Outsourcing , Lowering taxes


How much can out-sourcing for employment, lowering your corporate and individual tax bill to zero save you over the long term?

Let’s say you are a German resident for income tax purposes and you make 1,000,000 Euros a year or in USD terms 1,140,000 USD’s before your salary and employees’ cost.

When this was written Germany had a top tax rate of 45% and a 19% VAT not including municipal taxes and other taxes. It is easy to say that when you take all the taxes that an average six figure earning German has to pay out it would come out to be at least 50% of total income.

The minimum wage in Germany in dollar terms when I wrote this was 10.50 USD an hour using the Euro/USD conversion rate of one Euro equaling 1.14 USD’s.

In Pakistan the minimum wage is .94 USD per hour. Pakistan’s minimum wage is about eleven times less than Germany’s minimum wage.

I have out-sourced to Pakistan myself and the experience is good and English is widely spoken there and the Philippines is good also.

If you take your business outside Germany and move yourself to a pure tax haven country or a country that has a Territorial Tax System to operate your business from and your income is made outside that country or inside if in a pure tax haven with no income taxes this is what your savings could look like with an annual 500,000 USD employment cost if employment was done in Germany.

The 500,000 USD employment cost using Pakistan employees instead of German employees would decrease your employment cost by a lot.

Example: .94/10.50 = 8.95% x 500,000 USD = 44,750 or a savings of 500,000 – 44,750 = 455,250 USD a year off the employment cost using Pakistan employees instead of using German employees.

If you can live on 50,000 USD a year and your employment cost in Pakistan is only 44,750 USD a year based on the above formula you can save the other 1,045,000 [ 1,140,000 USD  – 50,000 USD  personal salary – 44,750 USD for Pakistan employees = 1,045,250 USD savings each year] you can invest because no personal income or corporate tax and if this got an 8% rate of return this would equal = 61,540,000  USD in 20 years.

If you did the same business in Germany,1,140,000 USD – 50,000 USD salary to yourself – 500,000 USD paid to German Employees = 590,000 USD – 50% tax = 295,000 USD to save each year over 20 years at 8% = 14,578,048 USD in 20 years.

Using the above scenario with a very low labor cost and avoiding the high German income tax you could generate 46,961,952 USD more money [ 61,540,000 – 14,578,048 = 46,961,952] using a tax haven with lower labor cost.

The key question is if you have the type of business that can work from anywhere in the world are you better off using super discounted outsourcing rates and paying little to no taxes?

I would say a definite yes!