The taxation of American businesses operating overseas is a controversial topic. The officers of a corporation, or the managers of a limited liability company (LLC), have a fiduciary duty to the owners of the business to maximize profits. With small businesses, the managers and owners are often the same people, but the duty remains. Minimizing a company’s tax burden is one way to do this. Some companies have developed a variety of schemes for keeping money offshore to avoid U.S. taxes. To the extent that these schemes do not violate U.S. tax laws, it is often because of loopholes in existing laws. A recent ruling from the European Commission (EC), the executive body of the European Union (EU), could have a significant impact on how American companies do business—and pay taxes—overseas.
According to some estimates, large U.S. corporations are holding over $2.1 trillion in profits in other countries, allegedly to avoid paying roughly $620 billion in income tax in the U.S. Unlike most countries, the U.S. requires both its citizens and its businesses to pay federal income tax on income derived outside U.S. territory. Why does the U.S. do this? One possible answer, albeit a rather cynical one, is that the U.S. projects its power and influence around the world, and both citizens living overseas and businesses operating abroad expect the protection of the U.S. government—and occasionally its armed forces—should they need it.
The EC is responsible for monitoring the compliance of EU member nations with EU laws and treaties. In the summer of 2014, the EC announced investigations into three companies either based in or closely tied to the United States, and their business practices in three European countries: Apple in Ireland, Starbucks in the Netherlands, and Fiat Chrysler Automobiles in Luxembourg. In October 2014, it also announced an investigation of Luxembourg’s tax treatment of Amazon. The investigations are targeted more towards the countries than the companies, but the EC’s rulings will substantially affect the companies. The EC announced rulings in the investigations of Starbucks and Fiat in October 2015.