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November 25, 2010

How much taxes would Warren Buffet Pay ?

Warren Buffet favors increasing income taxes and a higher inheritance tax but neither one of those things would have much impact on his situation. Through charitable donations Buffet can drive his income taxes to zero. There are any number of ways that Buffet can have his insurance companies and his foreign companies not pay taxes. Big global companies like Google can reduce taxes nearly to zero and do so now.

Buffett stated that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes (due to their being from dividends & capital gains), while his employees paid 33% of theirs, despite making much less money. On the other hand in 2008 Berkshire Hathaway paid $1.9 billion in federal corporate income taxes on $7.5 billion in earnings (more than 26% in federal taxes alone.

Buffet can lower his taxes by donating appreciated Berkshire Hathaway stock — which costs him pennies on the dollar — to charity, and receives a tax deduction at the appreciated price without having to pay a capital gains tax on the appreciation. The money then sits in his own charitable organization. He’s saving income taxes with the ordinary deduction so it’s essentially a tax shelter. He builds up net worth and doesn’t have to sell stock while deferring capital gains. When he does take a capital gain, it’s at a 15% rate, and he lives in a low-tax state.

There are also favorable tax rules and rates for insurance companies.

Captive insurance companies are used by more than 80% of the Fortune 500 companies.

The cost of ‘self-insurance’ outside of a valid CIC structure is not tax deductible. With a properly formed CIC, the insurance premiums are deductible so that claims are paid with pretax dollars. If no claims are made, the CIC retains the premiums for future business risks or distribution. CIC policies may replace current coverage to cover copyright infringement, errors and omissions, employment practices and property damage.



Buffet owns the insurance and reinsurance companies GEICO, General RE and Berkshire Hathaway Assurance and a Dutch life reinsurance company

Google tax structure is the Double Irish and is an example of why changing the tax structure or rules in one country is meaningless for global company

Google uses a complicated structure to send most of its overseas profits to tax havens, keeping its corporate rate at a super-low 2.4 percent

In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)

All of these arrangements are legal.

"Google's practices are very similar to those at countless other global companies operating across a wide range of industries," says Jane Penner, a company spokeswoman who declined to address the particulars of Google's tax strategies. Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers' national tax practice in Boston, says that "a company's obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally."

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