I would like to advise you on the issues related to the tax burden of your company and how you can decrease it through transfer costs to a country other than the U.S. The tax rate in the U.S is 34% but in the foreign location it is 30% which means that if a business earns $50 million in pre- tax earnings $1,700,000 would be deducted from this amount whereas if this amount was earned in the foreign location $1,500,000 would only be deducted s tax. This difference of $200,000 may not seem substantial at first but if we consider the yearly benefit the firm would have with respect to tax savings it is a viable option. This tax saving would not only make free cash flows available to the firm but eventually help in increasing overall value of the firm.
The option entails a benefit of tax saving but it also has cost attached to it which is to be considered and that is the transfer cost. This transfer cost is the cost of transferring technology, assets and raw-material to the other country. Many companies follow this practice for tax savings purposes because the marginal costs incurred for transfers from one country to another county are negligible when compared to the benefits associated with this transfer. The profits are shifted from the U.S to a foreign country with a lower tax rate or a tax haven where special exceptions are given on investment in various sectors (Economist.com, 2007).
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