Here's a Corporate Tax Loophole a Porsche Could Drive Through

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PorscheFor years, much of the tax-paying American public has been appalled by the loopholes that U.S. corporations and rich individuals use to reduce their tax liability to the IRS.

Elsewhere in the world, those big money players generally abided by more stringent rules.

But just as the U.S. has exported American culture in everything from entertainment to fast food, so, too, have companies in other countries started mimicking the moves that have made U.S. corporations infamous.

Since 2008, European car companies Volkswagen (VLKAY.PK) and Porsche (POAHY.PK) have been exploring different ways to combine into a single entity. A merger agreement in 2009 led to Volkswagen taking a 49.9% stake in Porsche. But the prospect of a tax bill as high as 1.5 billion euros that would be one result of the merger had led the two companies to postpone the transaction until late 2014 at the earliest.

Yet earlier this month, the companies said they were going through with their merger this year. How did they address the tax problem? By including a single share of Volkswagen stock -- worth less than $200 -- in the $5.6 billion it will pay Porsche, Volkswagen will be able to take advantage of a tax-law quirk that makes the transaction a "restructuring." The net result: Volkswagen will cut its tax bill by as much as 90%.

What's Fair Versus What's Right

As is the case with many U.S. companies that take advantage of similar loopholes, there's nothing illegal about what Volkswagen is doing. In fact, companies typically argue that they have a duty to investors to minimize taxes whenever they can.

But the amounts involved make such loopholes difficult for ordinary taxpayers to swallow. Bloomberg interviewed one German political leader who noted that the ability of large companies to avoid so much of their taxes undercuts the confidence that all taxpayers have in the tax system. Similar tax shelters that U.S. multinationals take advantage of, such as keeping income locked in foreign subsidiaries rather than repatriating it and paying the resulting tax, have drawn similar ire from U.S. politicians. Large fractions of the cash that large tech companies have on their hefty balance sheets, for instance, represent foreign earnings on which they haven't paid any U.S. taxes.

With the federal budget badly out of balance, the U.S. government has targeted loopholes like these as ways to increase revenue. But the better solution would be to simplify taxes enough that the opportunity for complex tax-avoidance strategies would disappear. Until that happens, you can expect more deals like Volkswagen's to result in more lost tax revenue for countries around the world.

Learn how to be smarter about your taxes: Fool contributor Dan Caplinger pays his fair share of taxes. You can follow him on Twitter here.


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33 Comments

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kentblackdog

Just more class warfare by the Obama machine, to divide the groups even more--------the wider the divide, the beter for Obama, come election day.

Just maybe, people a geting smartened up to the Obama ways, and they will vote thier pocketbooks, rather than talk talk talk

July 10 2012 at 5:46 PM Report abuse rate up rate down Reply
buzard1bait

Just maybe rather than paying a big tax bill to governmental idiots to waste on stupidity these company's will put that money to work and create jobs and spur economic growth. Imagine that private use of money doing it better than governments, what a silly idea.

July 10 2012 at 11:15 AM Report abuse +1 rate up rate down Reply
Master Sixkiller

Isn't spreading capitalism fun

July 10 2012 at 10:38 AM Report abuse +1 rate up rate down Reply
mdavidmy

the bigger question is: why should two european companies have to pay the US ANYTHING to combine? It really isn't any of our business.

July 10 2012 at 9:43 AM Report abuse +1 rate up rate down Reply
crtranspor

So let me get this straight, the companies will get hit with a 1.5 billion Euro tax if they merge and this article is making the companies out to be bad guys by looking for a loophole? Maybe if we got rid of the corporate tax companies could get down to the business of making new products and hiring people!!!!
Just another reason the corporate tax needs to be eliminated....and how the left wing liberal press is so off base with their reporting. Hey Dan Caplinger....know what you are talking about before you write and idiotic article.

July 10 2012 at 9:42 AM Report abuse +4 rate up rate down Reply
1 reply to crtranspor's comment
SPQR

Of course repeal the taxes and the CEOs will get 1 billion dollar bonuses instead

July 10 2012 at 11:13 AM Report abuse rate up rate down Reply
lchap17156

Instead of the class warfare constantly promoted by this administration, how about meaningful tax reform? Anyone should take every advantage of the tax lawes that exist. It is the job of our elected leaders to make the changes to close loopholes and make sure everyone is taxed FAIRLY. Would these be the same leaders we have had making the laws for the past decades?

July 10 2012 at 9:06 AM Report abuse +3 rate up rate down Reply
1 reply to lchap17156's comment
tonybraciolev

Pointing out how corporations and the wealthy have the upperhand isn't class warfare. People like yourself are easily duped.

July 10 2012 at 11:08 AM Report abuse rate up rate down Reply
Bill

Why doesn't anyone ever ask the question: "How do these things happen, it is outrageous???" Of course, the answer is simple but goes unreported, "Because the majority of the 537 Washington Politicians want it that way!!" If they didn't approve of the loophole it wouldn't be there.

July 10 2012 at 6:05 AM Report abuse +2 rate up rate down Reply
1 reply to Bill's comment
tonybraciolev

And because the voting public always feels sorry for the corporations that exploit them and cry 'class warfare' anytme something like this is brought to their attention.

July 10 2012 at 11:10 AM Report abuse +1 rate up rate down Reply
barackobamaout

Does this article point out the fact that our tax code is so complicated that hardly anybody can understand it -- BUT there are always high paid lawyers who can figure out how to scam the system. For instance, GE had over 700 Atty's working for them that do nothing but figure out the tax system, and that is why the paid NO income taxes in 2010 and the CEO of GE is the head of one of Obama's committee's which is supposed to level the playing field - - - Duh !

July 10 2012 at 12:49 AM Report abuse rate up rate down Reply
chris

If we added a 1% tax to all imports where would we be GEORGE WASHINGTON was the last and only president to tax imports. In the 80s The grand cherekee jeep was the hottest seller in JAPAN hiroshema put a $10,000 import tax on it and stopped that dead in its trax.

July 09 2012 at 11:20 PM Report abuse -1 rate up rate down Reply
1 reply to chris's comment
Brandon

You are either writing confusedly or are spectacularly misinformed. Today we still have some "import taxes" (I assume you mean tariffs). And we've had really bad ones well after Washington. Just look up Smoot-Hawley Tariff Act. Are you implying Hiroshima is the capital of Japan? And where did you here the Grand Cherokee was a hot seller in Japan?

July 10 2012 at 12:34 AM Report abuse +1 rate up rate down Reply
jm2200a

Giving foreign companies breaks like that sounds unlawful. Of course the Democrat's big international business friends have reasons to back the current White House with these kinds of breaks..

July 09 2012 at 10:24 PM Report abuse -5 rate up rate down Reply
1 reply to jm2200a's comment
tonybraciolev

Yeah, it's only the Democrats fault...pass me that Kool Aid.

July 10 2012 at 11:30 AM Report abuse rate up rate down Reply