corporate offshoring. The likelihood of the federal government creating new corporate taxes is low, especially during a Presidential campaign. So this leaves spending cuts and squeezing more out of existing revenue sources. The “squeeze” comes in the form of audits.
It has been stated that the IRS has little funds to conduct additional audits. Due to deep budget cuts, numerous media outlets have reported 2014 and 2015 as having the lowest audit rates in years. This may be true for individuals and small companies, but for larger corporations this is certainly not the case.
The numbers speak for themselves. According to the 2014 Internal Revenue Service Data Book last year, 12.2 percent of large corporations were audited, compared to .9 percent of individuals, and just one percent of small businesses. It seems the higher the revenue of a company; the more likely it is to be audited. Case in point: 84.2 percent of companies with more than $20 billion in annual revenue were audited in 2014. Couple these stats with the fact that offshoring has reduced the number of dollars available in the potential audit pool, and it becomes evident why large corporations need to keep their defenses up.
The Best Defense is a Strong Offense
In response, companies need to take a proactive stance in managing their federal corporate income tax compliance processes. From compliance and analysis to IRS negotiations, corporate tax management today requires professional skills that go far beyond filing tax returns. A company’s best defense is a strong offense in the form of reliable results that can stand up to intense scrutiny from auditors, executives, and investors.
Whether or not corporate offshoring continues, audits decline or increase, or federal corporate tax reform comes to fruition, savvy companies know that taking the necessary steps now to reinforce their audit defense and ultimately protect their bottom line is the prudent choice.
Corporate Tax Analyzer™, from Bloomberg Tax calculates and analyzes corporate taxes with far greater efficiency and control than manual methods such as spreadsheets. Access our Essential Corporate Income Tax Management eBook, below, to gain insight into how to optimize tax performance, improve decision making, and achieve reliable results that stand up to intense scrutiny from auditors, executives, and investors.Download eBook
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