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Make Me Smart with Kai and Molly

Episode 135: Your outfit is trash

Oct 15, 2019

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Sometimes, strategy all comes down to taxes

Dec 9, 2015
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On Wednesday, Yahoo announced that it would not spin off its stake in Chinese e-commerce giant Alibaba group, citing tax concerns. Instead, it will create a separate company to hold the rest of its assets. It’s a big decision to boil down to taxes. 

But taxes determine how companies are born, how they grow and how they die. 

“It begins at the beginning,” said Steve Rosenthal, senior fellow at the Tax Policy Center, “with the choice of entity and structure.” 

Start as a corporation, partnership, sole proprietorship, the choice a company makes will have a big effect on taxes. So will where a company starts or moves to in the case of inversions. 

“In the current global economy, companies have a lot of choice,” said Ryan Dudley, with accounting firm Friedman LLP.

It’s not just that the world is smaller, it’s that the nature of a lot of businesses these days makes them more mobile, and therefore more sensitive to the fact that different places have different tax rates.

“The modern economy is much more driven by intangible property,” Dudley said.

In in a manufacturing economy, companies choose where to locate factories — how close to market, how close to resources. And it’s hard to move a factory. Today’s economy is much more about patents, software and IP. All a company needs to move those assets to a low-tax country is an accountant and a lawyer.

 “It’s the basis for Google and Microsoft and other tech companies to transfer of all their intellectual property to Irish companies,” said Steven Bank, who teaches business law at UCLA.

And of course, taxes play into little things like mergers and acquisitions.

Take the most recent financial crisis and the bailout. Wells Fargo would not have acquired Wachovia Bank if the IRS hadn’t issued a notice suspending limits on the ability to use losses in acquisitions,” Bank said.

By the way, Congress hasn’t undertaken a major tax reform in almost 30 years. 

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