Twenty-one of the top 100 publicly traded US corporations -
including such big names as
) - avoided paying $93 billion per year in federal taxes by parking
their cash in a far-flung network of overseas tax havens, according
to a comprehensive new study that examines how corporate America
has gamed the US tax code.
The report issued Wednesday by the
US Public Interest Research Group
documents how relatively
commonplace this practice has become
. It pulled the data on those 21 companies from filings with the
Securities and Exchange Commission.
Based on its research, 82 of the 100 biggest publicly traded
companies have created 2,686 tax haven subsidiaries. Not all of
those firms documented how much this practice whittled down their
obligations to the Internal Revenue Service. However, these
companies have stored a total of $1.17 trillion overseas. In many
cases, shareholders put pressure on these companies to maximize
their profit margins by reducing their tax liabilities.
Some - such as
Bank of America
(MS) - depended heavily on
during the 2008 financial meltdown. Bank of America kept $17.2
billion in 316 different offshore subsidiaries, reducing its tax
bill by $4.5 billion. Morgan Stanley shaved its tax obligations by
$1.7 billion using foreign subsidiaries that are entirely legal
under US law.
On Tuesday, President Obama proposed a corporate tax reform that
would generate billions of dollars in new infrastructure and other
spending by giving a one-time tax holiday to companies with their
funds stashed overseas.
All of this comes as Rep. Dave Camp (R-MI) and Democratic Sen. Max
Baucus of Montana attempt to
overhaul the entire tax code
with an eye toward preventing dependence on overseas dodges. The
general framework would lower the top marginal tax rates by
eliminating deductions and credits that have yet to be publicly
"There is widespread agreement amongst academics, economists and
lawmakers that these practices are both unfair to taxpayers who
aren't able to engage in these strategies and harmful to the US
economy," Camp, chairman of the House Ways and Means Committee,
said in June before hearings on the issue.
To limit the use of tax havens, Camp has proposed a 15% tax on any
earnings from patents and trademarks regardless of where the
subsidiary controlling them has been incorporated.
(GE) is willing to trade a loss of tax breaks for lower overall US
rates, while firms such as Microsoft and
(AMGN) oppose the measure.
Eliminating loopholes will not be enough unless the reform changes
the incentives that cause companies to rely on foreign
subsidiaries, said Dan Smith, the tax and budget advocate who
authored the PIRG report.
"You might close one loophole," Smith said. "A company like GE has
1,000 lawyers at its disposal in their tax department - they're
going to find another one."
This is not a case where these companies are serving the needs of
international customers, the report notes. Many tax havens are
island nations such as
Bermuda and the Cayman Islands
where these companies have few workers or local customers. A 2008
report by the Government Accountability Office estimated that 43%
of all of multinational earnings came from just five countries:
Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.
A Senate subcommittee highlighted this practice in May with a
report showing that even as
became the most profitable US technology company in history, it
avoided paying billions of dollars in taxes in the United States
and around the world with an unprecedented international web of
subsidiaries and shell organizations.
In some cases, Apple's subsidiaries had no employees and were
largely run by senior officials from the company's headquarters in
Cupertino, California. By setting up subsidiaries in Ireland and
other countries, Apple was able to render those entities stateless
- and exempt from taxes.
Apple has placed $82.6 billion in three subsidiaries that have no
"tax residency" in Ireland, where they are incorporated, or in the
United States, where company executives manage those companies. An
Apple subsidiary that controls Apple's retail stores in Europe has
not paid any corporate income tax in the last five years.
, the giant manufacturers of appliances, light bulbs, jet plane
engines and high-tech industrial equipment, is holding $108 billion
in 18 overseas subsidiaries.
(PFE), the mega pharmaceutical corporation, set up 174 separate tax
haven accounts containing $73 billion. Software giant Microsoft has
five overseas tax haven subsidiaries containing $60.8 billion. The
grocery store chain Safeway has operations in Mexico and Canada,
but it has eight tax haven subsidiaries as well.
Tax havens are jurisdictions with very low or nonexistent taxes,
places where profits on intellectual property can be stashed in
holding companies. Simply by registering subsidiaries in a
jurisdiction such as the Cayman Islands, these companies can use
legal accounting gimmicks to make much of their US-earned profits
appear to be earned in the Caribbean territory. While the top
statutory US corporate tax rate is 35%, the 21 companies that
provided more detailed information to the SEC paid an average rate
of only 6.9% on revenues kept overseas.
"The only business they're doing is tax avoidance business in the
United States," said Kent Conrad, the former North Dakota senator
at a Tuesday panel hosted by the Bipartisan Policy Center. "Does
anyone seriously think that's a tax increase if those folks start
paying what the rest of us are paying?"
Tim Cook, Apple Inc.'s chief executive, strongly defended his
company's tax practices at the May Senate hearing that focused on
the technology giant's use of Irish subsidiaries to shelter
billions of dollars of income from US taxes.
"We pay all the taxes we owe - every single dollar," Cook told the
Senate's Permanent Subcommittee on Investigations. "We not only
comply with the laws but we comply with the spirit of the laws," he
said. "We don't depend on tax gimmicks." But the PIRG report argued
that - regardless of whether the practice is legal -- it is grossly
unfair to other taxpayers who meet their obligations.
"Loopholes in the tax code make it legal to book profits offshore,
but tax haven abusers force other Americans to shoulder their tax
burden," the PIRG report said. "Every dollar in taxes that
corporations avoid by using tax havens must be balanced by other
Americans paying higher taxes, coping with cuts to government
programs, or increasing the federal debt."
Viewed another way, Congress and the Obama administration could
cancel the next round of deep, across the board cuts in defense and
domestic discretionary spending under sequestration if the Treasury
were able to collect the $93 billion of tax revenue now sheltered
by overseas tax havens.
The report also said that Congress should reject the idea of a
"territorial" tax system
, which would exclude any foreign earnings from US taxes. Adopting
this system could only further accelerate the use of tax havens.
Instead, the PIRG report urges lawmakers to reform the corporate
tax code to end the incentives that encourage the creation of these
tax havens. The most comprehensive solution to ending tax haven
abuse would be to no longer permit US multinational corporations to
defer indefinitely paying U.S. taxes on the profits they attribute
to their foreign entities.
Editor's Note: This article by Eric Pianin and Josh Boak
originally appeared on
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