When a company is founded, it registers itself to a specific country. That country then has the right to tax that company under its laws. Tax is very important for nations because it pays for things like infrastructure, cops, and aid programs. Governments usually tax a certain percentage of your profits and the tax varies depending on the nation.

All companies want to expand into other countries. This is because moving into a new country allows them to access a whole new market to sell their product. Also, many companies move their production facilities to other countries because they can pay their labor force a much cheaper rate. While the corporation may pay these new nations to move into them, they will still be paying the bulk of their tax to the country of origin.

The issue of offshore tax comes about then a company based in say, the United States starts a business in Canada. This new business could be completely new and have its country of origin be Canada even though its controlling stockholder is based in the United States. Should this new company be taxed under United States law or Canadian law?

This is a big issue because different nations tax people different percentages so it can be a million dollar difference. This issue takes years to resolve and usually requires a entire team of lawyers. They have to take into account the best interest of the company and both of the competing nations.

These issues are the reason why many companies want to start in third world countries. These nations don’t tax their businesses very much. This allows the start-up to expand faster because they will be paying less of their earnings to the government. Once they become well established they can expand to a country with a high consumer base and still continue reaping the benefits of the low taxes.