Tuesday, February 19, 2013

Death and Taxes

I recently came across a post in regards to Manny Pacquiao refusing to fight on US soil due to the high tax rate applied to his earnings. From his last fight, the total payout was $24 million (he lost to Marquez) -- but after tax, it can turn out to be $15 million. At 39% tax rate, it becomes stupid to think about fighting on US soil.

Incidentally, there are reports of Americans giving up their citizenship for other countries to "evade" tax -- One being Eduardo Saverin, who saved over 60 million dollars in tax when Facebook IPO'd. He now lives in Singapore. Looking at tax rates per country, it almost always feels like the go-to country to setup a corporation will always be Ireland. Setting up shop in Ireland is a fairly common "pay less on taxes" strategy because it is only 12% for corporations. One thing I am starting to notice in startups that start to gain traction and revenue is that they all start bringing in a CFO who has significant experience in being able reduce paying taxes in order to invest more money into engineering or marketing. The stages (when growth happens) are usually:

1) MVP
2) Get users
3) Convert users to paying customers
4) Hire a CFO in order to "shift" money into more product development when revenues reach X/year

Howard Hughes is another great engineer who moved his companies around into different states to get around paying too much tax. While governments have become smarter about stopping these processes, it is always a constant battle because as a growing company, every dollar counts. If a startup can pay another salary in engineering or marketing because it didn't pay that amount in taxes, it can increase the potential of the company to grow.

Ultimately, 40% in tax seems ridiculous for boxing earnings. I'm in total agreement with Pacquiao's team to never fight on US soil. Boxers spend their lives on training (they only have a few years of being professional), pushing themselves to the limit -- they deserve every penny of the agreed amount when signing a fight contract.


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