You Want To Make A Company
I was watching a financial show and an ad came on, asking folks to relocate their business to Macedonia, and promoting their tax advantages.
This is a rather effective example of why California is “toast” as a business destination.
So, just imagine you are a financier and you are thinking of making a new corporation somewhere. You need a little land, some labor, and intend to have profits from year one, so the tax rate matters. You have a home office in California right now, and you are trying to decide between California and somewhere else… For California, you have a major tax and regulatory load to deal with. Corporate taxes from 8% to 10%+ along with a 9%+ sales tax, the CARB, and a few dozen other agencies, all with a load of fees. THEN, on top of that, you get to pay US Federal taxes. The total bite can run out to about 50%.
Now, lets look at what Macedonia is offering:
From this site:
INCENTIVES IN THE TECHNOLOGICAL INDUSTRIAL DEVELOPMENT ZONES
– 0% personal and corporate income tax for the first 10 years (10% thereafter)
– No VAT and customs duties for export production
– Subsidy of up to €500,000 towards building costs
– Land lease for up to 99 years at attractive concessionary rates
– Free connection to utilities
– Green Customs Channel expediting exports to the EU
– Advantageous location – access to pan-European corridors 8 and 10, railroad, and international airport
Gee… Income tax of ZERO for a decade. More than enough time to get my business launched and proving itself. After that, it jumps all the way to 10% TOTAL. Not a double dip of state and federal as in the USA.
For exports, I get a free pass on VAT (so it’s better to export to California than to build in it).
And they will pay me up to a half million Euros toward my factory. (Where California will hit me with fees and penalties up the wazoo…)
So, Dear Governator: In a nutshell, that’s why you are toast. If you can’t compete on the global stage, business leaves and taxes with them. No wealth creation means you are eating your seed corn and when that is gone, you die. Please explain this to the senate and assembly. Have a nice day.
FWIW, this link is a bit old (almost 3 years), but still has interesting information in it. The focus is a bit more on property taxes:
Dec 07, 2007
Income taxes in Macedonia are moderate
EFFECTIVE TAX RATE ON RENTAL INCOME
€1,500 €6,000 €12,000
7.5% 7.5% 7.5%
Non-residents are liable to pay taxes only for their income from Macedonian sources. Personal allowances are not available to non-residents.
Income is taxed at a flat rate of 12%. The taxable base depends on which kind of income is being taxed, as the rules for deducting expenses vary with the categories. The rate will go down to 10% for 2008 and the succeeding years.
Rental income is taxed at a flat rate and the applicable rate depends on the category of the rental property. Unstudied business space is taxed at 8.11% and accommodated business space is taxed at 7.52%. Taxable income is gross rental income.
Capital gains realized from the sale of real estate property are taxed as ordinary income at 12%. The capital gain is computed as the selling price, less acquisition costs, maintenance costs and depreciation. The tax is then levied on only 70% of the computed capital gain. Capital gains from the sale of real estate property held for more than 3 years are exempt from taxation.
Real Estate Tax
The owner of the property is generally liable to pay the tax, but in the case of a rental agreement, the tenant is the one liable. The rates are determined by the municipalities and range from 0.1% to 0.2%. A 50% tax reduction is available for taxpayers living in a residential building, or flat with family.
Corporate income is taxed at a flat rate of 12%. Expenses incurred in the generation of income are deductible. This rate will go down to 10% in 2008 and later years.
Corporate capital gains are taxed as ordinary income at 12%. Capital gains are generally computed as selling price less acquisition costs, maintenance costs and depreciation. The tax is levied on only 70% of the computed capital gain.
Notice a couple of nice goodies? Things like NO Capital Gains on real estate held over 3 years (and if less than that, on only 70% of the gain). Or how about the corporate capital gains being on only 70% of the gain and then at the ordinary income rate (that is now 10%). Effectively that’s a 7% Capital Gains rate and you apply that net of costs of the gain. Nice…
Oh, and if I pack up and move there, my US income will have a ‘pass’ on the first large chunk ( last I looked it was about $75,000 but I’m sure that’s changed now) for US taxes AND be exempt from Macedonian taxes too. Very Very nice.
So where do you think I’d put my new factory (and my new home…)?
“Suck the life out of me California” or business partner Macedonia?
I’m sure there are fleas on this hound somewhere, there always are. Perhaps it is a high labor cost or heavy unionization, or maybe it’s a layer of local and city taxes to be uncovered. Left over tensions between former Yugoslavia ethnic groups? Perhaps very high fuel costs… There is always something.
But there are also a load of ‘fleas on the hound’ in California too ( including local sales taxes, various fees, licenses and punishments at all levels, illegal immigration and that ethnic tension).
And the Feds are busy “fixing” our low energy costs with various forms of breakage of the energy industries. ( For example, in a “Ministry of Stupidity Speaks” moment, Obama froze offshore drilling for 6 months. Well, one small problem: Those rigs cost about 1/4 million $/day and that breaks the contract. They will up-anchor and go to the Middle East and Brazil to drill. And enter a new contract for a few years. We are locking in higher dependency on OPEC for the next 4 to 5 years. And higher prices. The shut-in capacity here is about 1/2 the total non-OPEC growth of supply. Yeah, that much.)
So most likely those minor costs in each country will be about the same. It will be very very hard for the combined Macedonian load to rise higher than the combined USA / California set…
Also realize, this was a focused look at just ONE place out looking for business. There’s a whole world of such places, and a proper business plan would look at all of them and match the particular needs more closely (such as nature of the labor force, local support facilities, etc.). This could easily find places as good, or perhaps even better than, Macedonia for any one company.
It’s a big world out there, and California needs to realize that it is NOT “special”… Macedonia looks like a great location for making movies too…
FWIW, if I were looking to set up a new company, I’d put Macedonia on the shopping list of places. California would not even be considered.