"Most Companies in US Avoid Federal Income Taxes: Report Says Most Corporations Pay No Federal Income Taxes; Lawmakers Blame Loopholes"
By JENNIFER C. KERR Associated Press Writer
The Associated Press, August 12, 2008
Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.
The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.
Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.
"It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.
An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called "S" corporations pay taxes under individual tax codes.
"Half of all business income in the United States now ends up going through the individual tax code," Edwards said.
The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.
More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.
The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns for the years 1998 through 2005. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.
Dorgan and Levin have complained about companies abusing transfer prices — amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.
"It's time for the big corporations to pay their fair share," Dorgan said.
On the Net:
Government Accountability Office: http://www.gao.gov
"What the Top U.S. Companies Pay in Taxes"
by Christopher Helman - Forbes.com - April 2, 2010
As you work on your taxes this month, here's something to raise your hackles: Some of the world's biggest, most profitable corporations enjoy a far lower tax rate than you do -- that is, if they pay taxes at all.
The most egregious example is General Electric (NYSE: GE - News). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.
Avoiding taxes is nothing new for General Electric. In 2008 its effective tax rate was 5.3%; in 2007 it was 15%. The marginal U.S. corporate rate is 35%.
How did this happen? It's complicated. GE's tax return is the largest the IRS deals with each year -- some 24,000 pages if printed out. Its annual report filed with the Securities and Exchange Commission weighs in at more than 700 pages.
Inside you'll find that GE in effect consists of two divisions: General Electric Capital and everything else. The everything else -- maker of engines, power plants, TV shows and the like -- would have paid a 22% tax rate if it was a standalone company.
It's GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely. The timing of big deductions for depreciation in GE Capital's equipment leasing business also provides a tax benefit, as will loan losses left over from the credit crunch.
But it's the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. "When you add in state taxes, the U.S. has the highest tax burden among industrialized countries," says Hodge. In contrast, China's rate is just 25%; Ireland's is 12.5%.
Corporations are getting smarter, not just about doing more business in low-tax countries, but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, like patents and software.
As a result, figures tax economist Martin Sullivan, companies are keeping some $28 billion a year out of the clutches of the U.S. Treasury by engaging in so-called transfer pricing arrangements, where, say, Microsoft's (NYSE: MSFT - News) overseas subsidiaries license software to its U.S. parent company in return for handsome royalties (that get taxed at those lower overseas rates).
"Corporations are paying lower amounts of their profits in taxes now than in the past," says Douglas Schackelford, who teaches tax law at the University of North Carolina at Chapel Hill. "Other countries have been lowering their rates, but not the U.S."
Mind you, not all global megacorps enjoy such low tax rates. Try to muster some pity for Big Oil. ExxonMobil (NYSE: XOM - News) paid more income taxes than any other U.S. company last year, some $15 billion, or 47% of pretax earnings. Exxon's peers Chevron (NYSE: CVX - News) and ConocoPhillips (NYSE: COP - News) likewise paid out more than half their earnings in income taxes. The oil companies are oddities among the multinationals because many of the oil-rich countries where they do business levy even higher taxes than the U.S.
Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. No wonder that of $15 billion in income taxes last year, Exxon paid none of it to Uncle Sam, and has tens of billions in earnings permanently reinvested overseas.
Likewise, GE has $84 billion in overseas income parked indefinitely outside the U.S.
Naturally the Obama administration wants to put an end to this. It has proposed doing away with tax deferrals on overseas income. If the plan passes, a U.S. company that pays a 25% tax on profits in China would have to pay an additional 10% income tax to Uncle Sam to bring it up to the 35% corporate rate. "Eliminating deferrals would put U.S. companies on an unlevel playing field," says the Tax Foundation's Hodge, "especially if competing with the likes of Germany, which only taxes companies on domestic operations."
Hewlett-Packard (NYSE: HPQ - News) and others among the top 25 state in their annual reports that if Obama's tax measures pass it would mean a certain tax hike, probably amounting to billions of dollars.
Would no more tax holiday for GE really end up helping Mr. and Mrs. Taxpayer? Doubtful. "The average Joe should be in favor of lower corporate taxes," says Hodge, "because ultimately they are paying the corporate income tax. Either as workers, getting lower wages and fewer jobs, or as consumers, paying higher prices, or as retirees, getting lower dividends and earnings on their investments."
In the same vein, JPMorgan Chase (NYSE: JPM - News) Chief Executive Jamie Dimon has spoken out against an Obama proposal to levy a special tax on banks to recoup bailout costs. "Using tax policy to punish people is a bad idea," said Dimon. "All businesses tend to pass costs on to customers."
No. 1: Wal-Mart Stores
(Robyn Beck/AFP/Getty Images)
Sales: $401 billion
Pretax income: $20.9 billion
Income taxes: $7.1 billion
Tax rate: 34.2%
$1.2 billion of Wal-Mart Stores' taxes are international.
No. 2: ExxonMobil
(Eric Thayer/Getty Images)
Sales: $311 billion
Pretax income: $35 billion
Income taxes: $15 billion
Tax rate: 47%
None of ExxonMobil's income taxes were paid in the U.S. In 2008 the company's income tax bill was $36 billion.
No. 3: Chevron
(David McNew/Getty Images)
Sales: $172 billion
Pretax income: $18.5 billion
Income taxes: $8 billion
Tax rate: 43%
Chevron paid $19 billion income tax in 2008. Of this year's taxes, just $200 million were paid in the U.S.
No. 4: General Electric
(AP Photo/Paul Sakuma)
Sales: $157 billion
Pretax income: $10.3 billion
Income taxes: (-$1.1 billion)
Tax rate: N/A
How Can It Be That You Pay More to the IRS Than General Electric?
GE's financial services unit, GE Capital, keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. and make lots of money overseas, where tax rates are lower.
No. 5: ConocoPhillips
(AP Photo/David Zalubowski)
Sales: $152 billion
Pretax income: $10 billion
Income taxes: $5 billion
Tax rate: 51%
ConocoPhillips paid $13 billion in taxes in 2008.
No. 6: AT&T
(Justin Sullivan/Getty Images)
Sales: $123 billion
Pretax income: $19 billion
Income taxes: $6.2 billion
Tax rate: 32.4%
AT&T's executive officers are eligible to bill the company $14,000 a year for their own income tax preparations.
No. 7: Bank of America
(David McNew/Getty Images)
Sales: $120 billion
Pretax income: $4.4 billion
Income taxes: (-$1.9 billion)
Tax rate: N/A
How did Bank of America not pay any taxes on $4.4 billion in income? Because of deductions like $860 million in tax-exempt income, $670 million in low-income housing credits and a $600 million loss on shares of foreign subsidiaries. With a provision for credit losses of $49 billion, Bank of America probably won't be paying taxes for a long time.
No. 8: Ford Motor
(Scott Olson/Getty Images)
Sales: $118 billion
Pretax income: $3 billion
Income taxes: $69 million
Tax rate: 2.3%
Ford's tax rate is so low because of past years' losses from U.S. operations.
No. 9: Hewlett-Packard
(Justin Sullivan/Getty Images)
Sales: $115 billion
Pretax income: $9.4 billion
Income taxes: $1.75 billion
Tax rate: 18.6%
HP's low tax rate is due to lower tax rates in foreign countries. The company says in its annual report that President Obama's proposals to end tax deferrals on international operations would mean a big tax hike.
No. 10: Berkshire Hathaway
(Justin Sullivan/Getty Images)
Sales: $112 billion
Pretax income: $11.5 billion
Income taxes: $3.5 billion
Tax rate: 30%
"G.E. paid no taxes on $5.1 billion in profits"
By Brett Michael Dykes, Yahoo! News, March 25, 2011
As Washington worries about the United States' growing deficit problem, there's mounting evidence the government is failing to collect taxes from wealthy individuals and corporations. A piece in today's New York Times by David Kocieniewski outlines how G.E. skirted paying any taxes on $5.1 billion in profits in 2010--in addition to claiming a $3.2 billion tax credit.
The main reason G.E. is so adept at avoiding paying taxes, Kocieniewski writes, is because it's compiled an all-star team of in-house tax professionals plucked from the Internal Revenue Service, the Treasury Department, and "virtually all the tax-writing committees in Congress."
G.E.-- whose slogan is "Imagination at Work"-- has in-house, Kocieniewski writes, what is considered by many to be the best tax law firm in the world. Their secret to success is a familiar one, though G.E. appears to have perfected it: "fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore."
In a regulatory filing just a week before the Japanese disaster put a spotlight on the company's nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.
Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation's tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.
In an interesting twist, President Obama recently asked G.E. CEO Jeffrey Immelt to be
his chief outside economic adviser, and the company recently came under fire for being the manufacturer of the faulty reactors that sparked Japan's nuclear crisis in the wake of the devastating earthquake and tsunami.
(Photo: Paul Sakuma/AP)
"GE: No taxes and a refund"
The Berkshire Eagle, Editorial, March 28, 2011
Taxpayers sweating out the approaching filing deadline may be interested in knowing that General Electric has filed its paperwork and is claiming what amounts to a $3.2 billion refund in the form of a tax credit. Even though it did not pay any federal taxes in 2010.
The nation’s largest corporation benefits from something the average taxpayer does not -- the best tax department money can buy. According to David Kocieniewski of the New York Times, that team includes former officials of the Internal Revenue Service and Treasury Department, as well as aides to members of the congressional committees who wrote the tax codes. No wonder the federal government ends up owing GE money.
GE is also able to avoid U.S. taxes by focusing its profitable ventures offshore, which is also not an option for most taxpayers. Again according to The Times, GE’s accumulated offshore profits have risen from $15 billion to $92 billion in the past 10 years. Over that same period of time, GE has eliminated 20 percent of its American work force. At a time when America desperately needs jobs and investment, GE is providing both in foreign countries and not even paying U.S. taxes. (Ironically, GE CEO Jeffrey Immelt heads President Obama’s newly formed Council on Jobs and Competitiveness.)
The ability of GE, and to a lesser extent other multinational corporations, to exploit tax loopholes, credits, subsidies, shelters and foreign tax laws to avoid providing desperately needed revenue to the American treasury is the latest of a long list of arguments for reform of corporate tax laws. GE’s lobbyists, however, are as gifted and well-connected as are its tax lawyers, so reform is unlikely. One thing Democrats and Republicans have in common is their susceptibility to lobbyists.
In the months ahead, much will be said about various proposals to clean up PCBs left in the Housatonic River by General Electric. Let it not be said, however, that GE cannot afford a cleanup.
"Nightly News stays mum on GE’s $0 tax bill"
By Chris Lehmann, Yahoo! News, March 30, 2011
As the New Yorker's former press critic, A.J. Liebling, famously said, "Freedom of the press is guaranteed only to those who own one." Perhaps that quotation is framed somewhere in a boardroom at the General Electric Corp., which owns NBC News.
In spite of robust profits of $14.2 billion worldwide, GE has calculated a corporate tax bill for 2010 that adds up to zero, via a creative series of tax referrals and revenue shifts. (This was, indeed, the second year running that the company—which has an enormous, and famously nimble, 975-employee tax division, led by former Treasury official John Samuels—paid nothing in U.S. taxes; indeed by claiming a series of losses and deductions, GE came up with a negative tax of 10.5 percent in the admittedly dismal business year of 2009, and realized a $1.5 billion "tax benefit.")
The curious thing about this year's tax story is that it turned up in many major news outlets, with one key exception: NBC News. As the Washington Post's Paul Farhi notes, the network's "Nightly News" broadcast, hosted by Brian Williams, has not mentioned anything about its corporate parent's resourceful accounting, even though the story has been in wide circulation in the business and general-interest press for nearly a week. "This was a straightforward news decision, the kind we make daily around here" network spokeswoman Lauren Kapp told the Post.
One press critic who begs to differ: Daily Show host Jon Stewart, who noted that the Nightly News found the time for a dispatch on the inclusion of slang expressions in the Oxford English Dictionary, such as "LOL" and "OMG." Of course, Comedy Central's corporate parent, Viacom, is also no slouch when it comes to tax strategy: Earlier this year it sold its struggling videogame unit Harmonix for $50—so that it could claim a tax credit of $50 million.
"Some U.S. firms paid more to CEOs than taxes: study"
By Nanette Byrnes | Reuters – August 31, 2011
WASHINGTON (Reuters) - Twenty-five of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax, a pay study by a Washington think tank said on Wednesday.
At a time when lawmakers are facing tough choices in a quest to slash the national debt, the Institute for Policy Studies, a left-leaning group, said it also found many of the companies spent more on lobbying than they did on taxes.
The senior Democrat on the House of Representatives oversight committee, Elijah Cummings, called for hearings on executive compensation "to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today."
Several companies mentioned in the report took issue with its methodology and said they paid all taxes owed.
General Electric spokesman Andrew Williams called the study "inaccurate" and noted it did not include significant income taxes paid in 2010 for previous years, or state taxes paid. "GE pays what it owes," he wrote in an e-mail response to questions.
Boeing spokesman Chaz Bickers said the study is "simply wrong".
Instead of Boeing's reported "U.S. federal current tax expense" of $13 million which the IPS used, he said a better approximation of the company's taxes paid would be the $360 million it reported as its net income tax payments, most of which, he says, was federal.
"On federal cash tax payments last year we paid in the hundreds of millions," Bickers told Reuters. The company also received a $371 million credit from the government last year for overpayment of taxes in the past, and has added 5,000 U.S. jobs this year Bickers says, in part because of Federal tax breaks.
The institute compared CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which can often be far larger than current taxes paid.
The group's rationale was that U.S. taxes paid are the closest approximation in public documents to what companies may have actually written a check for last year. It said deferred taxes may or may not be paid.
The accounting used in SEC filings differs from the accounting used to tally what's owed on a corporate tax return. Neither the IPS number nor the figure cited by Boeing exactly equals the check written to the IRS, says Scott Dyreng, an assistant professor at Duke's Fuqua School of Business who studies corporate taxes, and though companies could disclose that figure, don't have to and don't do so.
$16.7 MILLION AVERAGE
Compensation for the 25 CEOs with pay surpassing corporate taxes averaged $16.7 million, according to the study, compared to a $10.8 million average for S&P 500 CEOs. Among the companies topping the IPS list:
* eBay whose CEO John Donahoe made $12.4 million, but which reported a $131 million refund on its 2010 current U.S. taxes.
* Boeing, which paid CEO Jim McNerney $13.8 million, sent in $13 million in federal income taxes, and spent $20.8 million on lobbying and campaign spending
* General Electric where CEO Jeff Immelt earned $15.2 million in 2010, while the company got a $3.3 billion federal refund and invested $41.8 million in its own lobbying and political campaigns.
Though the companies come from different industries, their tax breaks fall into two primary areas.
Two-thirds of the firms studied kept their taxes low by utilizing offshore subsidiaries in tax havens such as Bermuda, Singapore and Luxembourg. The remaining companies benefited from accelerated depreciation.
Shareholders have responded favorably when companies in which they invest keep a tax bill low through legal methods, thereby benefiting earnings. But Chuck Collins, an IPS senior scholar and co-author of the report, said that is a mistake.
"I think it's an exposure of weakness in a company if their profitability is dependent on their accounting department and not on making better widgets," he said.
In prior reports, Collins said, out-sized CEO pay was often a red flag of bigger problems to come. The IPS has been putting a pay report together for 18 years. Among those whose leaders have made the high pay list in years past, only to have their businesses falter: Tyco, Enron and WorldCom.
(Reporting by Nanette Byrnes; Editing by Howard Goller, Todd Eastham and Jackie Frank)
"Corporate Tax Dodgers: 10 Companies and Their Tax Loopholes"
By Sarah Anderson and Scott Klinger and Javier Rojo, April 17, 2013 by Institute for Policy Studies
As the budget battles in Washington continue, corporations have stepped into the fray with some of the most aggressive lobbying we’ve seen in years – calling for cuts to corporate tax rates, a widening of offshore tax loopholes that already cost the U.S. Treasury $90 billion a year, and cuts to government services and benefits, including Social Security and Medicare.
In making their case, corporate executives decry the U.S.’s 35% corporate tax rate claiming it is the highest in the world and makes their businesses uncompetitive globally. The evidence suggests otherwise.
Corporate profits are at a 60-year high, while corporate taxes are near a 60-year low. U.S. stock markets are at record levels, and American CEOs are paid far more than executives who run firms of similar size in other nations. Many U.S. corporations pay a higher tax rate to foreign governments than they do here at home.
America’s 35% tax rate is the highest among industrialized nations, but very few companies pay anything like those rates. Total corporate federal taxes paid fell to 12.1% of U.S. profits in 2011, according to the Congressional Budget Office. The average profitable company in the Fortune 500 paid just 18.5% of its profits in federal income taxes between 2008 and 2010, according to Citizens for Tax Justice, a nonpartisan tax research organization. Dozens of large and profitable companies paid nothing in recent years.
HIGHLIGHTS OF 10 CORPORATE TAX DODGERS
Bank of America
Had $17.2 billion in profits offshore in 2012 on which it paid no U.S. taxes. Reported it would owe $4.3 billion in U.S. taxes if profits are brought home.
Had $42.6 billion in profits offshore in 2012 on which it paid no U.S. taxes. Reported it would owe $11.5 billion in U.S. taxes if profits are brought home.
Paid just a 15% federal income tax rate from 2010-2012, less than half the official 35% corporate tax rate – a tax subsidy of $6.2 billion. Had $43 billion in profits offshore in 2012 on which it paid no U.S. taxes.
Made $5.7 billion from 2010-2012 and didn’t pay a dime in federal income taxes. Got a tax subsidy of $2.1 billion. Received $10.3 billion in federal contracts from 2006-2012.
Made $88 billion from 2002-2012 and paid just 2.4% in taxes for a tax subsidy of $29 billion. Paid no taxes in 4 years. Had $108 billion in profits offshore in 2012 on which it paid no U.S. taxes. Received $21.8 billion in federal contracts from 2006-2012.
Made $5 billion from 2009-2012 and paid just $50 million in federal income taxes – a tax subsidy of $1.7 billion. Had $11.6 billion in profits offshore in 2012 on which it paid no U.S. taxes. Received $16.7 billion in federal contracts from 2006-2012.
Made $13.6 billion and paid $2.5 billion in federal income taxes from 2009-2012. Paid an 18.4% federal income tax rate, half the official 35% rate – a tax subsidy of $2.2 billion. Had $53.4 billion in profits offshore in 2012 on which it paid no U.S. taxes. Received $8.7 billion in federal contracts from 2006-2012.
Saved $4.5 billion in federal income taxes from 2009-2011 by transferring profits to a subsidiary in the tax haven of Puerto Rico. Had $60.8 billion in profits stashed offshore in 2012 on which it paid no U.S. taxes; reported it would owe $19.4 billion if profits are brought home.
Received $2.2 billion in federal tax refunds from 2010-2012 while earning $43 billion worldwide even though 40% of its sales are in America. Had $73 billion in profits offshore in 2012 on which it paid no U.S. income taxes. Received $3.4 billion in federal contracts from 2010-2012.
Made $19.3 billion in U.S. pretax profits from 2008-2012 but paid no federal income taxes during the period; instead got $535 million in tax rebates. Total tax subsidy: $7.3 billion. Received up to $6 billion in federal contracts from 2011 through 2023.
Fixing the Game, Designing the Rules
CEOs who are the face of various corporate pro-austerity, anti-tax campaigns with names like Fix the Debt, The LIFT America Coalition, The RATE Coalition and even the long-standing Business Roundtable, preach a theory that cutting corporate taxes is “pro-growth.” But they neglect to say that the growth is of their corporate bottom lines, not the economy and certainly not social well-being.
Though many of these austerity crusaders have corporate retirement plans that will provide tens- and even hundreds of thousands of dollars PER MONTH in their retirement, these CEOs shamelessly argue for cutting monthly Social Security benefits and raising the retirement age to 70 – which automatically reduces seniors’ retirement benefits by 20%.
It wasn’t always this way. There was a time, not so long ago, when America’s largest businesses did not question the need for taxes to pay for investments in education, infrastructure and basic research that benefited businesses and citizens alike. It was from these investments that things like computers, the Internet and life-saving drugs and medical technology emerged in life-changing ways.
In 1952, under Republican President Dwight D Eisenhower, corporate income taxes were nearly a third of the federal government’s receipts but had declined to less than 10% by 2012. This is due to a corporate tax code riddled with loopholes, perks and preferences won by corporate lobbyists and backed by millions of dollars of campaign gifts to Members of Congress.
This report looks at 10 U.S. corporations that have used an array of tax loopholes and corporate subsidies to slash their tax bills. Here are a few of the loopholes and subsidies:
The offshore tax loophole. This gaping loophole costs the U.S. Treasury $90 billion a year by letting corporations ship profits and jobs overseas. It was originally established to encourage U.S. multinational corporations to expand their businesses into other countries; for instance, to encourage car manufacturers to build plants and sell cars in Germany or England. If profits from those sales were reinvested in new and better plants overseas, that money would not be subject to U.S. income taxes. But starting a couple of decades ago, corporate tax attorneys and accountants found ways to stretch this concept and set up ways for companies to register intellectual property, such as patents or trademarks, in low-tax nations, called tax havens.
When a product is sold in America, a chunk of the purchase price is sent to the tax haven to pay for use of the patent, and these funds escape U.S. taxes. One of the companies profiled in this report is Microsoft, which sends 47 cents of every U.S. sales dollar to Puerto Rico to pay for patents on discoveries largely made in the United States. Pfizer has turned these tax-avoiding paper transactions into an art form – it sells 40% of its drugs here but hasn’t reported any U.S. profits in five years. Merck and Citigroup also benefit from offshore tax loopholes.
The excessive CEO pay tax dodge. This loophole was created in 1993 when Congress passed legislation seeking to cap the deductibility of executive compensation to no more than $1 million per year per executive. Companies could continue to pay whatever they wanted, taxpayers just wouldn’t be subsidizing more than the first $1 million per executive. As the bill moved through Congress, a loophole was inserted that exempted all pay considered to be “performance based.” Rather than reining in pay, the effect of the law with the loophole intact was an explosion of stock-based compensation. This loophole costs the U.S. Treasury $8 billion a year. Honeywell is one of the company’s profiled that has used this loophole to save on its taxes.
The corporate malfeasance tax dodge. When you get a parking ticket or a speeding ticket, come tax day you are out of luck because such fines are not tax deductible. But if you are a corporation, the costs of corporate crimes and abuse are most often tax deductible, in effect forcing other taxpayers to subsidize their abusive behavior. When Bank of America paid to settle claims that its foreclosure practices violated the rights of customers who lost their homes or when ExxonMobil paid $1.1 billion to settle claims for the Exxon Valdez oil spill, their tax deductions of these costs meant the rest of us picked up some of the tab for their harmful practices.
The paying business to do what it would do anyway tax subsidy. Several companies profiled were able to sharply cut their taxes by taking advantage of special tax write-offs associated with the 2009 stimulus bill. Corporations have long been allowed to deduct a portion of the cost of their property and equipment over the life of the asset. But the 2009 law allowed companies to immediately write-off 50% of the value of the equipment in the year the purchase was made, regardless of how long the equipment was expected to last. While the intent of the legislation was to get businesses to spend more to stimulate the economy, in reality most companies got enormous tax breaks for doing what they were going to do anyway. FedEx and Verizon are big beneficiaries of this subsidy as they buy aircraft and build cell phone towers.
Bank Bailout, round 2. America’s taxpayers spent more than $2 trillion to bailout America’s financial institutions during the recent banking crisis. But the terms of the bailout did not address whether the financial institutions involved could use the losses incurred during the crisis to reduce their taxes for years to come, in effect, giving them a second bailout. Bank of America used its losses as a get-out-of-taxes free card. Many other banks and financial institutions did the same.
IT DOESN'T HAVE TO BE THIS WAY
There are two bills in Congress that would close some of these loopholes and ensure that some companies pay their fair share of taxes.
The Cut Unjustified Tax Loopholes Act (S. 268, introduced by Sen. Carl Levin (D-MI)) would close offshore loopholes by establishing command and control provisions that would treat foreign subsidiaries controlled from America as U.S businesses for tax purposes. It would also end some of the deductions corporations presently enjoy from stock-option based pay of corporate executives, and close some of the oil and gas subsidies in the tax code.
The Corporate Tax Dodging Prevention Act (S. 250, introduced by Sen Bernie Sanders (I-VT) and H.R. 694, introduced by Rep. Jan Schakowsky (D-IL)) would end the current practice of deferral that allows companies to avoid taxes on offshore profits, both those earned offshore and those shifted there through accounting gimmicks. This bill would tax the global profits of U.S. corporations and provide for a 100% foreign tax credit for any taxes paid to foreign governments. It would raise $590 billion over ten years according to the Congressional Joint Committee on Taxation.
There is widespread and growing public opinion among the American public and the small business community that corporate tax loopholes need to be closed so we have the money to invest in a more promising future. This support is seen across the political spectrum. Corporate tax dodging is not a Republican issue or a Democratic issue, it is an American issue. The American people are saying it is long past time that corporations step up and pay their fair share to fix the debt and assure that our country has sufficient public investment to create opportunities for all to succeed in their life, their liberty and the pursuit of happiness for them and their families.
Sarah Anderson directs the Global Economy Project of the Institute for Policy Studies, a progressive multi-issue think tank, in Washington DC. She’s also the co-author of the IPS report, America’s Bailout Barons: Taxpayers, High Finance, and the CEO Pay Bubble.
Scott Klinger is an Associate Fellow at the Institute for Policy Studies.
Javier Rojo is the Institute's New Mexico Fellow. He recently completed his undergraduate degree at University of New Mexico. As a student, he conducted research on Mexico’s drug war and co-founded the Latin America Sustainability Association.
I Acknowledge Class Warfare Exists's photo
How is this fair?
Accumulated offshore profits:
General Electric: $110 billion
Microsoft: $76.4 billion
Pfizer: $69 billion
Apple: $54.4 billion
Exxon Mobil: $48 billion
Citigroup: $43.8 billion
Google: $38.9 billion
Goldman Sachs: $22 billion
Walmart: $19 billion
McDonald's: $16 billion
"U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes"
By Richard Rubin, Bloomberg Business, March 4, 2015
Eight of the biggest U.S. technology companies added a combined $69 billion to their stockpiled offshore profits over the past year, even as some corporations in other industries felt pressure to bring cash back home.
Microsoft Corp., Apple Inc., Google Inc. and five other tech firms now account for more than a fifth of the $2.10 trillion in profits that U.S. companies are holding overseas, according to a Bloomberg News review of the securities filings of 304 corporations. The total amount held outside the U.S. by the companies was up 8 percent from the previous year, though 58 companies reported smaller stockpiles.
The money pileup, reflecting companies’ incentives to park profits in low-tax countries, has drawn the attention of President Barack Obama and U.S. lawmakers, who see a chance to tap the funds for spending programs and to revamp the tax code. That effort is stalled in Washington, and there are few signs that tech companies will bring the profits back to the U.S. until Congress gives them an incentive or a mandate.
“It just makes no sense to repatriate, pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation, a policy-research group whose board of directors includes executives from Microsoft and Oracle Corp. “Computing and IT companies especially have a lot of flexibility in where they declare their profits.”
Microsoft, Apple and Google each boosted their accumulated foreign profits by more than 20 percent over the year, the largest increases by any of the 34 companies with at least $16 billion outside the U.S. International Business Machines Corp., Cisco Systems Inc., Oracle, Qualcomm Inc. and Hewlett-Packard Co. each added at least $4 billion.
The profits added by the eight technology companies accounted for 45 percent of the net gain in overseas funds among the corporations surveyed. At the same time, firms in some other industries felt enough pressure to meet domestic needs that they chose to take the tax hit by bringing money home.
Duke Energy Corp., based in Charlotte, North Carolina, took a $373 million tax charge against earnings in February as part of a plan to get access to $2.7 billion in accumulated foreign profits. Stryker Corp., a Kalamazoo, Michigan-based maker of medical devices, is planning to repatriate $2 billion this year.
Apache Corp., a Houston-based oil and gas company, had $17 billion indefinitely reinvested overseas at the end of 2013. Now, it has none.
“The company made the decision to utilize international cash to pay down U.S. debt and grow its North American operations,” Castlen Kennedy, a spokeswoman, said in an e-mail.
General Electric Co. topped the list for the fifth straight year. The company now has $119 billion outside the U.S., an increase of 8 percent from the end of 2013 and a 27 percent gain since 2010.
By contrast, Microsoft has more than tripled its offshore holdings since 2010. Apple, which counts only part of its non-U.S. holdings as indefinitely held offshore, increased that portion to $69.7 billion from $12.3 billion in 2010. Cisco now has $52.7 billion outside the U.S., up 10 percent since 2013.
Microsoft referred back to 2012 Senate testimony by Bill Sample, its vice president for worldwide tax. Sample said then that the Redmond, Washington-based company is “fundamentally a global business” and that U.S. law creates a disincentive for U.S. investment.
Kristin Huguet, a spokeswoman for Cupertino, California-based Apple, declined an interview request.
Google referred to a December 2013 letter that the Mountain View, California, company sent to the Securities and Exchange Commission. It said Google needs $20 billion to $30 billion for future acquisitions outside the U.S., $12 billion to $14 billion for foreign subsidiaries’ share of developing intellectual property and $2 billion to $4 billion for capital expenditures.
John Chambers, Cisco’s chief executive officer, said on Bloomberg TV on Feb. 20 that his company is investing in India, Israel and France in the absence of U.S. tax law changes.
“I’d prefer to have the vast majority of my employees here,” Chambers said. “And our tax policy is causing me to make decisions that I don’t think is in the interest of our country, or even in our shareholders, long term.”
The Bloomberg analysis covers 304 large U.S.-based companies that are required to report annually how much they hold outside the country in profits, which isn’t the same thing as cash.
It’s a measure of accumulated profits, including those reinvested in active businesses and factories. The companies say they won’t repatriate these profits, and they haven’t assumed that they will pay future U.S. taxes that would be owed if they did.
“One of the reasons that they’re holding the hoards of cash abroad is they don’t want to pay the repatriation tax when they bring it back,” said Rosanne Altshuler, a Rutgers University economist who studies international taxation.
The analysis starts with corporations in the Standard & Poor’s 500 Index and excludes purely domestic firms, real estate investment trusts and companies with headquarters outside the U.S. It includes each company’s most recent annual report, many of which were filed over the past month.
The companies owe taxes at the full U.S. corporate tax rate of 35 percent on profits they earn around the world. They get tax credits for payments to foreign governments and don’t have to pay the residual U.S. tax until they bring the money home.
Keeping money overseas is particularly easy for technology and pharmaceutical companies whose profits stem from intellectual property that can swiftly be moved.
“It’s very easy to place a patent in another country and accrue the income there,” Altshuler said. “They’re very sensitive to differentials in corporate tax rates.”
Gilead Sciences Inc., for example, reported that it held $15.6 billion outside the U.S. as of Dec. 31, up from $8.6 billion a year earlier. That’s because the intellectual property for the company’s blockbuster drug -- Sovaldi -- was in Ireland before the Food and Drug Administration approved it in 2013.
Corporations that rely on intellectual property -- trademarks, logos or patents -- have an advantage over heavy industrial companies and the financial industry, which relies on providing services to customers, said Jennifer Blouin, an associate professor of accounting at the University of Pennsylvania’s Wharton School.
“You can’t move an oil rig out of certain jurisdictions,” she said. “You can’t shift the service income without moving the people.”
Companies have a duty to their shareholders and they’re responding logically to the incentives in the system, Kennedy said. “Companies are strongly driven by the need to increase shareholder value, and especially any public company has to meet market expectations,” he said.
Whatever the reasons, the potential tax revenue from offshore profits is tempting to U.S. lawmakers, who have been struggling to fund road projects and revamp the tax system.
Obama and top Republicans on the tax-writing committees say they won’t repeat a 2004 law that gave companies a voluntary repatriation holiday with a 5.25 percent tax rate.
Instead, Obama earlier this year proposed applying a 14 percent mandatory tax on the stockpiled profits and a 19 percent minimum tax on foreign earnings going forward.
The one-time tax would generate $268 billion over six years, which Obama wants to use for infrastructure.
Because the one-time transition tax is levied on past earnings, it doesn’t distort companies’ decisions, Altshuler said. The real questions are the rate and the details of the tax system for future earnings.
Obama’s plan hasn’t advanced in Congress, amid Republican objections to some of the details and the idea of using one-time money for needs such as highway construction.
The president met March 2 with the chief executive officers of Xerox Corp., Micron Technology Inc., Qualcomm, IBM and EMC Corp., which have a combined $114 billion in accumulated offshore profits.
“The president and the executives also discussed a shared desire to work with Congress to enact pro-growth, business tax reform,” the White House said in a statement.
That doesn’t mean it’s going to happen anytime soon.
Author's link: www.bloomberg.com/authors/AQNpeIUd-U8/richard-rubin
Information on tax inversions link: www.bloombergview.com/quicktake/tax-inversion
- Jonathan Melle
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