The saying that there are two things in the USA that cannot be avoided – death and taxes – remains valid during the last 200 years. It even acquires new meaning with time.

There are three levels of taxation in the USA:

• federal taxes (everybody pays the same taxes);
• state taxes (depend on the state where the company does business);
• local taxes (depend on the place where the company is situated).

There are no offshore companies in the USA and there have never been any. All companies pay the same federal income tax. At the state level, taxation is very different. From 0% in Nevada, Wyoming, Texas and state of Washington to 9.99% in Pennsylvania. In some places there are also local taxes. In the majority of places there are no local taxes, but in big cities (like New York) they exist.

Taxes – You will have to pay them, get used to the idea of paying them and find ways how to pay them.

Some of our clients come to us and ask us to explain US taxation to them in a brief letter. This is quite a task. Only laws and normative acts related to federal taxation make about 11 volumes with 1000 pages each. If we take into account that each of the 50 states has its own taxation system this mission becomes impossible…

See State Corporate Income Tax Rates – 2007

To those who want to get a first idea about US federal taxes we can recommend IRS (Internal Revenue Services) website which is quite good:

http://www.irs.gov/businesses/topic/index.html

To get a more general idea, we recommend reading articles on US taxation in Wikipedia:

http://en.wikipedia.org/wiki/Taxation_in_the_United_States

To those who do not want to get lost in the English and specialized American financial terminology, we recommend using the services of our Russian speaking accountants and CPAs (Certified Public Accountants), who will help you figure out all the intricate details of US taxation.

Now let’s look at the principles the US tax law is based on.

These principles were formulated by Adam Smith, whose works were read by Pushkin’s Onegin. They sound as follows:

• Fair allocation of taxes and ensuring that population can pay them. (If you earn more you pay more, but until certain limits. If you earn really a lot you pay less).
• Clear and distinct taxes. (Adam Smith was definitely an idealist. Albert Einstein was closer to reality: “The most difficult thing in the world is to understand American income tax legislation”. There is an opinion that the theory of probability was inspired by US tax legislation.
• Practical and convenient keeping of tax records. In many respects it is already accomplished by high automation of accounting and availability of systems that let a person who does not know much about US tax legislation to fill in tax returns correctly.
• Economy and efficiency of the tax service. This is a fact. US Inland Revenue Service spends not more than 0.5% of the collected taxes for those purposes.

But is it possible that during more than two centuries that passed from Adam Smith’s time, nobody invented anything better in the USA?

Well, they did invent something…

First of all, it is preliminary tax withholdings from salary (as it is received). In general like in Russia and Ukraine.

Secondly, tax credits for people with low income (i.е. not only refrain from charging taxes on their money but on the contrary – pay them for their poverty).

Thirdly, modern taxes are used not only for fiscal purposes (to fill in the country budget), but also as a convenient governor of a desirable (or not desirable) behavior of businesses and private individuals.

And finally, although it is usually not said aloud, IRS can serve as a civilized substitute of the Bastille. One of the complaints against president Nixon was about him setting IRS against people he did not like, and it was not without reason. Leaving alone the classic case of conviction of Al Capone not according to usual criminal articles but for tax evasion.

However a number of recent notorious US corporate scandals revealed the fact that US tax legislation is too flexible, permitting companies both conceal multi billion incomes and hide multi billion losses absolutely legally. The Enron case about the disappearance of a billion dollars finally turned out to be kids’ stuff as compared to MSI and QUEST COMMUNICATION cases, where dozens of billions were at stake. At the moment of writing this article in the USA there were 26 cases about hidden or “lost” billions and not all US companies have billion turnover…

In most cases the “heroes” are already in jail.

Well, OK, episodes from the life of billionaires are not about us anyway.

But there are some other examples.

1. One businessman from Moscow asked us to register a business for him in California. We wanted to know what was his business about. It turned out that he bought electronics from major Californian companies and sent it for sale to Russia and Kazakhstan. If he registered a company in California he would have to pay Californian taxes amounting to 8.84% of profit or $800 per year if there is no profit or the total amount of taxes is lower than $800. If one Californian company buys goods from another one it has to pay a sales tax of 7.25% to 8.75% depending on the region (county). Given a turnover of millions dollars he would lose hundreds of thousands. His business was registered in Nevada and now he pays exactly $125 per year for the business license of the state of Nevada.

2. A family from Moscow (not a poor one) having a couple of apartments and stores was about to move to the USA for permanent residence after receiving green cards via L-1 visas. They developed quite a complicated scheme of disposal of their assets in Russia. Eventually they decided to find out the outcome of their scheme from US taxes point of view. Our tax consultants made a tax expertise of their arrangement. They did not like the result.

At the same time we suggested to them two more options of selling their real estate:

One according to which they were not supposed to pay any US taxes.

Another one where they not only did not have to pay any US taxes but also would receive tax benefits for future US income.

Just imagine that all these options exist at the same time. Why is it so? Because US tax laws are compiled to regular life situations, implying that a person lived in the same conditions all hsi/her life and his/her material standing gradually improves (or deteriorates) from year to year. I.e. laws for people.

Tax laws of the USA (as well as other countries) do not envisage situations when there appears someone who has 500 thousand dollars which he/she can either show or hide.

Well, if they do not envisage, we do not insist. It gives us a lot of space for maneuver.

Taxes are not about what you could do or should have done (according to logic). They are about what you have done. It’s about a fact. That is why by showing your 500 thousand dollars at different times and in different portions you can easily manipulate the tax consequences.

Here is another example.

3. One of our clients decided to sell his factory and invest the money into his US company. One “competent” lawyer explained to him how he “should” do it. Our specialists carried out expert analysis and found out that as result of implementing this option the client loses more than HALF of the earned amount in taxes both in the USA and in his country. Our experts suggested an option according to which the client not only did not lose ANYTHING, but even gained due to tax benefits for future US income. That is why, we can confidently say that the most stupid thing that can be done is trying to save money at the expense of tax planning in the USA. And you will have to pay taxes anyway. But, as we say, happiness is not about money, it’s about its quantity…

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