As Labor Day weekend approaches, a tanned and rested Congress is poised to return to Washington to hash out corporate tax changes. Much of the debate over corporate tax reform in Washington sensibly focuses on how to encourage Fortune 500 corporations to repatriate and pay U.S. taxes on the $2.1 trillion on profits they have declared to be “permanently reinvested” (and thereby free of U.S. taxes) overseas. But an overlooked fact in this debate is just how much tax companies have avoided by keeping these profits (on paper, at least) offshore. An April 2015 CTJ report estimates that Fortune 500 corporations likely have avoided $600 billion in federal income taxes on these offshore profits.
Corporations declaring their intention to keep profits permanently offshore are required to estimate, if possible, the amount of U.S. tax they would pay if they repatriate these profits. Most companies legally avoid complying with this rule simply by declaring that it is too complex to make the calculation. But CTJ went through corporate filings and found 57 Fortune 500 corporations do comply. (See table below for details) These companies estimate they would pay a 29 percent tax rate on repatriation. (Since the federal tax on repatriated profits is 35 percent minus any taxes already paid to foreign countries, this means these companies have paid an average tax rate of just 6 percent on these profits, an indicator that much of this income is being kept in low-rate tax havens.)
Hundreds of other companies with offshore cash fail to make this disclosure, so it is impossible to know precisely how much corporate income tax they have avoided on their offshore cash. But if these companies, which include notorious tax avoiders General Electric, Pfizer, Merck and IBM, owed tax at the same 29 percent average rate reported by disclosing companies, the unpaid tax bill on Fortune 500 corporations’ offshore cash would be $600 billion (that is, $2.1 trillion times 29 percent). Since almost two-thirds of Fortune 500 corporations disclose owning subsidiaries based in offshore tax havens, it seems likely that many of these corporations are sheltering their “permanently invested” profits in these havens.
President Obama and congressional tax writers are sensibly focusing their energies on finding a way to make companies with offshore cash pay at least some tax on these profits. But Obama has proposed a tax rate of just 14 percent, less any foreign taxes already paid. (Republicans in Congress will likely propose a tax rate much lower than that.) This would bring in just $220 billion. That’s nearly $400 billion less than the full amount owed. CTJ’s finding suggests that any plan that would bring in less than $600 billion would amount to yet another giveaway for corporate tax dodgers. It’s time these offshore tax dodgers pay what they owe.
|57 Companies That Disclose Likely Tax Payments from Repatriation|
|Income||Tax Bill||Implied||Implied Foreign|
|Company Name||$ Millions||$Millions||Tax Rate||Tax Rate|
|Hertz Global Holdings||$ 475||$ 184||38.7%||0.0%|
|Advanced Micro Devices||349||122||35.0%||0.0%|
|AK Steel Holding||27||10||34.9%||0.1%|
|PNC Financial Services Group||77||24||31.2%||3.8%|
|Group 1 Automotive||17||5||28.1%||6.9%|
|Jacobs Engineering Group||26||7||28.0%||7.0%|
|Bank of America Corp.||17,200||4,500||26.2%||8.8%|
|Air Products & Chemicals||5,894||1,466||24.9%||10.1%|
|J.P. Morgan Chase & Co.||31,100||7,000||22.5%||12.5%|
|State Street Corp.||4,200||876||20.9%||14.1%|
|Kraft Foods Group||578||118||20.4%||14.6%|
|Bank of New York Mellon Corp.||6,000||1,200||20.0%||15.0%|
|Goldman Sachs Group||24,880||4,660||18.7%||16.3%|
|Laboratory Corp. of America||30||2||6.4%||28.6%|
|TOTAL||$ 590,926||$ 169,412||28.7%||6.3%|
|Source: CTJ analysis of companies' 10-Ks|