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Dell buyout shows importance of tax planning

Tax planning is a key part of running a success business. Indeed, even when a business is already successful, making strategic decision about how to structure tax burdens may be crucial to continuing that success.

A case in point could be Dell, the computer company that has put millions of PCs into people's hands in recent years. This week, a leveraged buyout of the company by its founder, Michael Dell, is making headlines. The company remains profitable, though it faces increasing competition from upstarts in its industry. Increasing sales of tablet computers and smartphones have also cut into the company's traditional PC market

The real driver behind the buyout, however, is sound tax planning, particularly regarding assets held in offshore accounts. Dell has considerable cash holdings in foreign accounts. But using that money to pay dividends to shareholders does not necessarily make sound business sense.

It might not make sense because bringing the money back to the U.S. would not only involve the step of "repatriation." It could also make the repatriated profits subject to a 35 percent corporate income tax.

A leveraged buyout, however, could enable the company to avoid such taxes. And legally avoiding taxes is what sound tax planning aims for. The goal is to keep costs down, compete effectively in the marketplace and deliver value - not to enrich Uncle Sam. There is, after all, an important difference between tax avoidance and tax evasion.

What is that difference? Tax avoidance is when a business or individual does whatever is legally possible to minimize taxes. Tax evasion, by contrast, involves fraud or some other illegal method to get out of paying taxes.

Source: "Dell's Gigantic Tax Dodge," Slate, Matthew Yglesias, 2-5-13

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our offshore accounts section.

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