Yesterday, the conservative Tax Foundation wrote a misleading response to the report, “Offshore Shell Games,” by U.S. Public Interest Research Group (PIRG) Education Fund and Citizens for Tax Justice (CTJ).
Major Conclusions Not Challenged by the Tax Foundation
The Tax Foundation does not challenge most of the report’s findings because a strong body of research by academics, journalists and other tax policy analysts reach the same conclusions.
USPIRG Ed Fund/CTJ conclude that American corporations in the aggregate are obviously engaging in tax avoidance when they report to the IRS that their subsidiaries earn $94 billion in profits in Bermuda during a year when that country has a GDP (total economic output) of just $6 billion. We conclude that American corporations are engaging in obvious tax avoidance when they report to the IRS that they earn $51 billion in the Cayman Islands when that country has a GDP of just $3 billion. The Tax Foundation does not challenge this.
We also conclude that when Apple discloses it would pay a U.S. tax rate of about 33 percent on its offshore profits if it officially brings those profits to the United States, that means Apple has only paid a 2 percent effective tax rate to countries where it claims to have earned those profits. We conclude that when U.S. Steel discloses that it would pay a U.S. tax rate of about 34 percent on its offshore profits if it officially brings them to the U.S., that means U.S. Steel has only paid a 1 percent effective tax rate to the countries where it claims to have earned those profits. The findings are similar for Nike, Microsoft, Oracle, Safeway, American Express, Wells Fargo, Citigroup, Bank of America, and several other companies. This strongly suggests that most of these profits are reported to the IRS as earned in tax havens.
The Tax Foundation challenges none of this.
Tax Foundation’s Own Analysis Depends on Wildly Misleading Use of Data
The Tax Foundation claims that we ignore IRS data that “reports corporations actually paid a tax rate of about 27 percent on their reported foreign income” in 2010, as one of its own reports claims.
This is outrageously misleading. The Tax Foundation’s 27 percent figure is based on the offshore profits that American corporations “repatriate” to the U.S., which excludes profits that are reported as “earned” in tax havens or other countries with low tax rates. (Specifically, the Tax Foundation uses data reported on form 1118, which applies to offshore profits actually taxed by the U.S. in a given year.) The profits booked offshore for tax purposes that the U.S. PIRG Ed Fund/CTJ cite are those that companies have claimed are “permanently reinvested” offshore, meaning they have no plans to ever pay U.S. tax on them. By definition then, the Tax Foundation study does not factor in those profits at all.
As our report explains, when offshore corporate profits are “repatriated,” (officially brought to the U.S.) they are subject to U.S. corporate income tax minus a credit for any corporate income tax they paid to foreign governments. (This is the foreign tax credit.) As a result, American corporations are far, far more likely to repatriate offshore profits that have been subject to relatively high foreign tax rates, because they generate larger foreign tax credits. They are far less likely to repatriate offshore profits that they reported to earn in tax havens, because these profits would generate few if any foreign tax credits.
Tax Foundation’s Attempts to Pick Apart US PIRG Ed Fund/CTJ Analysis Do Not Withstand Scrutiny
The Tax Foundation attempts to pick apart pieces of the analysis in order to create a general sense that there is disagreement about the data and what the data can tell us. For example, we explain that only 55 companies disclose how much they would pay in U.S. taxes on their offshore profits if they officially brought those profits to the U.S. That’s how we determined that Apple, U.S. Steel, and those other companies officially hold most of their “offshore” profits in tax havens. The Tax Foundation claims that we are “cherry-picking” because most companies do not disclose this. We cannot possibly be “cherry-picking” if we provide the data for every Fortune 500 company that discloses such data. Further, there is no reason to believe (and none suggested by the Tax Foundation) that these 55 corporations are not representative of the rest of the Fortune 500 that have significant offshore profits.
In addition, the Tax Foundation challenges our use of IRS data to show how much of the officially “offshore” profits of American corporations are reported to be earned in tax havens, claiming that double-counting makes the data unreliable. The fact is that this data have been used in the same way in the report on tax havens by the non-partisan Congressional Research Service (CRS). Another report from CRS used data from the Bureau of Economic Analysis (BEA), which is similar, and noted (on page 9) that any double-counting in the BEA data would not have a significant impact on the results.
For some unknown reason, the Tax Foundation also challenges our definition of the countries that are tax havens. As discussed in the text of the report, the definition of tax haven is based on the list of countries created by the non-partisan General Accountability Office's (GAO) review of research done by the Organization for Economic Cooperation and Development (OECD), the National Bureau of Economic Research (NBER), and a U.S. District Court.
Rather than disputing the robust research done by various independent authorities that classify these countries as tax havens, the Tax Foundation makes the baseless claim that our list includes countries that have “international recognized normal tax systems.” In reality, each of the countries they define as normal has a well-known history of facilitating tax avoidance. For example, the Tax Foundation lists the Netherlands and Ireland as having normal tax systems, despite the well publicized use of international tax avoidance techniques like the ‘Double Irish With a Dutch Sandwich’ that utilize subsidiaries in these countries.
The bottom line is that the Tax Foundation is probably close to right that American corporations pay about a 27 percent tax rate to foreign countries where they actually do business. Of course, that finding contradicts the Tax Foundation’s frequent false claim that U.S. companies pay lower taxes to real foreign governments than they pay to the United States on their U.S. profits.
But the profits that American corporations book in offshore tax havens for tax purposes are mostly U.S. profits that these companies have artificially shifted offshore to avoid paying U.S. taxes. Such profit shifting is one reason why American corporations pay only a little over half the 35 percent corporate tax rate on the profits they actually earn in the United States.