Millions of Dollars Taxed
Elon Musk is the founder, CEO and CTO of automotive and energy firm Tesla and aerospace manufacturer Space X, as well as owner of The Boring Company. His entrepreneurial spirit and business acumen have been the catalyst for rapid growth within these companies and his estimated net worth currently stands at a marvelous $155 billion. But, given his incredible wealth and success, how much does he pay in taxes? In this article, we aim to answer this question and provide background information, relevant data and perspectives from experts.
On paper, tesla CEO Elon Musk is only required to pay a 14.8% tax on his income, which is the same as the US’s average national income tax rate. However, in the US, it is the responsibility of individual to remain aware of their obligations and pay their taxes accordingly, whether it is a sales tax, income tax, property tax, etc. To this end, in 2018, Elon Musk is estimated to have paid more than $68 million in taxes on his income, both in the US and internationally. In addition to this, he is believed to have regularly contributed to Tesla’s legal, lobbying and public relations costs, resulting in Musk’s overal expenditure on taxes rising to an estimated $105 million.
Financial experts have suggested that Musk’s extremely high pay return stems from his success in marketing and the sale of uncompensated Tesla shares. They have also suggested that his international operations, including his financial investments and holdings, serve to increase the level of taxation that he must pay, resulting in him having to reroute resources away from other areas of his business. This is due to the large scale taxation rules in countries such as the US, where taxes are mandatory for income and global investments.
From a legal standpoint, Musk needs to remain compliant with applicable laws, due to the fact that the overwhelming majority of his finances are held overseas. US legal requirements mandate that all US citizens earning income from foreign sources must file their taxes accordingly. In addition, Elon Musk has reported on numerous occasions that he resides in the US, effectively creating a double taxation issue which means that he is charged twice for the same income. This pushes the overall taxation return extremely high and furthers erodes his estimated net worth considerably.
Experts have speculated that due to the size of Musk’s yearly tax bill, he is under growing pressure to make cost saving decisions within his business, in order to optimise his own individual tax position. This could involve a range of strategies from the acquisition of certain assets, investments in offshore credit systems, the formation of company trusts or private holding partnerships. Such strategies are expected to be undertaken with the aid of sophisticated financial advisors, who can legally structure deals to ensure minimal taxation for Mr Musk.
Accounting and Reporting
Apart from the direct management of tax returns, Elon Musk also has to acquaint himself with the current accounting and reporting regulations in the countries he operates in. This is to ensure that all of his transactions, investments and holdings are documented and reported correctly, in order to avoid any form of civil and criminal prosecution. To this end, a general understanding of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) is essential, and the aid of qualified advisors is strongly recommended.
In the US, Chief Financial Officers (CFOs) are expected to abide by US Generally Accepted Accounting Principles (GAAP) without fail, allowing them to adhere to the full spectrum of US taxation laws. Additionally, US-based companies are required to account for, report and pay taxes on their worldwide income, with documentation and reporting rules for domestic operations and international operations being particularly stringent. Elon Musk has to ensure that all of his companies have compliant accounting processes and legal taxation arrangements in place in order to avoid any form of costly prosecution.
Another key element of financial reporting is that unions and workers need to pay income tax deductions on a quarterly basis. This includes wages, salaries, tips, bonuses, investments and self-employment earnings. Citizens and business owners must also be aware of state, local and federal taxes and the range of deductions that can be claimed. All of this information must be accurately documented and reported in order to be compliant with the law.
Tax Planning Strategies
Elon Musk is thought to employ a range of tax planning strategies in order to maximise his financial savings from taxation. These include the establishment of trusts and holding companies, in order to basically move money from one jurisdiction to another in order to avoid substantial taxation from certain income sources. As aforementioned, Elon is believed to employ a number of experts, in order to ensure that all of his tax planning remains within the boundaries of the law.
A key factor in Elon Musk’s fortune is the generous compensation package that he has awarded himself. Since taking over as CEO, Musk has earned a large portion of his wealth through stock-based compensation, meaning that he profits from the increased value of Tesla’s stock. As a result of this, a portion of the money he makes is tax exempt, so the tax rate on his income effectively decreases significantly. This is a major tax-saving strategy that is employed by a number of prominent businessmen, in order to reduce their overall tax liabilities.
In addition to this, the earnings from Musk’s individual shareholdings and investments are not subject to capital gains tax. This means that any profits generated from his investments are not taxed unless he chooses to withdraw the funds or liquidates the assets. This is a powerful strategy for individuals with large amounts of resources, as it allows them to defer taxation and thereby increase their net wealth.
Government Initiatives
In recent years the US government have attempted to clamp down on excessive wealth accrual and the avoidance of taxation. To this end, the US has proposed various plans to combat the problem of wealth disparities, such as limiting stock-based compensation, imposing a wealth tax and introducing a higher marginal tax rate on earnings above a certain point. Advocates believe that such moves would prevent individual billionaires from further padding their wealth and thus reduce the risks inherent in an unequal society.
In response to this, some of the world’s wealthiest individuals, including Elon Musk, have organized to fight the proposed laws and challenge the government’s view of excessive wealth accumulation. Indeed, the joint efforts of numerous billionaires have already successfully stopped the implementation of several proposals. However, it is certain that the debate will continue regarding the taxation rates applicable to wealth accumulation, and it is likely that Elon Musk will remain an instrumental figure in this ongoing discussion.
Tax Breaks and Penalties
In order to mitigate taxation, it is important that individuals and businesses remain aware of any applicable tax breaks. The US government typically offers these tax breaks to incentivise innovation and business development. In the past, Elon Musk has successfully negotiated and obtained a number of large tax breaks in order to facilitate the expenses of his companies. This includes the development of new batteries and electric car models, research and development costs and corporate office development.
On the other hand, not being tax compliant carries a range of penalties from the US government, which can range from hefty fines to even criminal charges. In addition to this, individuals also have to be mindful of the legal penalties for not filing one’s taxes on time and/or in an accurate manner. Taxpayers who do not comply with these laws can be guilty of fraud or evasion, which can carry heavier penalties.
International Taxation
Elon Musk’s activities are worldwide in scope, and as such he is subject to the taxation laws of a multitude of countries in which he operates. These countries all have their own distinct taxation rules, and some even have as high as a 40% rate on upper-level earnings. To optimize his global tax position, Musk uses the services of advisors who specialize in international tax structuring, so as to legally channel his global income in the most beneficial manner.
What is more, given the unstable nature of global politics, taxation can alter significantly between years. This means that a global business such as Musk’s must keep abreast of international taxation news and trends, as these can directly impact on his overall global tax rate. Additionally, as global markets become increasingly interconnected, individuals and businesses must also be cognizant of other tax jurisdictions that may potentially be applicable to their affairs.
Innovative Tax Structuring
In order to aid global companies, a number of countries have introduced ways to decrease the taxation burden of international businesses. Examples of this include EU Parent-Subsidiary Directive Taxation, where profits are shared between parent companies and subsidiaries on a pre-agreed basis, and Double Taxation Treaties (DTTs). DTTs are legally binding agreements made between two countries, where both of the countries agree to tax a person or business with the same income only in one of the countries or provide a credit for the tax which has already been paid in the other country.
In addition to this, individuals and businesses can set up holding companies, which essentially act as umbrella companies for foreign assets, in countries where taxation is low. Furthermore, President Trump’s Tax Cuts and Jobs Acts of 2017 have allowed many companies to further optimize their taxation positions, with taxes on dividends and capital gains being significantly reduced.
Given the size and breadth of mogul Elon Musk’s global operations, if meticulous tax planning is not employed, the resulting tax bills can be enormous. In light of this, it is clear that the US government must modify its rules and regulations governing taxation in order to incentivise fair taxation, while also rewardng those who are productive members of society.
