As we all know tax is a compulsory payment levied by the government to citizens and as a matter of fact we pay tax on almost everything ranging from the salaries were receive as a compensation to the work we do and also will pay value added tax on things we buy from the supermarket and stores almost all out expenditure is taxed
In order to reduce the burden of tax most people especially the wealthy engage in different forms of tax avoidance which is legal.
A typical life example is apple between 2009 to 2012 Apple avoided paying tax worth around $44B by setting up a shell company known as Apple corporation Euro located in Ireland. In case you don't know A shell company is a company that only exists on paper no employees nothing just name.
Ireland usually tax only companies controlled in Ireland and the United States tax companies incorporated in the United States. What Apple did is to incorporate their company in Ireland to avoid tax from the united states and control their company from the united states to avoid tax from Ireland.
Another way is using tax haven countries like Cayman Islands that charge 0% corporate tax in this case The company moves money between its branches in different countries, and make profits show up up in branches with very low taxes.
For example, Levi Cap Corporation in the United States. sold a new design of cap and
made $2 million in income.
By assumption corporate tax in the United States is 30%. Normally, which means Levi Cap Corporation would pay $600,000 in tax and keep $1,400,000.
But instead of paying this 30% tax, Levi Cap Corporation decides to use a tax haven like the Cayman Islands, which has 0% corporate tax. So, Levi Cap Corporation set up a subsidiary in the Cayman Islands called Creative Levi Corporation and
transfers Levi Cap Corporation Corporation's
Design royalties and copyrights to this New company.
In other words it's assumed that Creative Levi Corporation cap are designed by Creative Levi Corporation
If Levi Cap Corporation made $2,000,000 from their design they can claim it needs to pay $1,600,000 to Creative Levi Corporation
brand for using its design.
This leaves only $400,000 in the U.S. to be taxed at 35%. So, Levi Cap Corporation only pays $140,000 in U.S. taxes and no taxes in the Cayman Islands, keeping $1,860,000 in profit after taxes.
However Levi Cap Corporation can't bring this money to the United States as they would have to pay tax on it so they can decide to reinvest the money outside the U.S.
