Free widgets?

[MikeHalloran]

Let's say that a company makes widgets, sells them all over the world, and is competitive in all those markets.

The Big Boss behaves a little unusually; he does all of the production engineering, worrying about cycle rates of the machinery and such. He bitches about productivity, but the numbers are hard for anyone else to get. There appears to be a reason.

The production buyer has been quietly told that when the paperwork reaching her desk tells her to buy, e.g., ten thousand pounds of brass bar, she is to buy instead twenty thousand pounds. She does this for all commodities.

What appears to happen is this: Whenever a thousand assembled widgets reach finished goods storage, the paperwork says that a thousand widgets have been added to the world inventory, at a measured cost that makes them competitive in the domestic USA market.

But, real quietly, at the same time, another thousand assembled widgets arrive in finished goods storage for the Overseas Division, run by Big Boss' son. Overseas is under the same roof, but has no production capacity of its own, and it does not detectably buy anything from anyone. The stuff it needs to sell ... just shows up. It can be competitive anywhere in the world, because the cost basis is .. zero.

The company is privately held. Big Boss, or his wife, is the majority stockholder. Officers of the company may or may not own any stock. It is not clear that anyone but Big Boss and the buyer are aware of the standing order.

Questions:

If this is not a scam, why the charade?

If it is a scam, who is being scammed?

What would you do if you encountered it?

Report it? To whom?




Mike Halloran
Pembroke Pines, FL, USA

 

[CajunCenturion]

A few things come to mind, but to be honest, don't know.

Is the Overseas Division actually a separate company incorporated overseas? That would allow the local company to incur all the expenses, thus reducing profitability and in turn, local taxes. The Overseas Company, because it's overseas, would be in a complete different tax situation. When looking at the two tax bills together, this may be the cheapest arrangement.

The second idea revolves around import duties and/or costs involved with the import/export of technology. If there is not record of the overseas company buying goods, then they may be skating around any import fees or duties.

Another possibility is that your supplier(s) may not do business with you if you're doing business in certain overseas countries. I remember back in the days of Apartheid where your supply chain could be adversly affected if it were known you were doing business in South Africa.

Just some random thoughts ...

Good Luck
--------------
As a circle of light increases so does the circumference of darkness around it. - Albert Einstein

 

[zdas04]

If it is not a tax scam, then who gets hurt by this operation? The corporation pays for the full amount of raw materials and the cost of assembly, the corporation is depreciating capital assets. What does it matter how the costs are allocated (as long as no one's incentive bonus is based on their division's profitibility)?

It sounds like the total cost is being used to set domestic pricing. They can use any algorythm that they want to use to set pricing and they may simply be treating international sales as pure gravy.

This doesn't have to be evil, I have clients that pay so slowly that I always treat a check from them as a windfall and do something frivolus with it. The Big Bosses secrecy may just be a way to keep from having to explain something to people without the right to know his business strategies.

On the other hand it may be a (legal or illegal) means of avoiding a particularly burdensome tax. Tax avoidance is an obligation, tax evasion is a felony. He may have just found a legal loophole to lower his tax bill.

Were I you and I wasn't personnaly being injured by these actions I'd red flag this thread and try to forget what little I knew about the arrangements.

David

 

[IRstuff]

Maybe he's skimming profits through the overseas division?

Money laundering?

TTFN

 

[GregLocock]

Agreed, sounds like a tax scam.

Multinationals do this by setting an artificial (ie non competitive) internal charge back scheme for goods or services supplied by one country's division to another. Then they minimise their global tax bill. A slightly more moral version of this is to prevent their subsidiaries from local soucing some services or product.

That's not quite what is happening in this case, but I suspect tax is at the root of the dodge, if it is a dodge.

I'm intrigued that a company could be competitive in the states with a cost base twice that of the competition.


Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[TheTick]

My gut feeling...

If there are other stockholders, it is likely they are getting scammed. Profit? What profit? We spend all of our money on materials. Nothing left for dividends!

Big boss is likely pocketing money while the rest of the investors are left without returns. Just because Mr. & Mrs. Big Boss are majority stockholders does not necessarily mean they are the ones with the most money at stake.

 

[dbuzz]

The boss and/or his wife own 100% of the company. The two divisions (domestic and overseas) will have aggregated costs and revenues, which will result in a loss or a profit for the shareholders, i.e. the boss and/or his wife.

If the business' costs can be totally recovered in the domestic sales, then the product can be offered to the overseas market at a cheaper price. It seems to me this is a just a sensible business decision, rather than some conspiracy, to compete in the international market where competitors are based in counties like China and India, which have a significantly cheaper manufacturing base.

Good luck to him.

 

[MintJulep]

Is the overseas division incorporated in the US, or overseas?

If the overseas division has no expenses, and no capital equipment to depreciate they are left with only profit, right? This would seem be a tax liability anywhere.

Does the overseas division perhaps sell finished widgets back to the US division somehow?

CC and Tick may have hit it. Do the US stock holders also hold the overseas division? If not then this would seem to divert profits away from the stock holders and into the pockets of sonny.

Ain't nepotisim great?

Perhaps the share holders would be interested?

 

[CajunCenturion]

==> I'm intrigued that a company could be competitive in the states with a cost base twice that of the competition.
Maybe it's not. Perhaps the local company is actually losing money, and the owner is taking the losses personally to offset gains from another source.

Good Luck
--------------
As a circle of light increases so does the circumference of darkness around it. - Albert Einstein

 

[TheTick]

The boss and/or his wife own 100% of the company.

Where did this bit of informatioin come from? You can't tell this from MH's original post.

 

[MikeHalloran]

Thanks for all the responses.

Overseas is a separate U.S. corporation.

The company is clearly profitable.

One reason: Local semiskilled wage rates are relatively low, because there's a large supply of women whose husbands commute to the cane fields a hundred miles away. They want to be home in time to prepare dinner, so they won't go far. They sit at long tables and work industriously while chatting with their neighbors.

Another reason: They've invested heavily in automation. Not all new, and not all new technology, but none of it idle.



Mike Halloran
Pembroke Pines, FL, USA

 

[drawoh]

MikeHalloran,

I am not an expert on this either, but let's try some creative accounting.

I charge all of my expenses in the US, and subtract this from my gross US income. I use this to calculate my taxes.

My international firm is incorporated in a tax haven somewhere. I report my gross international income there, with my international expenses subtracted. Oops! There weren't any!

This would result in tax savings. Probably, it is illegal, although the investigation could be a challenge.

JHG

 

[GregLocock]

If that is illegal then many multinationals are in trouble.

They have more money, more time, and more lawyers than the Government. They also fund political parties.



Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[MintJulep]

Drawoh,

Do tell, where is this magic tax haven where a corporation can have no operating expenses, no capital to depreciate (e.g. no deductions), and make a high profit, yet pay no taxes.

I want to move there.

Both US and Overseas are US based corporations, so there seems to be no effort to use foreign incorporation as a tax shelter.

From the information available here it seems that this scheme is designed to reduce the profitability of the US division (which apparently has non-family share holders) and increase the profitability of the overseas division (which it seems likely is "all in the family").

Too bad that you have such high ethical standards Mike, otherwise I would suggest that you "inquire" about obtaining shares in the overseas division.

 

[dbuzz]

The Tick, I stand corrected.

 

[dbuzz]

Perhaps I'm missing something here. I just don't see the conspiracy theory that many of you do.

The domestic and overseas organisations are described by MikeHalloran as being divisions of the same company. The company will have aggregated costs and revenues from the two divisions, which will result in an overall profit or loss.

If the business chooses to recover 100% of its costs in the activities of the domestic division, to make the overseas division more competitive or perhaps to break into and establish itself in the international market, that's just a strategic decision taken by the company.

I say again, good luck to them. It's not easy for manufacturers from Western, industrialised nations to compete internationally.

 

[MikeHalloran]

To clarify:

Overseas and Domestic are separate US corporations that share only a street address. They are not divisions of one corporation.

I suspect that a few long- term employees may hold shares in Domestic.

I claim no moral or ethical high ground.

I have not detected similar situations before or since. I'm always far removed from the streams of money and power, so that doesn't mean it's unusual. I infer from your replies that it is either unusual, or we are all far removed from the streams...





Mike Halloran
Pembroke Pines, FL, USA

 

[unclesyd]

Isn't this very similar to what ENRON did prior to the ship hitting the sand.

 

[MikeHalloran]

ENRON was buying and selling the same power at the same time. Most of the transaction volume never actually existed.

Big Boss is producing twice as many widgets as he admits.

The schemes are complementary, but both have a fishy smell.



Mike Halloran
Pembroke Pines, FL, USA

 

[IRstuff]

The bit about foreign competitiveness doesn't hold much water, since it would absurdly obvious that the company is "dumping" below market price in the US. That sort of thing is frowned upon by the WTO.

I'm still leaning toward somesort of money laundering, particularly since it's apparently located in FL.

TTFN