Brace yourself for the future of Taxes: Taxing the mobile workforce and information technology by 2020 is what countries and states are getting ready for!

Disclaimer, I’m not a lawyer nor a tax expert, so if you have better ideas and feedback please share it with the community, so we can all build more high growth corporations and help foster better economy. The@ PRMA (puerto rico mojito arrangement) is an open source model feel free to share it and improve it! This is all hypothetical.

Milton Friedman argued that taxation beyond 10% of GDP during peace time is a sign of poor state management and we should be free to run away from that (After all the great empire of Britain at its peak and the USA before 1929 were taxing their good citizen around 10%)

Modern government are now taxing us between 25% and 40%, I come from #3 France (47.9% of the GDP!) #1 is Danemark at (50.8%) these are awesome country to live in, with great education and social security, but these are expensive countries, from a Tax perspective! As for the USA we get to enjoy a 26% of GDP taxation rate, but the reality feels different; For me in NYC between city, state and federal it feels more like 40% of my income (still better than France) As a result a lot of companies or freelancers are moving away their development teams around the world like Wordpress who has no offices

This trend will keep growing, by 2020 50% of the US workforce will be a freelancer. States and countries are aware of it, and are getting more aggressive about how to capture profits by changing their rules on Nexus (read further more to understand what that is). To quote this report about “Income Tax Nexus in the new economy”

As companies become less physically connected to the marketplace for their products and services, states can be expected to go to greater lengths to assert their jurisdiction to tax

If you’re curious about this tax trend feel free to read this extensive Ernst&Young paper on how to navigate it.

Long story short, if you sell something online to international customers or if you travel a lot for your work, if your startup is a platform or if you’re an online freelancer: you will be taxed more in the near future! This blog post is here to help.

What are tax Nexus? And why staying 14 days in NYC can change your taxes?

Did you know that If you work from Miami where there are no state taxes and you spend more than 14 Days in NYC you are eligible to be taxed on any activity you would have with a NYC client? It’s because the state of New York will consider you have an Income Tax Nexus there. And this is the simple part, just check all the rules you need to know as NYC Teleworkers and business travelers .

Now multiply this complexity by every states (50) by every major cities and major countries (France for example is planning a flat rate of 28% by 2020) and get that all of them have different rules and you end up with the same issue multibillion dollars corp are facing.

Democratizing GAFA Tax optimization

If you agree with my argument, then you will agree that modern workforce even if they are individuals are facing the same complexity that multibillion company are facing.

If you’re very confused about everything I just talked about, no worries, because this is complex!

So let’s look at the big picture here, city, states and countries want to take a cut of the profit of your work as they consider you beneficiate from their well spend taxes (cough cough). The good news is that other cities and countries are playing another game: Cutting taxes to attract talent, investors and high growth companies. Welcome to Tax war :)

The Puerto Rico Mojito arrangement (PRMA)

Don’t drink too many of them!

This is not as sophisticated as the Double Irish used by Apple, but it allows for a great lifestyle, while helping the Puerto Rican economy and still paying a fair amount to each states and countries (I told you, i’m all for fair taxes)

Note that this structure is for US based companies, If you’re abroad feel free to apply to join Parallel18 an accelerator program situated in Puerto Rico.

The magic of ACT20

Before getting to the Puerto Rico Mojito Arrangement (PRMA) let me introduce you to Act20. Act20 is a tax incentive program that allow your company net income to be taxed at a flat 4%. 2 days after learning about this on this blog post by Sebastian Vidal who runs Parallel18; I jumped on a plane from NYC to meet the startup community and get more details about what seems to be too good to be true.

The law currently required you to hire 5 local people for 2,080Hours each, at a minimum wage of $7.25 that’s almost $75k to spend! The good news is that the law has been amended and the new rule is now more startup friendly it will be case by case, but the requirement is now gone (meaning freelancers are welcome, the local impact for job is real as they will naturally look to hire attract and grow local talents)

There are many more incentives taking advantage of the common wealth status of Puerto Rico, here are the details. As the country is facing historical challenges and heavy level of debt (cf origin of the debt) they are doing their best to attract talents and future high growth companies and investor back to this beautiful island, I personally believe this is a smart move and would love to help the local economy.