Corporate Taxes News


Tax Avoiding Companies Well Represented at Tax Reform Hearingg


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Today the House Ways and Means Committee will hold its first tax reform hearing of 2017, which marks the official opening of the tax reform debate in Congress. True tax reform, if the committee sought to achieve it, could create more jobs and ensure companies are paying their fair share by cracking down on the massive offshore tax avoidance that companies engage in. Unfortunately, the panel of witnesses for today’s hearing is largely made up of representatives of various major corporations that are beneficiaries of the loopholes in our current corporate tax laws. Given this, it seems likely that these panelists will not push for a fairer corporate tax code, but rather a code that allows them to avoid even more taxes and incentivizes moving more jobs offshore.

The biggest tax avoider represented at the hearing is AT&T, which received $38 billion in tax breaks over the past eight years, meaning that it received more tax breaks than any other Fortune 500 company during that time. Over the past 10 years, the company managed to pay an average federal income tax rate of just 11.3 percent, less than a third of the statutory rate of 35 percent. In 2011, it managed to pay nothing in federal income taxes, despite earning $12 billion in profits.

Another company engaged in offshore tax avoidance represented at the hearing is Emerson Electric. This company is currently avoiding taxes on $5.2 billion in earnings that it’s holding offshore. Emerson also has as many as 68 subsidiaries in tax haven jurisdictions. Perhaps most suspiciously, the company has disclosed having a subsidiary in Bermuda named Emerson Electric Ireland Limited, which is connected to another subsidiary they report in Ireland. This structure appears to be identical to the subsidiary structure used by Apple and other companies to shelter profits from tax, which is known as the “double Irish.”

The third tax avoider represented on the panel is S&P Global. This company is avoiding taxes on $1.7 billion in earnings it is holding offshore. The company discloses owning 20 subsidiaries in foreign tax havens. In addition, S&P Global has advocated for a repatriation tax break that is more egregious than most of those previously considered. Their plan would allow companies to repatriate their earnings tax-free as long as they invest 15 percent of these funds in a short-term market rate bond. This would allow corporations to almost entirely avoid paying the over $750 billion they owe in taxes on their offshore money.

Real tax reform would mean ending the ability of companies to avoid taxes on their offshore income and cleaning out the corporate tax code of the kinds of tax breaks that allow AT&T to pay so little year after year. Ending deferral, the ability of companies to defer taxes on their offshore income, would encourage job creation in the United States by making it so that U.S. companies are paying the same tax rate on income earned in the U.S. as they do in countries throughout the world. Similarly, cleaning out the corporate tax code would improve the economy by creating a more even playing field since certain companies would no longer be given an artificial advantage due to special interest tax breaks they receive.

Considering the companies represented at today’s hearing, it will not be surprising to hear proposals moving in the exact opposite direction, such as a proposal to enact a territorial tax system. Rather than making corporations pay their fair share, a territorial system would allow these and many other companies to avoid even more in taxes because they would never have to pay a cent on income they earn or artificially shift offshore. Such proposals should be rejected if lawmakers really want to create jobs and economic growth.


Representative John Delaney's Bills Take the Wrong Approach on Funding Infrastructure


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Lawmakers across the political spectrum recognize the need for additional spending to maintain and upgrade our nation’s transportation infrastructure. According to the Federal Highway Administration, there is a backlog of $836 billion in needed repairs and improvements to roads and bridges and an additional $90 billion backlog of public transit projects. Maryland Democratic Representative John Delaney has been one of the most vocal lawmakers in the debate over funding infrastructure and has recently proposed two bills seeking to significantly increase spending on these critical needs. Unfortunately, rather than just funding infrastructure, both of Rep. Delaney’s bills would make the problem of inadequate revenue worse by giving away billions of dollars in tax breaks to corporations.

Rep. Delaney’s Partnership to Build America Act would give companies a huge tax break on their offshore earnings in order to help fund an infrastructure bank. The legislation would allow companies to bring back up to $6 in offshore earnings tax-free for every $1 they invest in infrastructure bonds. This means that to “fund” the intended infrastructure bank with $50 billion worth of bonds, the legislation could allow multinational corporations to bring back $300 billion tax-free and receive tax breaks of up to $105 billion.

While Rep. Delaney’s Infrastructure 2.0 Act takes a different approach, it would similarly mean huge tax breaks for the country’s biggest offshore tax avoiders. The legislation would use a deemed repatriation at a tax rate of 8.75 percent to raise about $200 billion in revenue to pay for an infrastructure bank and increase funding for the Highway Trust Fund. The key problem is that companies currently owe about $767 billion in taxes on their $2.6 trillion in offshore earnings, so by cutting the repatriation tax rate by three-quarters (from 35 to 8.75 percent) Rep. Delaney is proposing to reward multinational corporations with a tax break of around $550 billion. Rep. Delaney’s proposal to only tax offshore earnings at a 8.75 repatriation rate is especially striking given that this rate is lower than the 10 percent rate previously proposed by Republican President Donald Trump.

It is important to note that both of Delaney’s bills would, at best, provide only temporary and limited funding for infrastructure spending. In fact, both bills could make the funding situation worse in the long run by giving profitable corporations billions in tax breaks that could be used to fund infrastructure, other public investment priorities, or to lower the deficit. Either way, what is needed is a more permanent solution to the continual lack of infrastructure funding.

One of the best and most sustainable ways to fund infrastructure would be for lawmakers to finally reform the federal gas tax by increasing the tax rate and indexing it to grow over time.  The federal gas tax has been stuck at 18.3 cents per gallon since October of 1993, which means that this April 1st marked the all-time record for the longest period that Congress has gone without increasing it. Keeping the federal gas tax at the same nominal level for decades on end has meant that the revenue it raises has been substantially eroded by inflation and the higher fuel efficiency of motor vehicles. This growing gap between gas tax revenues and our nation’s infrastructure needs explains why, every few years, lawmakers have had to scramble to find revenue to fund infrastructure.

What may be leading lawmakers like Rep. Delaney to more convoluted approaches to funding infrastructure, rather than just raising the gas tax, is a perception that this reform is politically unpopular and will not garner bipartisan support. But this perception may not reflect reality. Since 2013, nearly two dozen states, led by elected officials across the political spectrum, have managed to make the fiscally responsible move to increase their gas taxes without running into significant political problems. In recent weeks, President Trump even mentioned the possibility of raising the gas tax to fund additional infrastructure spending, which has drawn much needed attention to the idea. Rather than continuing to rely on gimmickry and giveaways to corporations like those proposed by Rep. Delaney to fund infrastructure, it is about time lawmakers finally reform the federal gas tax instead.


Apple: A Case Study in Why a Tax Holiday for Offshore Cash is Indefensible


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The Apple corporation made waves earlier this week with its disclosure that its worldwide cash now exceeds $250 billion.  Less noticed was a separate disclosure on Wednesday that the company’s offshore cash now exceeds $239 billion, meaning that more than 93 percent of the company’s cash is now held—at least on paper—abroad. This represents an increase of $9.4 billion in the past three months, sending a clear signal that the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company.

Taken on its own, holding cash abroad isn’t inherently bad behavior for a U.S. multinational engaged in business worldwide. But virtually everyone except Apple CEO Tim Cook now recognizes that in Apple’s case, the firm’s mountain of offshore cash reflects not the normal workings of a worldwide enterprise but a brazen effort to hide U.S. and European profits from the reach of the tax man. Back in 2013, the U.S. Senate’s Permanent Subcommittee on Investigation (PSI) made a careful and convincing case that Apple had used loopholes in the tax laws to make legal, but ethically reprehensible, “cost-sharing agreements” with its insubstantial Irish subsidiaries that allowed the company to avoid paying tens of billions of dollars in income taxes. Then, last fall, the European Commission (EU) ruled that Apple has used its Irish subsidiary for an elaborate profit shifting scheme that was not only unethical but downright illegal.

But you don’t need a lengthy investigation to know that Apple is dodging taxes offshore: the company’s annual report tells us so. The disclosures in the company’s latest 10-K reveal that Apple has paid a total foreign tax rate of less than 4 percent on its offshore cash. This means its unpaid U.S. tax bill on this cash is a whopping $75 billion.

It’s in this context that policymakers should be evaluating the current plan—supported by Congressional leaders and President Donald Trump—to offer a “tax holiday” for companies holding profits indefinitely offshore. While hundreds of companies hold at least a chunk of the $2.6 trillion plus in U.S. corporate cash that now sits offshore, Apple’s share is by far the biggest, and Apple’s near-zero foreign taxes on these profits mean that Apple would likely be far and away the biggest beneficiary from a low-rate holiday on offshore profits. Which means that the biggest winner from the proposed tax holiday is a company that has been on an illicit tax holiday of its own making for years.

The question isn’t whether Apple has played U.S. policymakers like a piano so far: it has. CEO Tim Cook has used his considerable PR skills to portray Apple as a helpless victim of a rampant corporate tax law, while insisting that the findings of the PSI and the EU are “total political crap.” But he has offered no evidence to counter these tax avoidance claims.

The real question is whether Congress will continue to be duped. Instead of offering a new tax holiday, Congress could easily make Apple pay its taxes. It could require Apple (and other companies shifting their intangible profits from the U.S. to foreign tax havens, for that matter) to pay their fair share by ending deferral of tax on offshore profits. This would give an immediate shot in the arm to U.S. tax collections, and it would help counteract the corrosive public fear that tax rules are written for and by powerful corporate interests.  If, instead, Congress instead follows President Trump’s recommendation and rewards Apple’s bad behavior with billions of dollars in new tax breaks, the public’s trust in our political leaders will be further eroded—and our leaders will deserve it. 


President Trump's Corporate Tax Outline: At Least He Didn't Use a Napkin


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The most complimentary thing that can be said about the corporate tax changes outlined by President Donald Trump earlier this week is that they weren’t scribbled on a napkin. Unlike supply-side architect Arthur Laffer, who infamously sketched out his explanation for why tax cuts can somehow pay for themselves in this manner, the Trump administration took the trouble to fill an entire page (generously double-spaced) with information about how the President proposes to cut taxes as part of his as-yet-unwritten detailed tax plan later this year.

But while the President’s one-pager is clear on the easy questions—he says he’d cut the statutory corporate tax rate from 35 percent to 15 percent, making our corporate tax rate among the lowest among developed nations—the document is virtually content free on the hard question of how this tax cut will be paid for. The document says only that the plan will, “eliminate tax breaks for special interests,” without naming even a single tax break that would fall into that category or giving a sense of how universal that effort would be.

Far from filling the $2.2 trillion 10-year budget hole that would be created by cutting the corporate rate to 15 percent, in fact, Trump’s one-pager digs the hole deeper by proposing a move to a territorial tax system, opening the door for rampant tax avoidance by permanently exempting any income companies claim they earn offshore. And even the one apparent “revenue raiser” in Trump’s corporate outline (a one-time tax on the $2.6 trillion companies are currently claiming to hold offshore) should be thought of as a revenue loser, since these profits ought to be taxable at a rate closer to 35 percent than the 10 percent transition tax Trump has proposed in the past.

At a time when U.S. corporate tax collections are near historic lows as a share of the economy due to pervasive tax avoidance, and when the country faces persistent budget deficits, the first step toward corporate tax reform should be a detailed plan for ending wasteful corporate tax dodges, putting a name on each specific tax break that is deemed unaffordable or ineffective and identifying a plan for reform—or repeal. This week’s corporate tax outline sends a clear signal that the Trump administration is not at all serious about taking even this first step toward true reform, and is likely bent on simply pushing through exactly what Trump promised last week: “maybe the biggest tax cut we’ve ever had.”


Does a 15 Percent Corporate Tax Rate Sound Low? For Dozens of Major Corporations, Maybe Not


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President Donald Trump has promised to release new details Wednesday on what he says could be “the biggest tax cut we’ve ever had.” While much is unclear about the shape this plan will take, the Wall Street Journal reported yesterday that it will include a 15 percent tax rate on corporate profits, less than half the 35 percent statutory rate currently in effect.

If this sounds like a gigantic tax cut, that’s because it is: the corporate tax is projected to collect $320 billion in 2017, and Trump’s rate cut taken on its own would give away more than half of that. But as a recent ITEP report found, plenty of the biggest and most profitable corporations could be forgiven for being unimpressed by the plan: of 258 Fortune 500 corporations that have been consistently profitable over the last eight years, 69 companies—more than a quarter of them—paid an effective federal income tax rate of less than 15 percent over the eight-year period. These include Honeywell (14.9 percent), ExxonMobil (13.6 percent), FedEx (13.2 percent), Amazon (10.8 percent), United Technologies (10.4 percent), Verizon (9.1 percent), Time Warner Cable (7.8 percent), Boeing (5.4 percent), CBS (5.4 percent), and tax-avoidance industry leader General Electric, which paid a negative federal effective tax rate of -3.4 percent over the eight-year period. And 167 of these companies found a way to pay less than 15 percent in at least one year during this period, which means about two-thirds of profitable Fortune 500 corporations are already quite familiar with the experience of paying less than Trump’s proposed 15 percent rate.

These numbers suggest that the first sensible step toward corporate tax reform should be closing the many legal tax loopholes that make this widespread tax avoidance possible. We may find out tomorrow whether President Trump intends to answer the hard questions about tax reform—that is, how to pay for it—or whether he’ll continue to focus on the easy part by offering huge new giveaways to his wealthiest and most influential constituents. But early indications are that the President’s approach to corporate tax reform is precisely the opposite of what’s needed to ensure a sustainable and fair tax system going forward. 


The Trump Administration Should Not Reopen Offshore Loopholes Closed by Recent Regulations


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A new executive order signed by President Donald Trump on Friday asks that Treasury Secretary Steven Mnuchin review significant tax regulations issued in 2016. The broader context of the order is that President Trump is seeking to roll back regulations across the government - many of which he claims are overly burdensome - and could potentially target critical Treasury regulations such as two recent rules curbing corporate inversions. Any attempt to reopen tax loopholes closed by recent regulations would be counterproductive to the goal of creating a fair tax system and should be rejected.

One of the loopholes in the corporate tax code that has gotten the most attention in recent years is the corporate inversion loophole, which allows U.S. companies to pretend to be foreign on paper by merging with another company (often a much smaller company). Despite their claims to be foreign companies, inverted companies often continue to be managed and controlled in the United States and can still be considered foreign even if a company is owned by a majority of its original U.S. stockholders after the merger. By claiming to be a foreign company, inverted companies avoid billions in U.S. taxes by artificially shifting more of their profits offshore or avoiding taxes on their existing offshore earnings. In fact, one estimate found that partially closing the inversion loophole would raise as much as $40 billion over the next ten years.

In the face of continued inaction by Congress to close the loophole, Treasury stepped up its anti-inversion actions in recent months by using its regulatory authority to crack down on the worst abuses of this loophole. In October 2016, the Treasury finalized the so-called earnings stripping rule, which limited the ability of companies to load up their U.S. subsidiaries with debt as a way to shift income out of the U.S. into low-tax jurisdictions. While incomplete, by limiting earnings stripping the rule curbs the incentive companies have to invert as a way to fully take advantage of this tax avoidance technique. In January, the Treasury finalized the so-called serial inverter rule, which disregards newer inversions in determining whether anti-inversion rules apply to a company, which makes it harder for companies to avoid existing anti-inversion regulations.

Reversing these rules would also represent a significant turnabout from President Trump’s rhetoric on offshoring issues. During the presidential campaign, then candidate Trump called Pfizer’s attempt to invert by merging with Allergan “disgusting” and said that “politicians should be ashamed” of the deal. This inversion was stopped in its tracks by the Treasury’s serial inverter rule, which means that any reversal of this rule could bring back the possibility of this or similar “disgusting” deals in the future.

Rather making inversions easier by reversing these rules, the Trump Administration should support legislation that closes the corporate inversion loophole entirely. For example, the Trump Administration should embrace legislation such as Representative Lloyd Doggett’s Corporate EXIT Fairness Act, which would require companies to pay what they owe on their unrepatriated earnings before expatriating and no longer allow companies with a majority U.S. ownership after a merger to claim to technically invert. More broadly, policymakers should be seeking to close tax loopholes either through legislation or administration action, not making them larger as rolling back the anti-inversion regulation would do.


How to Shut Down Offshore Corporate Tax Avoidance, Full Stop


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A new bill introduced this week by Rep. Mark Pocan (D-WI), the Tax Fairness and Transparency Act, would rip out the offshore corporate tax avoidance system by its roots. This legislation combines into a single, comprehensive bill elements of three pieces of legislation that Rep. Pocan has proposed in previous years.

While many drivers of offshore corporate tax avoidance exist, the single biggest one is companies’ ability to defer paying taxes on their offshore earnings. According to official estimates, this provision of the tax code, known as deferral, will cost the U.S. Treasury about $1.3 trillion over the next 10 years.

Rep. Pocan’s bill would end deferral, which means companies would be required to pay the full U.S. corporate tax rate each year on their offshore earnings (less foreign taxes already paid), rather than indefinitely putting off paying these taxes. This provision would remove the incentive for companies to hold their earnings in tax havens because they would owe the same amount in taxes regardless of where they report their profits.

Ending deferral is a proposal that has garnered substantial bipartisan support over the years. For example, in the presidential primaries, Sen. Bernie Sanders (I-VT) and then Republican presidential candidate Donald Trump both put out tax reform plans calling for an end to deferral. In addition, Sen. Ron Wyden (D-OR) and former Sen. Dan Coats (R-IN) proposed tax reform legislation that would have ended deferral as well.

Rep. Pocan’s bill also takes aim at a tax avoidance practice known as earnings stripping, wherein companies shift profits by making loans from their subsidiaries in low-tax jurisdictions to their subsidiaries in higher-tax jurisdictions. The bill would crack down on this behavior by limiting the amount of interest that companies can deduct if their U.S. subsidiaries are taking on a disproportionate share of the company’s worldwide debt. Curbing earnings stripping would reinforce the bill’s move to end deferral by limiting the incentive of companies to avoid U.S. taxes by engaging in a corporate inversion and then using earnings stripping to shift U.S. income out of the country tax-free.

A final key provision in Rep. Pocan’s proposed legislation is that it would require all publicly traded companies to disclose key financial data on a country-by-country basis. The financial data would have to be publicly disclosed and would include companies’ income, income taxes paid, revenue, number of employees and capital in each of the countries in which they operate. This provision would add critically needed transparency to our tax system by allowing the public, media and even tax officials to ascertain whether major corporations are paying their fair share in taxes. It would also make the United States a leader, rather than a laggard, in the international effort to end corporate tax avoidance.

Offshore corporate tax avoidance is neither inevitable nor acceptable. Lawmakers could immediately put an end to these offshore tax shenanigans once and for all by passing Rep. Pocan’s Tax Fairness and Transparency Act


Two New Bills Would Plug Major Loopholes in Our Offshore Corporate Tax System


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A new pair of bills introduced by Representative Lloyd Doggett (D-TX) this week would crack down on loopholes that allow corporations and individuals to avoid paying their fair share in taxes.

Rep. Doggett’s Stop Tax Haven Abuse Act, which was sponsored by Senator Sheldon Whitehouse (D-RI) in the Senate, would close a number of the most harmful loopholes in the current international tax code. Taken together, the provisions of the bill would reduce international tax avoidance by $278 billion over 10 years.

Corporations’ use of offshore tax gimmicks have grown so out of control that companies have now accumulated a stunning $2.6 trillion hoard of money offshore for tax avoidance purposes. The bill wouldn’t entirely solve the problem of tax haven abuse, but it could ensure corporations are paying part of the estimated $100 billion they avoid each year in taxes. Some of the key components of the bill include provisions that would:

  • Reduce corporate inversions by treating the corporation resulting from the merger of a U.S. and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company, or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).

  • Disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called "earnings stripping," a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation to wipe out U.S. income for tax purposes.

  • Require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors.

  • Repeal the "check-the-box" rule and the "CFC look-through rules" that allow companies to shift profits to tax havens by letting them tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist.

Rep. Doggett’s other new tax-related bill, the Corporate EXIT Fairness Act, takes direct aim at one of the main drivers of corporate inversions. Under the current tax code, companies have a huge incentive to invert or become a foreign corporation (at least on paper) because they can permanently avoid paying taxes on accumulated offshore earnings. Doggett’s legislation would require inverted companies to pay the full amount of taxes they owe on offshore earnings if they become a foreign company, which means that avoiding taxes on unrepatriated earnings will no longer be a factor in making that decision.

The bill also contains the same anti-inversion provisions in the Stop Tax Haven Abuse Act that tighten rules around what constitutes a domestic corporation.

What differentiates Rep. Doggett’s exit tax bill from similar bills is that it would require all expatriating companies to pay what they owe on their offshore earnings, rather than just those companies that are engaging in a transaction that meets the definition of an inversion. This makes the bill even more effective in that it reduces the offshoring tax incentive across the board and allows the bill to work as a complement to other anti-inversion legislation.

Rather than moving to an even more loophole-ridden corporate tax code as the House GOP has proposed, lawmakers should be considering reforms such as those in the Stop Tax Haven Abuse Act and the Corporate EXIT Fairness Act that crack down on offshore tax avoidance.


A Comparative Analysis: Tax Rates Paid by Companies for and Against the Border Adjustment Tax


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It’s often noted that corporate tax reform is difficult, in part, because it creates so many winners and losers. As Congress turns its attention to federal corporate tax reform, the House GOP’s proposed border adjustment tax, which is intended to raise enough revenue to justify cutting the corporate tax rate from 35 to 20 percent, is quickly demonstrating the truth of this statement. Corporate lobbyists representing different business sectors have created competing coalitions to lobby for and against the border adjustment: Americans for Affordable Products, a coalition of retail giants, opposes the plan, while the American Made Coalition supports it.

A close examination of average tax rates paid by companies in each coalition reveals the counterintuitive reality that those supporting the border adjustment tax are generally already paying low corporate tax rates, while those opposing the proposal are generally paying higher rates.

A recent analysis by the Institute on Taxation and Economic Policy (ITEP) revealed large profitable corporations paid an average effective federal income tax rate of 21.2 percent over the past eight years. Companies in the pro-border adjustment tax American Made Coalition paid an even lower rate. The 10 coalition members that were consistently profitable over the eight years between 2008 and 2015 paid an average tax rate of just 14.5 percent, a substantially lower rate than the Fortune 500 average of 21.2 percent. These companies likely pay relatively low tax rates because they benefit from a substantial number of tax breaks and can engage in more offshore tax avoidance. For example, American Made Coalition members are avoiding taxes on more than $600 billion in earnings that they are holding offshore.

In spite of their low average tax rate, members of the American Made Coalition argue that U.S. companies pay the highest effective tax rates in the world, even though the tax rates paid by many of its members are a stark reminder that many U.S. companies are in fact paying extremely low or even negative tax rates on billions in profits.

In contrast, an ITEP analysis finds that the companies in the Americans for Affordable Products coalition paid a comparatively high effective tax rate on average over an eight-year period. In fact, for the 20 companies in the coalition that were profitable over the same eight-year period, their average effective tax rate was 30.6 percent, substantially higher than the 21.2 percent rate for all large profitable companies and more than double the 14.5 percent rate paid by companies in the American Made Coalition. The likely explanation for these companies’ tax rates is that the bulk of the companies in the coalition are retailers, which have fewer opportunities to shift their profits offshore or take advantage of major tax breaks such as accelerated depreciation.

Ideally, tax reform would close the gap between the low-tax rates paid by those in the American Made Coalition and the higher rates paid by those in Americans for Affordable Products. In reality, the House GOP tax reform blueprint would likely make the gap between the companies substantially worse through its border adjustment provision.

Under the border adjustment tax provision, revenue earned by companies from exports in the United States would be exempt from taxation, and the cost of imports to companies in the United States would no longer be deductible. What this means in specific terms is that companies with lots of exports, such as Boeing or General Electric, could end up with zero or substantially negative tax rates since they would be able to deduct the expense of producing their exports but would not have to pay any tax on the income that they generate from these exports. Alternatively, companies with a lot of imports, such as Wal-Mart or Target, could end up paying tax rates significantly higher than the 35 percent rate since they will not be able to deduct the cost of imports.

Given these dynamics, it is no wonder that export heavy groups are lining up in favor of the border adjustment tax, while import heavy groups are lining up against it. What is surprising is that so many lawmakers in Congress are pushing a policy that would make our tax code more unfair by heaping even more tax breaks on profitable corporations that aren’t even paying half the federal statutory tax rate.

Corporate tax reform should not create more winners and losers. Instead, Congress should focus on closing tax loopholes and raising more revenue from corporations overall. 


The $767 Billion Money Pot Driving Tax Reform


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With the failure of legislation to repeal the Affordable Care Act, the Trump administration and Republicans lawmakers are moving on to corporate tax reform. At the heart of this debate is the problem of corporations shifting their profits to foreign tax havens to avoid U.S. income taxes. A new report by the Institute on Taxation and Economic Policy (ITEP) helps clarify the scope of this problem, finding that Fortune 500 corporations now disclose more than $2.6 trillion in offshore earnings on which these companies have avoided as much as $767 billion of income tax.

The reason for this exodus of offshore cash is that the corporate tax code allows companies to avoid paying even a dime of U.S. taxes on their offshore earnings, which often includes domestic earnings moved offshore, until they officially repatriate these profits. This policy, known as deferral creates a huge incentive for companies to simply hold their money offshore indefinitely because it allows them to avoid paying taxes to the United States.

ITEP’s new report shows that offshoring profits is a widespread phenomenon: 322 Fortune 500 companies now report having some offshore earnings. But the data also show that the bulk of these earnings are held by a relatively small number of companies. In fact, just 10 companies, including Apple, Pfizer, Microsoft and General Electric, alone hold $1 trillion of the $2.6 trillion hoard.

Fifty-nine of the offshoring companies disclose, in their annual financial reports, how much federal income tax they’re avoiding by keeping their profits offshore. The unpaid tax rate for these 59 corporations averages 28.7 percent. Since the federal tax bill on repatriation is 35 percent minus any foreign tax already paid, this implies that these companies have paid an average tax rate of just 6.3 percent on these profits so far. This is a clear indication that much of this income is being reported in low-rate foreign tax havens like Bermuda and the Cayman Islands. If the other offshoring companies faced the same tax rate on repatriation, then these companies would owe an estimated $767 billion in unpaid taxes on their offshore earnings.

Rather than seeking to collect this $767 billion in unpaid taxes, many lawmakers on both sides of the aisle appear more interested in giving companies a tax break. In lieu of tackling corporate tax reform head-on by repealing unwarranted tax loopholes, some policymakers have noticed that even a small tax on offshore cash could bring in enough revenue to pay for infrastructure and/or lower corporate tax rates, at least in the short run. For his part, President Donald Trump has proposed a mandatory tax of 10 percent on offshore earnings. While he has pitched the idea as a revenue generator, the reality is that applying a 10 percent rate would represent a 70 percent tax break compared to the 35 percent rate that the law requires. Overall, this would mean that President Trump’s tax plan would give companies a tax break of over half a trillion dollars compared to the $767 billion that they owe.

President Trump is certainly not alone in proposing irresponsible repatriation proposals. Lawmakers and advocacy groups on both sides of the aisle have put out a variety of proposals to tax offshore earnings at rates even lower than 10 percent. The House Republican leadership’s plan would tax these earnings at rates of 8.75 percent for liquid assets and 3.5 percent for all other offshore earnings. Bipartisan legislation proposed during the last Congress would have allowed companies to voluntarily repatriate their earnings at a rate of 6.5 percent, though this effort ran into trouble when the non-partisan Joint Committee on Taxation (JCT) found that the legislation would lose $118 billion in revenue. More recently, Rep. John Delaney proposed a pair of bipartisan bills that would allow companies to repatriate their earnings at a zero percent or 8.75 percent to pay for infrastructure spending. These bills are striking for their support by a number of Democrats, despite the fact that they are proposing a tax break larger than the one offered by President Trump.

The one bill that stands in sharp contrast to others is the Corporate Tax Dodger Prevention Act proposed in early March by Sens. Bernie Sanders and Brian Schatz and Rep. Jan Schakowsky. This bill would require companies to pay the full 35 percent rate they owe (minus foreign tax credits) on their offshore earnings. Even better, the bill would permanently close the deferral loophole, which would effectively shut down offshore tax avoidance once and for all. This approach would not only make the tax system more fair, it would also raise a substantial amount of revenue that could be used for public investments.


Debunking the 35 Percent Corporate Tax Myth


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For years, the number one tax policy talking point from corporate lobbyists has been the claim that the United States has the highest corporate tax rate in the world. The story then goes that this high tax rate is driving away business and Congress should move to dramatically lower it.

A new study by the Institute on Taxation and Economic Policy (ITEP) reveals the reality that while corporations face a statutory tax rate of 35 percent, the tax code is so packed full of tax breaks that over eight years our nation’s largest and most profitable corporations paid an average effective tax rate of just 21.2 percent.

The new study, The 35 Percent Corporate Tax Myth, is the 12th edition in a series of studies from Citizens for Tax Justice (CTJ) and ITEP showing the low tax rates that many corporations pay. What makes this new study so unique and powerful is that it examines companies’ tax rates over a full eight-year period. Even given this longer period, the study found that that 18 Fortune 500 companies managed to pay nothing in federal income taxes over the whole 8 years. Overall, 100 of the 258 Fortune 500 companies in the study managed to pay nothing in taxes in at least one year during this period.

Perhaps the most infamous tax avoider in the study is General Electric, which managed to pay nothing in taxes on its $40 billion in profits over the past 10 years. The biggest recipient of tax breaks in the study was AT&T, which avoided $38 billion in taxes over the 8-year period.

Busting the conventional wisdom, the report also found that most multinational companies in the study paid a higher tax rate to foreign governments than to the U.S. government. This means that U.S. tax rates are competitive with those of our major economic partners.

For their part, President Donald Trump and the House GOP leadership appear to buy into the high rate myth. Congressional leaders and the President have each signaled that cutting taxes for corporations will be a major legislative priority in 2017. In his revised tax proposal, President Trump proposed to dramatically cut the corporate tax rate from 35 to 15 percent. His proposal would cut corporate taxes by $2.4 trillion over the next 10 years.

Similarly, the House GOP tax reform blueprint would lower the corporate tax rate from 35 to 20 percent. To make up for some of the revenue loss, the House GOP have proposed a border adjustment tax (BAT), which would exempt revenue from exports from taxation and not allow companies to deduct the cost of imports from their taxable income. Even if the BAT raised the $1.2 trillion it’s estimated to raise (which is a big “if” considering the opportunities for tax avoidance and its potential to be ruled illegal by the World Trade Organization), the plan would still cut corporate taxes by $1.3 trillion over 10 years.

Rather than cutting their taxes even further, Congress should raise more revenue from corporations. The best place to start would be to close the myriad of loopholes, such as the deferral or stock option loopholes, that allow so many companies to pay so little in taxes. In addition, Congress should also mandate that companies disclose detailed financial information on a country-by-country basis so that policymakers and the public have an even clearer picture of how much and where companies are paying taxes. With so many critically needed public investments, corporations should be required to pay their fair share in taxes.


The Border Adjustment Tax Creates More Problems Than It Solves


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In recent weeks, the Republican congressional leadership’s effort to introduce a comprehensive tax reform bill has increasingly faced opposition from major business groups and skeptical lawmakers from across the aisle. The primary source of dissent thus far is that the most prominent tax framework, the House GOP’s “Better Way” tax blueprint, contains a radical provision to apply a border adjustment to pay for a cut in the rate from 35 to 20 percent.  

A new report from the Institute on Taxation and Economic Policy (ITEP) released today finds that this border adjustment tax would be regressive and loophole-ridden and would likely violate international trade agreements.

Under the proposed border adjustment, companies doing business in the United States would no longer pay corporate income tax on revenue earned from exports and would no longer be able to deduct the cost of imports from their corporate income tax liability. Because the United States currently runs a significant trade deficit, applying the tax at a 20-percent rate on imports and exempting exports could raise about $1.2 trillion over the next ten years.

It is important to note from the outset that even assuming the U.S. could raise a substantial amount of revenue from the border adjustment, the House GOP plan would still decimate federal revenue. An ITEP analysis finds that without the border adjustment provision, the House GOP plan would lose $2.5 trillion on the corporate side, and $4 trillion as a whole, over 10 years. In other words, even with the border adjustment the House GOP plan would fall $2.8 trillion short of its goal of revenue neutrality overall and would result in a $1.3 trillion revenue loss from the highly progressive corporate income tax.

The problems with the primary component of the House GOP’s corporate tax proposal go well beyond its revenue effects however. To start, the border adjustment likely would make the corporate income tax substantially more regressive. The inability of companies to deduct the cost of imports could substantially raise the tax rates paid by import-dependent industries such as retailers. To maintain profitability, import dependent industries would be forced to raise prices and pass on the cost of the tax to whatever extent possible. This means that a significant portion of the border adjustment tax would be paid in the form of a regressive tax on consumers. One recent estimate found that the bottom 10 percent of taxpayers may see their taxes go up by 5 percent of their pretax income, while the top 10 percent of taxpayers would only see their taxes go up by about 1.5 percent of their pretax income.

One of the major arguments that proponents of the border adjustment tax make is that it would stop corporate tax avoidance. It is certainly true that the border adjustment would remove companies’ incentive to use certain existing loopholes in our current system, but it would create numerous new opportunities for tax avoidance through the shifting around of sales. For example, Microsoft could avoid the tax by selling its software to consumers in the United States directly from servers in Ireland or another tax haven. At this point there is no reason to believe that following a tumultuous transition to a border adjusted tax that our tax system would end up less prone to tax avoidance than our current system.

And the transition to a border adjustment tax would certainly be tumultuous. Legal experts agree that it would likely be in violation of international agreements. Most importantly, the border adjustment is likely to be ruled illegal by the World Trade Organization (WTO) as an export subsidy. This is because the tax would favor domestic products over imported ones by allowing domestic producers to deduct compensation expenses, but would not allow the same deductions for imported products. A negative ruling by the WTO would mean that the U.S. would have to change the border adjustment tax into a proper tax on consumption, repeal the tax entirely or face retaliatory tariffs.

Given the myriad of problems that it creates, lawmakers should reject the border adjustment tax in favor of fixing the corporate income tax system that we have. The most effective way to accomplish this would be to end the ability of companies to defer paying taxes on their offshore income. While this approach has received less attention from the media, it has gotten a fair amount of high profile bipartisan support from lawmakers in the past. Both Democratic Senator Bernie Sanders and President Donald Trump called for ending deferral as part of their tax reform plans during the 2016 presidential primaries. On the Senate Finance Committee, Democratic Senator Ron Wyden and former Republican Senator Dan Coats introduced a bipartisan tax reform bill that would also have ended deferral. Taking this approach would have the benefits of raising a substantial amount of revenue and curbing tax avoidance without the daunting fairness and legal problems posed by a border adjustment.

Read the full report: “Regressive and Loophole-Ridden: Issues with the House GOP Border Adjustment Tax Proposal”


Trump Plan to Give Billions in Tax Breaks to Multinational Corporations May Have Bipartisan Support


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There are a lot of troubling components of the tax reform packages being proposed by President-Elect Donald Trump and the House GOP, but one that especially stands out is the push to give companies a tax break on the earnings they are holding offshore. Unfortunately, proposals rewarding the nation’s most egregious tax dodging multinational corporations with hundreds of billions in tax breaks represent an area where lawmakers on both sides of the aisle seem to agree, making it a potential area of movement if broader tax reform efforts flounder.

Fortune 500 corporations collectively hold $2.5 trillion offshore. As long as corporations keep this money offshore, this massive stash remains an untapped source of tax revenue because a loophole in the tax code called deferral allows companies to avoid taxes on profits until they “repatriate” or bring those profits to the United States. Rather than requiring corporations to pay the full 35 percent rate (minus foreign tax credits) that they owe, lawmakers have introduced various proposals to lower the repatriation tax rate to 20, 8.75 or even 0 percent. Some of these proposals have bi-partisan support.

Corporations are avoiding up to $720 billion in taxes through this offshoring strategy. With such a significant sum at stake, any reduction in the repatriation rate would be a bonanza for multinational corporations. For example, under President-elect Trump’s revised tax plan, companies would be required to pay a 10 percent rate on their offshore earnings, meaning that they would get a 70 percent discount from the current rate owing an estimated $206 billion in taxes. In other words, President-elect Trump is proposing to give companies a $514 billion tax break on their accumulated offshore earnings.

A new ITEP report examines the benefit to the 10 companies with the most money offshore: Apple, Microsoft, Oracle, Citigroup, Amgen, Qualcomm, Gilead Sciences, JP Morgan Chase & Co., Goldman Sachs Group, and Bank of America Corp. The top 10 companies account for $182.8 billion of the potential $720 billion in tax revenue and would receive a $130.6 billion tax break under President-elect Trump’s proposal.

Giving companies a discounted tax rate of 10 percent on repatriation, or any rate below 35 percent, would disproportionally benefit companies that have most aggressively stashed profits offshore. For instance, Apple would receive a tax break of $48.1 billion on its $216 billion in unrepatriated earnings. Similarly, Microsoft would see a $28.1 billion break on its $124 billion in unrepatriated earnings. Wall Street firms such as Citigroup, JP Morgan and Goldman Sachs would receive breaks of $9.1, $5.9 and $4 billion respectively.

A one-time tax break on offshore earnings would provide a quick infusion of revenue, which is likely why lawmakers on both sides of the aisle have backed the idea. Many policymakers, including advisors to President-elect Trump, would like to use this one-time revenue to fund additional infrastructure investment. Alternatively, some conservatives would like to use any one-time repatriation revenue to help make lowering corporate tax rates appear revenue-neutral in the short term, even if over the long term the rates will lose revenue.

Rather than rewarding tax avoidance for a short-term revenue boost, lawmakers should pursue legislation that would require companies to pay the full $720 billion they owe on their unrepatriated earnings. In addition, Congress should end offshore tax avoidance once and for all by no longer allowing companies to indefinitely defer paying taxes on their foreign earnings. These two policies would be a huge win for the American public, raising hundreds of billions in much-needed revenue for public investments and making our tax system fundamentally fairer.


Beyond the PR Spin: Carrier Corp. Holds American Jobs Hostage for Tax Breaks


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“If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the incoming Trump administration, rather than as a savvy deal.”

The Carrier Corporation Tuesday announced that it will not fully follow through on its threat to move 2,100 jobs from Indiana to Mexico, and instead will keep 1,000 of those jobs in the U.S.

The move comes in the wake of “wide-ranging policy talks” between representatives of the incoming Trump administration and Carrier officials. The New York Times reports that Carrier’s reward for this apparent change of heart will include new tax incentives from the state of Indiana and a commitment from the Trump administration to aggressively pursue federal corporate tax reform in 2017.

While this move is being described as ground-breaking by its supporters—incoming Treasury Secretary Steven Mnuchin said that he“[c]an't remember the last time” a president took such steps—this approach to keeping jobs is hardly new. For decades, footloose corporations have used the threat of moving jobs to different cities, states or even countries to extract special tax incentives from state and local governments, despite the lack of evidence that these strategies create jobs. Company-specific tax breaks reward companies for what they likely would have done anyway, give tangible benefits to companies in exchange for tissue-thin promises of job creation, and send a clear signal to other tax-avoiding firms that they will be rewarded for making similar threats.

And Carrier’s parent corporation, United Technologies (UTC), certainly fits the description of a tax-avoiding firm. The company routinely pays effective federal tax rates of 10 percent or lower, far below the 35 percent statutory tax rate its executives have complained about. UTC also has aggressively shifted its profits offshore, holding $29 billion in undisclosed foreign countries at the end of 2015. If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the Trump administration, rather than as a savvy deal.

What makes this deal especially worrisome is that UTC is among the multinational corporations that have been pushing for international tax “reform” focusing on a repatriation holiday. These firms routinely build up huge stockpiles of offshore cash in low-rate tax havens—presumably the reason for UTC’s subsidiary in the Cayman Islands—and threaten that they won’t bring the cash back to the United States unless they receive special tax breaks in exchange for unenforceable promises of domestic job creation. Sound familiar?

This move also raises the question of the opportunity cost of a state providing tax incentives to a corporation to keep jobs in the state. All would agree that keeping good, middle-class jobs is a commendable, worthy goal. But what about the flip side? What will be the cost to taxpayers per job? What will this mean in terms of state revenue, and will a corporate tax cut or tax subsidy mean less revenue for critical state services? Giving bountiful tax breaks to companies that threaten to move jobs offshore may preserve some jobs in the short-term, but it certainly isn’t a jobs creation strategy. Beyond the public relations spin, President-elect Trump and Vice President-elect Pence (who is still the governor of Indiana) owe the people of Indiana and the country answers to these tough questions.

It remains to be seen whether Carrier’s promise to keep jobs in Indiana will carry any weight. If these jobs evaporate in two or three years, or come with inadequate pay and health care benefits, the only real winner from the deal announced today will be the shareholders of United Technologies. But even if this deal results in the longer-term preservation of Carrier’s Indiana employment base, it suggests that the incoming Trump administration may be far too willing to give away even bigger tax breaks to United Technologies and its tax avoiding brethren at the federal level in 2017.


A Few Things to Consider Before Giving Away the Store to Carrier Corp


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Last summer, Indiana-based Carrier Corp. incurred bipartisan wrath after announcing it would move 2,100 jobs to Mexico in 2017. Now, the Wall Street Journal reports that representatives of President-elect Trump’s incoming administration are engaging in “wide-ranging policy talks” with executives of United Technologies Corporation (UTC), Carrier’s parent company, with a focus on reducing its federal corporate income tax rate.

Trump has pledged repeatedly to keep UTC and Carrier from offshoring jobs, and it now appears that UTC may want a lower tax rate as the price for complying with this demand. Saving middle-class jobs is an important and laudable goal. But policymakers should approach such consequential discussions with all the facts. And the fact is that Carrier’s parent company already pays a relatively low effective tax rate.

As we previously noted, UTC does not have a lot of skin in the game when it comes to federal income taxes. The company paid an effective federal tax rate averaging just 10.3 percent over the 15-year period (PDF of full tax calculation) between 2001 and 2015. UTC’s 2015 annual report shows the company paid a federal tax rate of just 9.4 percent on $2.8 billion in U.S. profits last year. This means year after year, the profitable company pays only a fraction of the federal statutory rate of 35 percent. 

The company’s push for a corporate tax cut likely has a lot to do with its offshore cash. As of 2015, UTC had a cumulative $29 billion in profits stashed offshore that it claimed it earned abroad and has no intention of repatriating to the United States. The profits, if repatriated, would be subject to the federal corporate tax rate less any taxes it paid to foreign governments.

It’s impossible to know how much of this offshore cash is in the hands of the company’s zero-tax haven subsidiaries in the Cayman Islands or the British Virgin Islands because UTC refuses to disclose this information. (The limited disclosures that have been made by other corporations with offshore cash show these companies are paying single digit tax rates on their foreign profits.) But it seems plausible that when the company warns of “adverse tax consequences” of repatriating from “certain of our subsidiaries,” it has its Caribbean affiliates in mind.

The United States is one of the world’s most advanced democracies, which our federal tax system enables. Infrastructure, public education, health and safety, clean water, safe food, and national defense all require tax dollars—from citizens and corporations. The Unites States simply cannot compete with a zero-percent tax rate, nor should it try.

A company like Carrier, which may be accustomed to stashing money in the Cayman Islands and paying a zero-percent tax rate, certainly would consider the U.S. federal statutory rate “adverse.” But given UTC’s consistent ability to avoid that tax rate over the past 15 years, it’s hard to see why Congress or the incoming Trump administration should prioritize finding a way to cut the company’s taxes even further. 

 


Correction: The original blog post misindentified the time period of our 15 year calculation as 2000-2014, rather than 2001-2015.

 

 


Taxing the $2.5 Trillion in Offshore Profits: What's Ahead for Repatriation?


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With a Trump administration and Republican-controlled Congress that have similarly-aligned goals for tax reform, the likelihood of a tax reform package being enacted in 2017 is higher than it has been in years. A key component of these discussions will be how to tax $2.5 trillion in collective profits that U.S. multinational corporations have parked offshore to avoid paying U.S. taxes.

U.S. multinationals are avoiding up to $718 billion in taxes on this offshore profit cash hoard.

The key reason companies use accounting gimmicks and other maneuvers to book profits offshore is that our corporate tax code allows them to indefinitely defer paying U.S. taxes on their foreign profits until they are officially repatriated to the United States. For example, Apple now holds $216 billion in earnings offshore on which it appears to have paid a tax rate of less than 4 percent, meaning that deferring taxation on these profits has allowed it to avoid an estimated $67 billion in U.S. taxes.

This offshore cash sum and the tax revenue it could generate is no secret to lawmakers. For the last several years, various lawmakers have introduced proposals that would either incentivize or force corporations to repatriate their profits. Unfortunately, most of the proposals would either perpetuate corporate tax avoidance or incentivize corporations to repatriate their current offshore profits but then return to stashing cash offshore in anticipation of another future tax break.

For example, a “repatriation holiday” is a popular proposal floated by Republicans and Democrats that would allow companies to voluntarily repatriate offshore profits at a sharply reduced rate. Similarly, a “deemed repatriation” proposal would levy a one-time mandatory tax (ranging from 8.75 to 14 percent) on the accumulated offshore funds at a reduced rate. For example, President-Elect Donald Trump has proposed a deemed repatriation at a 10 percent rate as part of his tax reform plan, with no plan on how he might treat future offshore earnings. What this means is that under Trump’s plan, companies would be let off the hook for more than $500 billion of the $718 billion in taxes they owe on their offshore earnings, representing a substantial reward to those companies engaged in offshore tax avoidance.

Lawmakers seem to be willing to compromise on this as they are eying a quick fix way to finance much-needed infrastructure improvements at a time when they cannot agree, for example, on how to ensure the Highway Transportation Fund remains solvent in the long-term. One possibility moving forward is that revenues raised from a deemed repatriation could be used to finance infrastructure improvements. Variations of this idea have been proposed by President Obama and members of Congress including Representative John Delaney and Senators Barbara Boxer and Rand Paul. In a recent meeting between Trump advisor Stephen Moore and Republican lawmakers, Moore proposed linking Trump’s 10 percent deemed repatriation with infrastructure spending as one way to make the plan bipartisan. However, many congressional Republicans (including House Ways and Means Committee Chairman Kevin Brady, who is tasked with drafting tax reform legislation) would prefer that revenues from a deemed repatriation be used to lower corporate rates. And if Republicans decide to push through tax reform using “budget reconciliation” (a special legislative process where the threat of a filibuster is eliminated), Democratic support will not be needed to pass tax changes. Other Trump advisors have also suggested new tax credits for corporate infrastructure equity investments, which could potentially offset or eliminate a company’s repatriation tax liability.

Rather than grant corporations a substantial tax break on their offshore earnings to generate a short-term revenue boost, lawmakers should no longer allow companies to defer paying taxes on their foreign earnings. Such a move could curtail offshore tax avoidance and generate substantially more revenue, which could be used to make the public investments in infrastructure, health care and other critical areas that we need.

For additional information on the various repatriation proposals and how they would work, see ITEP’s new Comprehensive Guide to Repatriation Proposals or our related two-page fact sheet What You Need to Know About Repatriation Proposals.


Like the iPhone 7, Apple's Tax Avoidance Scheme Remained About the Same in 2016 as Well


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The annual financial report that Apple released last week indicated two things: One, the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company; and two, in spite of the European Commission’s (EC) recent finding that Apple has used its Irish subsidiary for an elaborate profit shifting scheme to illegally avoid taxes, the company has no intention of admitting any wrongdoing.

With the addition of its latest $29 billion in offshore cash, Apple now has amassed a $216 billion offshore stockpile, on which it appears to have paid a foreign tax rate of less than 4 percent. This means its unpaid U.S. tax bill is up to $67 billion. It seems the company remains adamantly opposed to paying taxes to any government on its alleged Irish profits.

The new financial report also shows that Apple’s spin machine doesn’t miss a beat. The EC’s August announcement made it clear that Apple must pay $14.5 billion in back taxes as a result of illegal deals with the Irish government. The company’s latest annual report goes out of its way to prey on the fears of U.S. policymakers by noting that if and when it’s forced to repay its illegal Irish tax breaks, “any incremental Irish corporate income taxes potentially due would be creditable against U.S. taxes.”

This warning may explain the U.S. Treasury Department’s unfortunate public opposition to the EC ruling. Perhaps officials are convinced that if Apple pays a billion dollars of tax to Ireland on profits that will eventually be repatriated to its Cupertino headquarters, that’s a billion dollars the U.S. government will never see—even though it should.

But this thinking is both misleading and wrongheaded. In its August announcement, the EC went out of its way to point out that some of the unpaid $14.5 billion could go to the United States, rather than Ireland, “if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts.” Put another way, the EC’s main concern is not that Apple pays tax to Ireland, but that the company pays owed taxes to the country in which Apple’s allegedly Irish profits really were earned.

Congress certainly has both the motive and the means to require Apple to pay its taxes. It could require Apple (and other companies shifting their intangible profits from the U.S. to foreign tax havens, for that matter) to pay their fair share by ending deferral of tax on offshore profits. This would give an immediate shot in the arm to U.S. tax collections, and it would help counteract the corrosive public fear that tax rules are written for and by powerful corporate interests.

Beyond changing international tax rules, Congress could prevent Apple’s rampant tax avoidance by paring back more conventional U.S. tax breaks as well.

Besides indefinitely stockpiling even more cash offshore to avoid U.S. taxes, Apple further reduced its U.S. income tax bill by $407 million using tax breaks for executive stock options. The research and development tax credit knocked another $371 million off the company’s tax bill, and the special lower tax rate for domestic manufacturing yielded $382 million in tax reductions. These three tax breaks alone netted Apple more than $1.1 billion in U.S. tax breaks last year. We have argued that each of these tax break are unwarranted giveaways that should be repealed—but even defenders of these tax breaks should agree that it makes no sense to give them to a company whose tax avoidance strategies are just as inventive as the sleek products it manufactures. 


Companies Engaged in Offshore Shell Games Spending Millions Lobbying Congress


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A recent analysis by Bloomberg Government revealed that 125 Fortune 500 U.S. multinationals with earnings held offshore spent $230 million lobbying Congress, including on tax issues, in the first six months of 2016.

These and other profitable companies too often claim their tax avoidance strategies are within the boundaries of the law, but they don’t readily reveal how they spend millions lobbying Congress to keep in place or even expand the loopholes that enable rampant tax avoidance.  

A recent Citizens for Tax Justice (CTJ) report found that U.S. multinational companies currently hold nearly $2.5 trillion offshore on which they owe up to $718 billion in taxes. Just 10 companies, with $338 billion in offshore earnings among them, spent $59.8 million lobbying Congress in the first half of this year. Google, which holds $58.3 billion offshore, spent the most, $8 million, lobbying lawmakers. Apple and Pfizer, the two companies with the most cash stashed offshore ($408.5 billion), spent $2.25 million and $6.17 million respectively. The available data does not allow the public to determine exactly how much these companies spent specifically lobbying on tax issues, only the total amount spent on lobbying and whether the company spent any time lobbying on tax issues.

As Congress and a new presidential administration consider action on business tax reform next year, there is every reason to believe that companies will ramp up their spending to maintain the status quo or secure loopholes that will allow them to continue shielding profits from U.S. taxes.

A provision that corporations favor and has secured bipartisan support is a temporary discounted tax rate for companies that repatriate their offshore earnings. This is touted as a way to generate short-term revenue to fund infrastructure or other investment. But this essentially would reward bad corporate behavior and incentivize corporations to resume stashing profits offshore after taking advantage of the one-time discounted rate. Rather than allow companies to get a discount, lawmakers should instead require companies to immediately pay the 35 percent rate that they owe on current and future offshore earnings.

Corporations have demonstrated their willingness to spend millions lobbying Congress to get favorable provisions in the tax code. Ordinary working people have no such clout. The nation’s lawmakers should stand up to corporations and pass meaningful tax reform that will create a needed long-term revenue.

Aaron Mendelson, an ITEP intern, contributed to this report.

 


New Report Exposes World of Offshore Corporate Tax Avoidance


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A new report by Citizens for Tax Justice (CTJ), the Institute on Taxation and Economic Policy (ITEP) and the U.S. Public Interest Research Group (PIRG), finds that Fortune 500 companies are now holding $2.5 trillion in earnings offshore. The report finds that holding these earnings offshore allows companies to avoid an estimated $718 billion in taxes. Given the huge amount of revenue at stake, it is no wonder that congressional leaders and even the presidential candidates have begun looking at these earnings as a potential source of government revenue.

The key driver of offshore tax avoidance by U.S. companies is the tax loophole that allows companies to defer paying taxes on their foreign profits until they are repatriated to the United States. This provision creates a huge incentive for companies to shift and hold their income in low- or no-tax jurisdictions (aka tax havens) because it allows them to avoid paying U.S. taxes.

The most prominent example of a company engaging in extensive offshore tax avoidance is Apple. According the report, Apple is holding as much as $215 billion offshore on which it owes an estimate $65.4 billion in taxes, meaning that it has managed to pay a tax rate of only 4.6 percent on its offshore earnings. A report from the European Commission found that the company accomplished this in large part by holding about $115 billion in Ireland virtually tax-free.

As the report finds, Apple is not alone in its tax avoidance. Financial service company Citigroup is avoiding $12.7 billion in taxes on the $45.2 billion in earnings they have offshore. The sneaker and clothing giant Nike is avoiding $3.6 billion in taxes on their $10.7 in profit offshore. In fact, a total of 298 of the Fortune 500 companies declare holding some amount of earnings offshore for tax purposes.

The issue of what to do about these offshore funds has become so important that it was discussed during the recent presidential candidate debate between Hillary Clinton and Donald Trump. For his part, Trump has proposed requiring companies to immediately pay a 10 percent tax rate on their offshore earnings. Unlike Trump, Clinton has been less clear about her plan for the offshore earnings, but she has proposed previously to raise $275 billion in revenue from “business tax reform,” which mirrors the amount of revenue that would be raised by President Barack Obama’s proposal to allow companies to pay a rate of just 14 percent on their offshore earnings.

While both approaches may generate some money in the short term, they would end up giving companies a huge tax break on their offshore earnings. Rather than paying a discounted rate, the best option would be to require companies to immediately pay the full amount, $718 billion by our estimate, they owe on their accumulated offshore earnings. Going forward, companies should be required to pay U.S. taxes immediately on their offshore earnings (subtracting taxes already paid to foreign governments), which would put an end to any tax advantage companies receive by shifting their profits into tax havens.

Unfortunately, Congress appears to be headed on a path toward allowing companies to pay a discounted tax rate on their offshore earnings. In a recent series of interviews, Republican House Speaker Paul Ryan and Democratic Minority Leader Nancy Pelosi both noted that a corporate tax reform legislation with some form of repatriation was a possible area of compromise in 2017. Hopefully, lawmakers will resist the relentless lobbying of corporations to give them a tax break and instead put an end to offshore tax avoidance once and for all.


The Financial Accounting Standards Board and a New Opportunity for Transparency


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For those concerned with the fate of our corporate tax code, perhaps the most important organization to watch right now is the Financial Accounting Standards Board (FASB). While not well-known to those outside the accounting profession, FASB plays a critical role as the organization that sets the standards for what appears in corporate financial statements. What makes this role so important to the corporate tax debate is that FASB can require corporations to disclose information about the tax rates they pay in the U.S. and abroad—and is currently reevaluating its tax disclosure requirements.

One of the fundamental problems with the debate around our country’s corporate tax code is the lack of transparency on exactly how much companies are paying in taxes and how they structure their offshore operations. To the extent that this data is available, it comes in the form of companies’ publicly disclosed financial statements. For their part, Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) rely heavily for these reports to estimate the effective tax rates of different companies or estimate how much companies may owe in taxes on their offshore income. While these reports provide critical insights into our corporate tax code, they are only as good as the data that financial statements provide and unfortunately this data is lacking in a number of important ways.

As an example, one of the biggest information gaps in current financial statements is that the overwhelming majority of companies with offshore earnings fail to report how much they would owe in taxes if they were to repatriate these earnings back to the United States. In fact, out of the 298 Fortune 500 companies that report offshore earnings, only 58 companies disclose how much in taxes they would owe on this money on repatriation. This incomplete disclosure makes it difficult for lawmakers and the public to assess the extent to which companies are holding these earnings in tax havens to avoid U.S. taxes.

For the past few years, FASB has undertaken a wholesale overhaul of its disclosure requirements in order to make them more effective. Recognizing many of the problems with income tax disclosures, FASB recently proposed draft rules expanding the disclosure of income tax information and related information. While the changes FASB is proposing are helpful, in a comment letter to FASB sent today, ITEP called on the board to use this disclosure review process to bring complete transparency to company filing by requiring them to publicly disclose basic tax and financial data on a country-by-country basis.

If FASB required companies to disclose their income, revenues, assets and income tax paid on a country-by-country basis, this information would reset the corporate tax debate by providing a more complete picture of the operations and tax status of our nation’s corporations. The public would be able to see more clearly the extent to which the nation’s largest companies are engaging in tax avoidance. With this information in hand, the public and their representatives could make a better informed decision about the ways in which our corporate tax code needs to be reformed.

Even minor expansions to the current disclosure rules could prove important to the corporate tax debate. For example, FASB proposes to require companies to report their income taxes paid both in the United States and abroad. This information would better inform the debate on the corporate tax code by allowing the public access to a second measure of companies’ domestic effective tax rate.

While the work of FASB is often unappreciated, its decisions over the next few months will have important implications for our understanding of the corporate tax code and the reforms that it needs. Hopefully, FASB’s work will add greater transparency to the murky corporate tax debate.


New Bill Would Bring Transparency to World of Offshore Tax Avoidance


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On Thursday, Rep. Mark Pocan (WI-D) introduced the Corporate Transparency and Accountability Act, a bill which would require all publicly-traded multinational companies to disclose their revenues, profits, taxes, and certain other operations information on a country-by-country basis (CbCR) to the Securities and Exchange Commission (SEC). The measures in the bill are similar to the rules adopted by the Internal Revenue Service (IRS) earlier this year with the key difference being that this information would be available to the general public.

By requiring CbCR, passage of the bill would represent a major gain in the battle to end the practices of base erosion and profit-shifting in the corporate world. This information will help governments to identify the shady accounting practices companies use to minimize their tax obligations and combat those practices through responsible changes to the tax code.

Advocates have long been calling for the SEC to voluntarily adopt these rules, but there has been significant pushback from corporate and financial interests. That being said, there is evidence that even the largest financial interests are beginning to realize that they are fighting a losing battle. Earlier this year, Goldman Sachs sent a memo to investors telling them to “Buy stocks with high US sales and high effective tax rates and avoid firms with high foreign sales and low tax rates,” indicating at least one major firm believes that the lax financial regulations that have allowed multinationals to amass $2.4 trillion offshore are coming to an end.

The public and investors alike would benefit a great deal from the passage of Rep. Pocan’s bill because it would provide much needed transparency on the level of corporate taxes that companies are paying throughout the world. 

Aaron Mendelson, an ITEP intern, contributed to this report.


How Apple CEO Tim Cook Makes Data Crunchers Appreciate the Power of Words


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As tax policy analysts, wonks and researchers, it’s not a surprise that we love data and number crunching. But we also appreciate an eloquent turn of phrase. So, after reading Apple CEO Tim Cook’s response to this week’s European Commission (EC) ruling on his company’s tax avoidance, we had to admit his letter is a compelling, lyrical work of art. Convincing obfuscations often are.

Within hours of the EU competition Commissioner Margrethe Vestager’s announcement that Apple will have to repay as much as $14.5 billion in illegal Irish tax breaks, Cook wrote a letter claiming that the EU’s decision is a money grab, violates Irish law and will undermine the sovereignty of EU nations:

“It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe,” Cook wrote.

In a vacuum, this is compelling. But this phrase and Cook's entire letter ignore why Apple was the target of an EC investigation in the first place, not to mention what the EC seeks to accomplish with this ruling: applying the same 12.5 percent tax rate to Apple’s Irish profits that must be paid by the thousands of smaller Irish businesses.

More generally, Cook’s argument that the EC decision strikes a “devastating blow to the sovereignty of EU member states” misses the forest for the trees. When countries like Ireland can dole out special tax deals to companies as big as Apple, the ability of every other nation to tax corporate profits is threatened. Imposing basic limits on the ability of tax havens to subvert the tax base of other nations helps strengthen the rule of law and makes it possible for the corporate tax to survive in the modern era. If the most profitable corporations in the world are able to negotiate sweetheart deals that essentially zero out their taxes, the “sovereignty” of EU member states over their tax systems will be utterly meaningless in the long run.

But the master stroke at the heart of Cook’s letter is an extraordinary claim of the black-is-white, night-is-day variety: that “[a]t its root, the Commission’s case is not about how much Apple pays in taxes.”

There is one narrow sense in which this is true: the EC’s ruling really focuses on just how little Apple pays in taxes. But make no mistake, the main finding of Vestager’s commission, and of a U.S. Senate investigation of Apple’s Irish subsidiaries that announced its findings three years ago, is that Apple has played the Irish tax system and Irish taxpayers like a piano, creating a special post-office-box subsidiary with tax rates so low it’s hard to discern how many zeros to insert after the decimal point to show Apple in fact paid some semblance of taxes to the Irish government (the company’s 0.005 percent Irish rate in 2014 is precariously close to zero).

Cook attempts to counter the EC’s low-tax-rate claims by pointing out that Apple is “the largest taxpayer in the world.” While this claim is not easy to verify, it seems plausible given the enormity of Apple’s worldwide profits, which totaled $72 billion in 2015—more than virtually any Fortune 500 corporation in recorded history. Even the lowest tax rate on $72 billion will yield a very large number—but that doesn’t make Apple a good corporate citizen. It is possible for a company as highly profitable as Apple to pay billions in taxes and still clock in at a super low rate. Conspicuously absent in Cook’s rebuttal is any mention of the tax rate the company pays.

More so than most companies, Apple’s leadership clearly values public relations. The company cherishes its image as a responsible corporate citizen. But the EC’s huge tax penalty against the tech giant confirms what the U.S. Senate’s Permanent Subcommittee on Investigations first found more than three years ago: Apple has taken steps to set up an elaborate network of shell corporations with little or no substance, for the sole purpose of avoiding paying taxes to the United States and other nations.

Tim Cook has made we data crunchers at ITEP and CTJ appreciate the power of words, for sure. But as much as we have the skill to tease out what data tell us about tax trends, we—and the broader public—are also savvy enough to read between the lines and discern the difference between truth and a well-delivered public relations ploy. 


EU Ruling on Apple's Egregious Tax Avoidance Is Welcome News, But $14.5 Billion Is Only a Fraction of the Story


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In spite of Apple’s protestations, today’s European Commission ruling that the tech giant received billions in illegal tax breaks from the Irish government and must pay $14.5 billion in back taxes has been a long time coming.

Three years ago, the U.S. Senate’s Permanent Subcommittee on Investigations issued a report that found Apple used a network of offshore subsidiaries to not only avoid paying the 35 percent U.S. tax rate on its profits, but also to dodge Ireland’s 12.5 percent corporate tax rate. The commission’s investigation reveals more clearly how effectively Apple has used its Irish subsidiary to avoid taxes. In a press release, the commission stated that in 2014, “Apple paid a tax rate of just 0.005 percent on its European profits.”

Based on Ireland’s 12.5 percent rate, the EU ruling that Apple owes $14.5 billion implies the company holds as much as $115 billion in profit essentially tax free in Ireland. This figure represents just over half of the total $215 billion in earnings that Apple holds in offshore subsidiaries, according to its latest financial filings.

Before the ruling, Citizens for Tax Justice estimated that Apple is avoiding up to $66 billion in U.S. taxes on these earnings, meaning that even if Apple paid the $14.5 billion the EU Commission has declared it owes enitrely to Ireland, the company would still be avoiding about $51.5 billion in U.S. taxes.

The new European Commission ruling finds that Ireland violated EU rules that prohibit giving tax breaks to specific companies. In particular, the commission says the Irish government issued two tax rulings that gave Apple the green light to shift most of its nominally Irish profits to a subsidiary that was a resident of no country, and therefore paid no income tax to any country. While the commission says the agreement is “perfectly legal” under Irish national laws, it is nonetheless “illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.”

On its face, this looks like a $14.5 billion tax windfall for Ireland. But the EU release makes clear that Ireland doesn’t have to be the sole beneficiary of this ruling, noting that “[i]f other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.” In particular, the EU points out that some of this tax penalty could go to the United States, rather than Ireland, “if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts. These are conducted by Apple in the U.S. on behalf of Apple Sales International and Apple Operations Europe, for which the two companies already make annual payments.”

However, the U.S. government has not reacted to this news with anything resembling joy. Last week, President Obama’s Treasury Department preemptively released a report (PDF) arguing that the EU’s recent efforts to claw back illegal tax subsidies from large multinational corporations are a departure from prior law, and would undermine international tax reform efforts. And a Treasury spokesperson responded to the EU’s announcement today with a statement that the penalties against Apple “are unfair, contrary to well-established legal principles and call into question the tax rules of individual Member States.”

This is an odd reaction, to say the least, given the incontrovertible evidence that Apple has systematically organized its Irish affairs in a way designed solely for tax avoidance. It’s doubly troubling given the high likelihood that much of Apple’s nominally Irish profits are really earned in the United States, and should be treated as domestic profits. Rather than criticizing the EU for taking on tax avoidance among their member countries, the United States should instead focus on collecting the taxes on the more than $2.4 trillion in earnings that Apple and many companies are holding offshore.

But the Treasury’s harsh reaction may reflect the inability of the Obama administration to unilaterally take the necessary tax reform steps to claim the nation’s rightful share of Apple’s unpaid tax bill. The administration received verbal blowback from many members of Congress when it attempted to scale back corporate inversions via administrative action. It’s hard to imagine the current Congress requiring Apple, or any major U.S. corporation, to pay taxes it has successfully avoided by shifting tens of billions of dollars in profits offshore each year.

The U.S. Treasury and the Obama Administration should remain steadfast and consistent in its efforts to crack down on corporate tax avoidance.

The EU’s finding reiterates what CTJ has argued for years: it’s entirely within the power of Congress to restore our corporate tax by ending deferral and requiring U.S. corporations to keep their U.S. profits where they belong.


EpiPens and Inversions: How U.S. Taxpayers Are Underwriting Mylan's Corporate Profits


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“Don’t blame me, blame the system.”

This is a typical refrain from corporate CEOs when they are the subject of public outcry for unsavory business practices. So it came as no surprise on Thursday when Mylan CEO Heather Bresch, under fire for exponentially increasing the price of a life-saving drug, blamed Congress and the insurance and health care industries for her company’s price gouging.

“No one is more frustrated than me,” she said.

It is easy enough to pick apart that flimsy defense by highlighting how Bresch’s compensation has soared to $18 million while ordinary working families who require access to the life-saving allergy medication in the EpiPen have faced huge price increases. But, in truth, Mylan’s price gouging and brazen corporate greed is part and parcel of a larger, systemic problem that we cannot count on corporations to self-police.

Sen. Charles Grassley noted in an Aug. 22 letter to Mylan that in many cases, “taxpayers are picking up the tab” for the company’s skyrocketing profit margins because children using Epipens are often covered by Medicaid. But this isn’t the only way consumers and U.S. taxpayers are subsidizing Mylan’s profits.

In 2015, the Pittsburgh-based company completed a corporate inversion, a scheme in which a U.S. company buys a smaller, foreign multinational and subsequently claims the merged company’s headquarters are housed abroad. Such maneuvers are widely derided as a transparent effort to avoid U.S. taxes by claiming legal tax domicile in another country. In the case of Mylan, it now claims to be based in the Netherlands although, practically speaking, corporate executives manage the company from its U.S. base.

As a long-time U.S.-based multinational, Mylan routinely earned more than half its worldwide sales in the United States. Now, a year after abandoning its U.S. citizenship, the company’s latest annual financial reports reveal that Mylan continues to earn a majority of its revenue in the United States, and is earning huge profits domestically as well, with $466 million in U.S. income in 2015. The company, therefore, still benefits handsomely from the public infrastructure that U.S. tax revenue make possible. Further, the pharma company also benefits from U.S. tax breaks. For example, thanks in part to production tax credits, Mylan paid a measly 2.9 percent federal income tax rate on its U.S. profits last year.

When corporations invert and claim foreign residency for tax purposes, it is sensible to ask whether these companies should be allowed to continue to enjoy all the advantages of U.S. citizenship. Mylan’s shameless effort to use U.S. taxpayers as a profit center, both by avoiding federal income taxes and by jacking up prices of medical supplies, should prompt policymakers to closely examine all benefits lavished directly and indirectly on Mylan and its fellow corporate inverters and, if possible, revoke them.

The Obama administration has worked hard over the past two years to prevent corporations from engaging in tax-motivated corporate inversions. These efforts are built on the sensible principle that when companies remain American in practice, they should not be able to engage in the legal fiction that they are “foreign” for tax purposes. Yet, administrative action can only go so far. Congress can stop shady inversions once and for all by passing measures such as the Stop Corporation Inversions Act, which would shut down domestic companies’ ability to pretend that they are foreign for tax purposes.

Mylan’s recent corporate inversion and EpiPen price gouging are fairly damning evidence that the company is maximizing its profits at the expense of the American taxpayer. During her CNBC interview, Bresch said, “facts are inconvenient to headlines.” It’s a sentiment that, in context, made little sense in part because it’s a monumental challenge to defend the indefensible.

But we agree, Ms. Bresch. Facts are important. And no matter what the headlines say or don’t say, if a company heavily relies on the largesse of the federal government, as Mylan in fact does, it should be treated as a U.S. citizen for tax purposes – and it warrants intense public scrutiny over the pricing of its products.


Why We Must Close the Pass-Through Loophole


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While multinational corporations frequently avoid taxation by shifting profits to offshore tax havens, big businesses have increasingly exploited one onshore tax-avoidance trick: the pass-through loophole. By registering as S corporations and partnerships, businesses boasting revenues in the tens of millions of dollars can enjoy benefits originally reserved for C corporations while avoiding the corporate income tax. A new report released by the Center for American Progress (CAP) notes that the U.S. government lost as much as $790 billion of revenue from 2003 to 2012 from this loophole.

The Problem with the Pass-Through Loophole

It’s intuitive to equate “big business” with C corporations, which are required to pay the corporate income tax and, in the past, were the only ones to have their shareholders shielded from business liability. Pass-through entities, including sole proprietorships, S corporations, and partnerships, aren’t subject to business income taxes. Instead, these businesses pass income “through” to the owners of the business, who then pay individual taxes.

The reasoning behind taxing C corporation income at the individual and entity levels is that this form of business receives specific benefits not available to other businesses, such as limited liability, the ability to be publicly traded and other legal rights normally reserved for individuals. However, legal changes throughout the United States in the late 1980s and 1990s allowed pass-through entities to enjoy many of the same legal benefits as C corporations without being subjected to the corporate income tax. This explains why the Joint Committee on Taxation (JCT) found that the number of pass-through entities (in particular, S corporations and partnerships) for the first time outpaced the number of C corporations in 1987 and has nearly tripled since then.

Pass-through entities with limited liability represent the best of both worlds for a business: they can reap the benefits of a traditional corporation without having to pay taxes at the entity level. A recent Treasury report found that the average federal income tax rate on pass-through business income is only 19 percent, far lower than the average rate that C corporations face.

Defenders of the pass-through tax break often style pass throughs as “small businesses,” using the small, local law firm or medical practice as an example. But larger businesses are aggressively using the pass-through loophole as well: a National Bureau of Economic Research (NBER) study found that more than 100,000 big U.S. businesses (with revenue of more than $10 million each) avoided the corporate income tax in 2012 by registering as pass-through entities. Additionally, 70 percent of partnership and S corporation revenue goes to these big businesses.

All of this has troubling implications for the effectiveness and equitability of the U.S. tax code; in 2011, the pass-through loophole cost the U.S. government $100 billion in lost revenue that could have improved schools or funded much needed infrastructure projects.

Closing the Pass-Through Loophole

Pass-through tax reform must focus on holding large businesses accountable without harming legitimate small businesses. One solution would be to distinguish large pass-through businesses and treat them as C corporations in the tax code. One way that CAP suggests to do this is to make it so that any pass-through entity with gross receipts of more than $10 million will be treated as a C corporation in the tax code. According to a Congressional Research Service (CRS) report, such a rule would only affect the largest 1.1 percent of partnerships and 2 percent of S corporations.

Additionally, greater efforts should be taken to ensure that the corporate income tax is applied to companies that receive the benefits of incorporation. One approach would be to lower the threshold for the number of owners a pass through entity can have to either 25 or 10 from the current level of 100. A second complementary change would be to not allow companies to receive the benefit of limited liability without paying the corporate income tax.

Due to loopholes in our business tax code, more than half of all U.S. business income isn’t subjected to the corporate income tax with more and more businesses finding a way to circumvent the tax each year. Enacting the reforms mentioned above would help reverse this trend and ensure that businesses pay their fair share in taxes.

Kelsey Kober, an ITEP intern, contributed to this report.


Tim Cook's Disingenuous Argument to Justify Apple's $215 Billion Offshore Cash Hoard


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Tim Cook is a persuasive CEO. In a wide-ranging interview published earlier this week in the Washington Post, he discussed his vision for the company, thoughts about leadership succession, and humbly admitted he has made mistakes.

So it would be very easy to view as reasonable his declaration that Apple will not repatriate its offshore profits until the United States enacts a “fair” tax rate. Apple, he asserted, pays “plenty of taxes” and is justified in keeping profits offshore to avoid U.S. taxes because it “sells products everywhere.”

A review of the company’s latest public filing reveals that it holds $215 billion offshore, avoiding up to $66 billion in taxes. Just last year, Apple moved a record $50 billion offshore, far more than any other company has achieved in a single year.

Apple cemented its status as a champion tax avoider in 2013 after a U.S. Senate Permanent Subcommittee on Investigations (PSI) found that the tech giant exploits loopholes in the tax code to shift its U.S. profits to an Irish subsidiary where those profits will not be taxed. CTJ analysts outlined how it does this in a 2013 report.

When Cook  justifies Apple’s offshore cash stash by declaring that the company sells products everywhere, he is carefully conflating the political controversy over whether the U.S. should have a territorial tax system with the real issue—the fact that Apple is aggressively moving U.S. profits offshore to avoid taxes. It’s a clever PR strategy intended to make Apple’s tax avoidance scheme seem reasonable.

The U.S. has a global tax system in which it taxes all corporate profits (at the statutory rate less whatever rate the corporation pays to a foreign government) of U.S.-based companies no matter where said profits are earned. Corporations and their allies continue to push for legislation that would move the United States to a territorial corporate tax system in which only the profits they earn in the United States would be subject to taxation here. CTJ has written extensively about why this should not be a top priority for tax reform.

Shifting questions about Apple’s tax avoidance to political discourse over whether the U.S. should move to a territorial tax system is a ruse. As the Senate PSI investigation found, Apple shifts a significant percentage of U.S.-earned profits offshore so that it doesn’t have to pay taxes on its U.S.-earned profits.

Cook’s assertions are further bunk as it appears the company is paying a miniscule amount, if any, in taxes to any nation on these profits. ITEP’s Matt Gardner last year reviewed Apple's corporate filings and found that the company has an effective tax rate of “about 2.2 percent on its permanently reinvested foreign profits.” This means a significant percentage of those profits are in tax havens where they will not be taxed at all.

Tim Cook’s declarations that Apple will not repatriate profits until the United States has a “fair” rate and that the company pays “plenty of taxes,” appears to mean that the company has determined an upper limit of U.S. profits that should be taxed (plenty) and the rest should be moved offshore because the company has decided it’s paid enough.


Apple Inc.: Poster Child for Why We Need to Close Offshore Tax Loopholes


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Apple Inc. is not only the world’s leading cell phone designer, it is also number one when it comes to falsely asserting that most of its profits are earned in tax havens. The company has $215 billion in profits that it pretends are offshore, thus is avoiding an estimated $66 billion in U.S. taxes. Apple’s enormous stash alone accounts for nearly 10 percent of the $2.4 trillion in profits that multinational companies claim are offshore for tax purposes.

Tim Cook, CEO of Apple, feels no shame about his company’s tax-avoiding ways. On the contrary, he’s proud of it. In a recent interview with the Washington Post, he vowed that Apple will never pay taxes on the profits it has artificially shifted offshore until the U.S. enacts a “fair” tax rate. What does he think is “fair”? Well, at a 2013 Senate hearing, he suggested that a 5 percent tax rate might be acceptable.

That’s a far cry from the statutory 35 percent tax rate that Apple has avoided paying through its tax shenanigans.

Apple is not alone in believing that it should be able to avoid its tax responsibilities, although it may be the most arrogant about it. Many, many other multinational corporations, especially those with valuable trademarks, patents, copyrights, and other “intellectual” property, have found ways to pretend that those assets are located in tax havens, and that the profits they generate should therefore be tax-exempt.

The tax laws that allow such preposterous claims — written, of course, with the help of the tax-avoiding companies — need to be changed. You and I can’t decide that we should be allowed to pay a ridiculously low tax rate. Neither should multinational corporations.


Puerto Rico and Section 936: A Taxing Lesson from History


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The U.S. general election kicked off this week, and that means we’re going to be hearing about a lot of tax proposals—some good, others very bad—from House, Senate, and Presidential hopefuls. While the Puerto Rican debt crisis has taken a back seat in politics due to political conventions and a contentious presidential race, there is some talk in tax circles about resurrecting a lucrative business-friendly tax benefit centered on the island: Section 936. This is a bad idea.

Also known as the Possession Tax Credit, Section 936 was a provision in our tax code enacted in 1976 ostensibly to encourage business investment in Puerto Rico and other U.S. possessions. Congress voted to phase out Section 936 in 1996, citing excessive cost and the very limited number of U.S. companies that received the tax break. In 2006, the phase-out was completed.

Section 936 worked by exempting from federal income tax profits earned by U.S. companies in Puerto Rico and other possessions (under certain conditions). Corporations were quick to set up subsidiaries in Puerto Rico, and massive tax-dodging and profit shifting soon followed.

Over the 30 year lifespan of Section 936, companies shifted billions in corporate income to their Puerto Rican subsidiaries to receive partial or full exemption from federal taxes. In the 80s, corporations had an estimated total of $8.5 billion in tax savings and, in 1987 alone, these profit shifting activities are estimated to have cost the Treasury Department $2.33 billion in revenues. In 1998, during the phase-out period of the credit and when corporations were significantly disinvesting in Puerto Rico, six companies had a total of $912 million in tax breaks thanks to Section 936.

Even while the credit reduced corporate tax bills, Puerto Ricans did not see a proportional benefit. In fact, Puerto Rico soon found itself stuck with the “finance curse,” which occurs when a nation’s political and economic institutions are increasingly oriented towards and co-opted by wealthy international elites to the detriment of its people.

This is evidenced by the discrepancies between corporate investment in Puerto Rico and the development of the island. Despite some economic growth, Puerto Rican per capita income remained less than 30 percent of the U.S. average and local unemployment remained more than double the mainland’s rate. Meanwhile, the firms located on the island enjoyed large profits and low tax bills. Pharmaceutical companies, by far the biggest beneficiaries of Section 936, enjoyed a $70,788 tax break per employee on the island in 1987. In general, when faced with the decision to make investments that maximized profits or promoted Puerto Rican development, firms overwhelmingly chose to pursue the former, eventually convincing the U.S. Congress that the costs of Section 936 greatly outweighed its benefits.

The possibility that Puerto Rico would suffer greatly from the finance curse was inherent from its beginning as a commonwealth. In 1952, Puerto Rico’s constitution was ratified. It included a severely shortsighted provision. Section 8 of Article 6 requires that the Puerto Rican government must make payments to reduce its public debt before paying any other expenses, including the funding of basic public services. From the start, economic institutions were working against the people of Puerto Rico.

Despite Section 936’s shortcomings, some U.S. legislators, backed by corporate lobbyists, are considering reenacting it. They argue that such a step is necessary in light of Puerto Rico’s current debt crisis. But such a step would be like putting a Band-Aid on a bullet wound with the bullet still inside the body. It may look nice from the outside, but the heart of the problem is merely covered up.

There are much better policy solutions to Puerto Rico’s debt crisis that will create sustainable growth. One option would be for the U.S. to expand the Earned Income Tax Credit (EITC) to include Puerto Rico, which it currently does not. Expanding the EITC in this way could encourage low-income and out-of-work Puerto Ricans to enter the labor force and help Puerto Rican businesses through higher demand for their products and services.

More broadly, Puerto Rico needs to embrace public investments, not new corporate tax breaks, as the best way toward economic development. To this end, the U.S. government needs to give Puerto Rico the ability to fully fund critical public investments rather than subjecting it to continued austerity policies to satisfy U.S. hedge funds and other wealthy investors that have bought Puerto Rican bonds cheaply and hope for a windfall if the bonds are redeemed at their face value.

Repealing the Possession Tax Credit was one of the few corporate tax-reform achievements in the 1990s. Bringing it back would be an expensive move in exactly the wrong direction.

Aaron Mendelson, a CTJ intern, contributed to this report.


Microsoft's $39 Billion Tax Holiday Continues--But Ratings Agency Cries Foul


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Earlier this summer, Microsoft announced it would finance its purchase of the professional social networking site LinkedIn by borrowing $26 billion, rather than dipping into its substantial hoard of offshore cash. The ratings agency Moody’s subsequently placed the company under review for a downgrade.

And just last week after Microsoft released its annual report, Moody’s warned that “[t]he long term rating could be downgraded if… the company undertakes additional large, debt funded acquisitions … without a substantial increase in cash balances.” This appears to be a long-winded way of telling Microsoft not to try the LinkedIn strategy again.

Stern warnings from credit rating agencies are generally not shrugged off lightly. Yet Microsoft has a straightforward, if crass, reason for ignoring Moody’s advice: tax avoidance. The company, over the years, has declared $124 billion of its profits to be “permanently reinvested” overseas, much of which appears to have been untaxed. As long as the company keeps these profits offshore, they will stay tax free—but repatriating the profits to (for example) pay for a domestic acquisition would require the company to pay federal income taxes on this income. Microsoft’s executives and tax attorneys appear to have decided it makes more sense to borrow the money domestically than to give up the tax-free status of some of its foreign cash.

How do we know that much of Microsoft’s off-shore cash is tax-free? The company’s latest annual report, released last week, discloses that it has $124 billion in permanently reinvested offshore profits, an astonishing $15.7 billion jump over the $108.3 billion it reported last year. The company says that the unpaid U.S. income tax on repatriation of these profits would be $39.3 billion. Since the tax due on repatriation is 35 percent less whatever has already been paid to foreign governments ($39.3 billion is 31.7 percent of $124 billion), Microsoft has paid an effective income tax rate of just 3.3 percent on its offshore cash. This is a clear indicator that most of its offshore cash is in zero-rate tax havens.

Paradoxically, even though Microsoft is telling the IRS this income is abroad—and staying abroad—much of it likely never left the United States. The U.S. Senate Permanent Subcommittee on Investigations has estimated that more than 75 percent of Microsoft’s so-called offshore cash is in U.S. bank accounts. This means that even though the company can’t invest this cash domestically in ways that create U.S. jobs, it can still enjoy the protections of U.S. banks without paying taxes on profits stashed in these banks.

It shouldn’t take a public scolding from a ratings agency to make corporate leaders stop subverting the U.S. tax system. The choice made by Fortune 500 corporations to hold their cash offshore for tax purposes has real, and damaging, fiscal consequences for our nation. The $39 billion in federal income taxes that Microsoft has not paid on its offshore stash would be more than enough to cover the cost of the Pell Grant program next year, for example. Fortune 500 companies collectively are avoiding up to $695 billion in taxes by stashing profits offshore. Congress, rather than the Moody’s rating agency, should hold corporations accountable and do away with gaping loopholes that allow such egregious tax avoidance. Ending the indefinite deferral of U.S. tax on foreign corporate income would take away the perverse incentive for companies like Microsoft to borrow billions domestically while sitting on far larger troves of unused “foreign” cash. 


Why the SEC Needs to Require More Disclosure from Companies


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In 2015, Citigroup reported to the Security and Exchange Commission that it has 21 offshore subsidiary companies, but it reported to the Federal Reserve that it has 140. Similarly, Bank of America reported to the SEC that it has 21 subsidiaries while reporting to the Federal Reserve that it has 109. All told, 27 financial firms report wildly different numbers to the SEC v. Federal Reserve.

So what gives and which reporting is accurate? It turns out that SEC has less stringent reporting rules, requiring companies only to disclose “significant” subsidiaries. It defines significant as comprising 10 percent or more of the company’s assets. The Federal Reserve requires broader disclosure, but only for financial companies. A CTJ comparison of the disclosures revealed big banks and other financial firms collectively are under reporting to the SEC the number of subsidiary companies by a factor of more than seven.

Because Federal Reserve requires subsidiary reporting only for financial firms, it’s impossible to fully know the extent to which other Fortune 500 corporations fail to disclose their subsidiaries. But if financial companies’ reporting practices are representative of other corporations, then it is likely under reporting is pervasive.

This week, the SEC closed its comment period for an exposure draft, which is part of its review of disclosure requirements. CTJ, in written comments, urged the SEC to mandate greater corporate transparency by requiring companies to publically disclose all their subsidiaries. Such a requirement would prevent companies from gaming which subsidies they disclose, and it would provide the public and investors with a clearer picture of how public companies operate.

Another critical failure in SEC disclosure requirements is that companies can avoid specifying how much they owe in U.S. taxes on their “offshore” income by claiming that providing this calculation is not practicable. Eighty-two percent of Fortune 500 companies with untaxed offshore earnings used this loophole to avoid revealing what they would owe in taxes. Because of this, the public and investors are unable to determine whether and to what extent companies are engaging in offshore tax avoidance. A study by the financial firm Credit Suisse found that many large companies, including General Electric and Xerox, could face tax liabilities representing 10 percent or more of their total market capitalization. In other words, SEC rules enable corporations to obscure critical information about the financial health of a company.

As CTJ’s SEC comments note, the best way to bring transparency to companies’ offshore operations would be to require companies to report their tax and related information (such as income, number of employees, revenue, etc.) on a country-by-country basis. Companies already keep track of this information for accounting purposes and will soon have to send this information to the IRS anyway, so reporting it in a SEC filing would require no real additional cost.

For more read CTJ’s full comment to the SEC


Utilities Aren't Paying Their Fair Share


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A new report by Institute for Policy Studies (IPS) finds that the U.S. government is failing to meet clean energy goals due in part to opposition from public utility companies, which account for a third of U.S. greenhouse gas emissions. What’s more, federal and state tax policies that create inefficient business incentives lie at the heart of the problem.

The combined pretax income of 40 profitable public utility companies was $42.95 billion in 2015; however, these companies paid only $1.6 billion in federal and state corporate income taxes. From 2008 to 2012, these 40 utility companies had an effective tax rate of 2.9 percent, the lowest of any industry. The statutory federal tax rate on corporations is 35 percent. If utility companies paid the same effective federal rate as the retail sector, 29.6 percent, and paid the full state rates, the federal and state governments would have a total of $14.06 billion in additional revenue.

How do utility companies get away with paying a single-digit tax rate? Among other tax breaks, the most lucrative loophole utility companies use is accelerated depreciation. This tax break allows companies to deduct the cost of certain capital investments (such as on equipment) from their taxes at a rate faster than those investments depreciate in value. To wit, the 23 utilities companies that paid no federal taxes in 2015 received a combined total of $11.5 billion in tax benefits from depreciation. American taxpayers, on the other hand, are effectively taxed twice on their energy consumption: once at the end of the month when they pay their utility bills, and again to pay for the tax breaks utility companies receive annually. The tax policy problems highlighted by utility companies are just a few of the many problems with our corporate tax structure. Immediate and drastic action is needed to reform our corporate tax code to incentivize public utilities and other companies to work in the interests of the American public.

The ultimate goal of IPS and other environmental advocates is to overcome utility companies’ opposition to clean energy practices. Part of the challenge is that utility companies and their surrogates claim they do not have the funds to invest in clean technology, yet they are among the most profitable and undertaxed corporations in the country.

Rather than letting utilities get away with not paying their fair share, lawmakers should end or reform costly and ineffective tax breaks, such as accelerated depreciation, that allow utility and other companies to pay low tax rates. More broadly, utilities, and all corporations, should be required to report the taxes they pay in each state in which they operate in addition to their federal taxes.

Aaron Mendelson, a CTJ intern, contributed to this report.

Aaron Mendelson, a CTJ intern, contributed to this report

Gilead Sciences: One of the Many Price Gougers and Tax Dodgers


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Gilead Sciences has been the subject of lawsuits, political rebuke and public ire for the last few years as health advocates have called out the drug maker for price gouging after it purchased a smaller pharmaceutical firm and hiked the price of Sovaldi, a cure for Hepatitis C.

Now, a new report by Americans for Tax Fairness finds that not only is the company charging U.S. consumers an exorbitant amount for a critical, life-changing drug, it is shifting the profits it earns in the United States to offshore tax havens and avoiding taxes on a massive scale.

Of the report’s many findings, a few stand out. Between 2013 and 2015, Gilead’s profits more than quintupled from $4.2 billion to $21.7 billion. The explosion in profits can be attributed to Gilead’s 2011 acquisition of Pharmasset and its drug Sovaldi, a cure for hepatitis C (HCV). Gilead shifted the patent for this medicine to Ireland to avoid paying taxes on profits generated from that drug. In fact, Gilead’s untaxed offshore earnings rose by $12.9 billion, from $15.6 to $28.5 billion, between 2014 and 2015, the fourth largest offshore profit shift among Fortune 500 companies. Gilead Sciences reports that it has paid a tax rate of one percent on these billions in profits, a clear indication the company is using the magic of accounting to claim these profits are in low or zero-tax countries.

If Sovaldi had been developed by Gilead exclusively or in Ireland, perhaps there would be an argument for the company’s low tax rate on billions in profits. But what makes this case exceedingly egregious is that U.S. taxpayer dollars subsidized the research that helped create Sovaldi in the first place. Pharmasset’s founder, Raymond Schinazi, was an almost full-time worker at the Department of Veterans Affairs (VA) for almost three decades. During that time, he and Pharmasset received nearly $11 million in grants for research on viruses, including HCV, from the National Institutes of Health. Making matters worse, the HCV drug that Americans can end up paying $1,125 per pill for goes for one percent of that price in other countries. The price is so high that government agencies and programs, such as the VA and Medicaid, have been forced to ration the limited quantities they have and only treat a tiny portion of the total number of people they could help.

In addition to receiving major government subsidies for research activity, Gilead lowered its tax bill by $2 billion over the last decade by taking advantage of a loophole that allows stock options offered to corporate executives to be tax-deductible. If Gilead used the money it saved on taxes to significantly increase investment in research and development on new drugs, its tax dodging would seem far less egregious; however, the company spent nearly 20 percent more on stock buybacks than research and development between 2005 and 2014, greatly inflating the value of the company and the former CEO’s paycheck by almost 600 percent.

To be clear, Gilead Sciences is just one of many price gougers and tax dodgers of the corporate world. Multi-national pharmaceutical companies are some of the most egregious corporate price gougers and tax dodgers in the world, charging exorbitant rates for lifesaving drugs and circumventing countries’ tax codes all in the name of profits and their shareholders’ financial wellbeing.

More broadly, a recent CTJ analysis found that Fortune 500 companies are avoiding $695 billion in U.S. federal income taxes on the more than $2.4 trillion in profits they are holding offshore. As long as Congress refuses to act, it is complicit in this large-scale tax dodging. Neither Gilead Sciences nor any other major company should be allowed to avoid paying their fair share in taxes, particularly when those large profits are made possible by U.S. taxpayer investment in the first place.

The nation’s lawmakers should act immediately to shut down this tax avoidance behavior by ending deferral, making corporate inversions harder, increasing corporate transparency and closing egregious tax loopholes like the stock option loophole.

Aaron Mendelson, a CTJ intern, contributed to this report.


Why Treasury's New Anti-Inversion Rules Are Critical


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Since the Treasury Department announced new rules in early April designed to stop corporate inversions, some corporate lobbyists have protested loudly. This likely is an indicator the proposed rules would have a real effect on the ability of big multinational corporations to avoid corporate income taxes. The new rules are designed to prevent U.S. companies from merging with a foreign company and reincorporating as a foreign entity in order to escape paying U.S. taxes, a practice known as a corporate inversion.

In recent years, corporate inversions have emerged as a real threat to the U.S. tax base. In fact, the Joint Committee on Taxation (JCT) now estimates that inversions will cost the U.S. Treasury at least $34 billion over the next 10 years. The American people should not have to make up for the revenue hole created by inversions, and in the absence of legislation to curb this problem, the Treasury is right to take whatever actions it can within its legal authority to curb inversions on its own.

Citizens for Tax Justice (CTJ) submitted comments this week in support of two parts of the Treasury’s proposed rules, the Serial Inverter Rule and the Earnings Stripping Rule, while also urging Treasury to take additional action to curb corporate inversions.

The Serial Inverter Rule

Serial inverters are multinational corporations created by repeated inversions. The proposed rule on Inversions and Related Transactions, also known as the “serial inverter” rule, disregards newer inversions in determining whether anti-inversion rules apply to a company, meaning that companies will find it more difficult to circumvent these rules through a series of successive inversions.

We’ve already seen the positive impact of the proposed serial inverter rule in the case of Pfizer, which abandoned its planned $125 billion merger with foreign company Allergan, a serial inverter, shortly after this rule was proposed. This action alone may have already saved U.S. taxpayers as much as $40 billion in taxes on offshore profits that Pfizer could have avoided by inverting.

The Earnings Stripping Rule

Earnings stripping is an accounting gimmick used by multinational corporations to avoid taxes by shifting profits from higher- to lower-tax jurisdictions. Usually, this practice involves a multinational giving subsidiaries in higher-tax jurisdictions (like the United States) loans from subsidiaries in low- or zero-tax jurisdictions (like the Cayman Islands). Because interest payments on these loans are tax-deductible in the higher-tax country and are paid out to the subsidiary in the lower-tax company, the company is able to artificially shift much of its income to the lower-tax jurisdiction.

Treasury’s proposed rule on Treatment of Certain Interests in Corporations as Stock or Indebtedness, or the “earnings stripping” rule, will inhibit multinational corporations’ ability to use this trick to shift profits out of the U.S. by increasing the cost of excessive intercompany loans. This action will curb the incentive for companies to invert because it will lower the amount that companies can permanently shift out of the U.S. tax system if they invert.

A particular strength of this rule is that it applies not only to inverted companies, but to all multinationals doing business in the United States. Cracking down on all earnings-stripping activities will raise badly-needed revenue and will also help level the playing field between multinational corporations that can take advantage of this gimmick and the many smaller domestic businesses that cannot.

More Action Needed

Although these two rules will undoubtedly help to prevent tax-motivated corporate inversions, Treasury should take additional steps to curb this practice. A good starting point would be putting an end to “hopscotch loans,” which occur when inverted U.S. companies escape paying taxes on dividends by making a loan directly to a foreign parent and bypassing the U.S. parent.

Unfortunately, Treasury action can only go so far, and only legislative action can stop inversions cold. The good news is that Congress has available several promising legislative options to shut down inversions, including enacting an exit tax, further cracking down on earnings stripping and requiring that post-merger companies be owned by a majority of the foreign company’s shareholders in order to be considered foreign. The bad news is that lawmakers have not yet shown the political will to take these sensible steps. 

Kelsey Kober, an ITEP intern, contributed to this report.


Expat Medtronic Is a Case Study in How Corporations Gain More Ways to Avoid Taxes by "Moving" Offshore


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Aside from the ethical concerns around corporate inversions, the clearest case for establishing legislation to prevent this practice is the $2.4 trillion that U.S. multinationals have stashed offshore, and the potential for inversions to help these companies avoid up to $695 billion in U.S. tax on these profits.

But those of us who find the copious corporate tax loopholes that enable corporate inversions problematic also worry that these tax-motivated moves could result in a bigger, longer-term fiscal drain. Newly inverted companies could more easily engage in “earnings stripping,” which occurs when companies use accounting tricks to shift their profits from the United States to foreign tax havens. A new financial release from Medtronic, which successfully inverted in early 2015 and now claims it is headquartered in Ireland, suggests that the health care giant may be engaging in these accounting tricks.

Like many multinationals, Medtronic sells products and services around the world, and the company’s financial reports disclose the location of both the company’s sales and profits. Over the past decade, U.S. sales consistently have accounted for about 58 percent of Medtronic’s worldwide revenue. But since the company inverted last year, the U.S. share of pretax income has fallen precipitously: the company’s last pre-inversion disclosure showed the U.S. representing 54 percent of sales and 46 percent of income, but the company’s newest annual report, covering 2015, shows that while the company derives 58 percent of its revenues from U.S. sales, those revenues only translated into 8 percent of the company’s worldwide income

Earnings stripping is the likely culprit. This scheme typically takes the form of intra-company borrowing: a U.S. subsidiary borrows cash from its foreign parent, and pays interest on the loan to the parent. The interest payments reduce the company’s U.S. taxable income, and the interest income boosts the company’s foreign income — even though the entire transaction amounts to nothing but shifting profits from one corporate pocket to another.

Earlier this year, the U.S. Treasury issued regulations that are designed to reduce the tax benefits of earnings stripping, by treating interest payments of this as non-deductible dividends, rather than as taxable-deductible interest. If the dramatic shifts in the location of Medtronic’s income over the past two years are due to earnings stripping, one can only hope that the new rules will crack down on such tax avoidance schemes in the future.


Microsoft's New Plan to Avoid $9 Billion in Taxes


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Some of America’s most notorious offshore profit-shifters have found a new way to use the huge amounts of cash they’ve stashed in tax havens without paying the taxes they owe.

The latest is Microsoft, which is funding its takeover of LinkedIn by borrowing $26 billion, essentially using its $108 billion in offshore cash as collateral. By financing the purchase instead of paying for it outright, Microsoft will reportedly avoid $9 billion in federal income taxes this year and save more in years to come through tax deductible loan interest.

Microsoft is following in the footsteps of Apple, which used some of its more than $200 billion in untaxed offshore profits last year as implicit collateral to finance a $6.5 billion stock repurchase to boost its stock price. By structuring the deal as a loan, Apple avoided nearly $2 billion in taxes it would have had to pay if it used its offshore cash directly.

As law professor Edward Kleinbard told Bloomberg News, Microsoft’s (and Apple’s) borrowing is tantamount to “a tax-free repatriation.” Companies awash in untaxed offshore cash should not be allowed to use that money to back investments in the United States without paying the billions in taxes that they should pay.

Microsoft, for example, claims that, for tax purposes, 55 percent of its total profits are earned by three offshore tax-haven subsidiaries, despite the fact that these subsidiaries have only two percent of Microsoft’s workforce. This explains why Microsoft has paid only a 3 percent tax rate so far on the profits it pretends it earned offshore, meaning that the company owes $34.5 billion on that $108 billion cash hoard.

The problem of shifting earnings offshore to avoid taxes goes far beyond Apple and Microsoft. According to CTJ’s latest estimate, U.S. companies now hold $2.4 trillion in largely untaxed profits offshore, which has allowed them to avoid nearly $700 billion in U.S. taxes.

 At this point, our international tax laws have almost no connection to reality.

Ordinary working people can’t pretend we make our money in the Cayman Islands or other tiny no-tax places. But sadly, multinational corporations can do so. And their preposterous offshore tax-avoidance schemes will continue to proliferate until our lawmakers wake up and stop letting multinational corporations shift their tax responsibilities onto the rest of us.


Hamilton: Unwitting Father of Tax Breaks


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Hamilton’s 16 nominations and the 11 Tony awards it received last Sunday came as no surprise after months of critical and popular acclaim. What was unforeseen during Sunday night’s Tony’s telecast were the shout outs to New York Sen. Chuck Schumer, who was wholly uninvolved in the production of Hamilton or any other live theater production. What exactly did Schumer do to earn such accolades?

Year after year, Congress has renewed a package of temporary tax provisions known as the “tax extenders.” Most of the tax extenders are simply costly tax breaks designed for special interest groups and contribute very little to the nation’s economy. Sen. Schumer is receiving so much praise from Broadway recently because he managed to get “live theatrical productions” added to the film credit, which allows investors to immediately deduct the full cost of production in lieu of a longer depreciation schedule.

Broadway producers argue that including “live theatrical productions” in the film credit will protect their finances from under-performing shows. The fact that taxpayers shouldn’t be on the hook for protecting the economic well-being of wealthy theater producers notwithstanding, there are hits and there are flops every season (just as there are ups and downs in the financial markets), regardless of whether investors have a favorable tax credit. The industry has done just fine without the tax credit, employing tens of thousands of workers and has an economic impact of $12.57 billion in New York alone. While proponents of the tax break claim it is as an easy way to free up investment capital, in reality it is just another special interest tax break that disproportionately benefits a small number of wealthy individuals.

After officially premiering on Broadway in August 2015, Hamilton earned $61.7 million by April 2016, easily recouping the original $12.5 million investment. Investors' return could add up to $300 million within a few years by some estimates.

Hamilton’s success has been used by proponents of the live theater tax break to promote the economic and cultural importance of enacting and extending the tax break. This makes no sense: Investors financed Hamilton well before Congress passed the tax break, and the production owes none of its success to the credit. In other words, Hamilton seems a better example of why the credit is unnecessary rather than a reason for its enactment.

The film credit is just one example of a variety of special interest tax breaks in the extenders package that distort American markets and give very little back to the economy. There are niche extenders including tax breaks on rum, hard cider, NASCAR, and race horses, but there are also larger tax breaks that have significantly detrimental effects on our economy and only serve to boost the profits of large corporations. These tax breaks include bonus depreciation, the research credit, and offshore loopholes such as the active financing exception and the look-through rule. In total, full extension of the tax extenders will cost the American tax payer $740 billion over a decade. Congress should allow provisions like the live theater production tax break to expire in the coming years and also reverse course on its fiscally disastrous decision to make several other tax extenders permanent.

The irony, of course, is that all of those in favor of this tax break are pointing to a musical that was produced before the tax break took effect and is about a strong advocate of federal taxes. To quote our first Secretary of the Treasury, “[taxes] are evidently inseparable from Government. It is impossible without them to pay the debts of the nation, to protect it from foreign danger, or to secure individuals from lawless violence and rapine."

Aaron Medelson, a CTJ intern, contributed to this report.


LinkedIn's Loss May Be Microsoft's Gain


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LinkedIn has a tax avoidance problem: the company is generating tax breaks faster than it can use them. Between 2010 and 2014, the company used the “excess stock option” tax break to virtually zero out its federal income taxes, paying an average tax rate of just 1.1 percent on $453 million of U.S. income. But even after doing so, the company is in the enviable position of having a huge pile of unused stock-option tax breaks that can be exercised in years to come.

In the footnotes of its annual financial report, LinkedIn discloses that it has enough unused stock option tax breaks to zero out income taxes on the next $463 million of U.S. profits it earns. The bad news is that you have to earn a profit to use the stock option tax break, and LinkedIn itself has not appeared especially confident that it will do so going forward. This is one reason why Microsoft’s recently announced acquisition of LinkedIn appears especially fortuitous: When Microsoft buys LinkedIn, it is also buying LinkedIn’s stockpile of unused tax breaks. And as a consistently profitable company, Microsoft will certainly be able to make full use of its newly acquired stock option tax breaks.

As explained in a recent Citizens for Tax Justice report, companies that pay their executives in stock options instead of cash can pretend, for tax purposes, that they actually “spent” the value of these options, and can reduce their taxable profits by (most of) the amount of this alleged “cost.” The stock option tax break is a favorite of Microsoft as well, reducing the company’s tax bills by $1.17 billion over the past five years.

LinkedIn, like a number of other prominent tech companies, is notorious for relying heavily on stock options as a way of paying its employees without incurring an actual cash expense. Microsoft’s acquisition is a reminder that as long as the excess stock option tax break remains on the books, the use of stock options by companies such as LinkedIn can also be a remarkably effective way to become an attractive takeover target. 


To Maximize Corporate Transparency, the IRS Must Strengthen its Rules on Country-by-Country Reporting


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Update 6/29/2016:The new rules have been officially released. For more see the FACT Coaliton release here.

In the wake of new research revealing that offshore corporate tax avoidance has cost governments worldwide hundreds of billions of dollars in lost revenue, leaders of the world’s 20 largest economies have started to crack down on this behavior. As part of its action plan to counter tax avoidance, the OECD has advocated mandatory country-by-country reporting (CBCR) as a crucial tool needed to end the practice of base erosion and profit-shifting by multinational corporations. Following the OECD’s lead, the Internal Revenue Service put out rules to enact private CBCR, which would require U.S. parent companies that reported an annual revenue of at least $850 million to share information on profits, tax rates, and subsidies received in every country in which they do business.

While this new rule is a major step toward bringing an end to corporate tax dodging, it falls short by making these disclosures private instead of available to the public. As Heather Lowe, Director of Government Affairs at Global Financial Integrity, explained in her testimony before the IRS, making this information publicly available would give both Congress and advocacy groups the information they need to analyze solutions to the problem of base erosion and profit-shifting, instead of relying on the already over-burdened IRS.

Four U.S. senators have echoed Lowe’s concern. On June 7th, Senators Al Franken (D-Minn), Sheldon Whitehouse (D-RI), Bernie Sanders (I-Vt), and Ed Markey (D-Mass) signed a letter urging the IRS to require public CBCR, arguing that this change would strengthen the IRS rules by empowering the American public with knowledge about corporate offshoring. 

Shielded by a prior lack of federal transparency requirements, multinational corporations have been able to exploit loopholes in both U.S. and international tax laws to shift their profits to subsidiaries in low or no-tax nations; a recent CTJ report found that American Fortune 500 companies are avoiding up to $695 billion in federal income taxes this way. Expanding CBCR through a public disclosure requirement would put information about corporate behavior in the hands of citizens around the world who can hold both these corporations and their governments accountable.

A comment issued by the FACT Coalition highlights other ways in which the IRS rules on CBCR could be strengthened. For instance, the OECD has estimated that the $850 million annual revenue threshold would exempt between 85 and 90 percent of all multinational entities from reporting requirements; lowering this threshold to $45 million would provide a broader picture of multinational corporation behavior. Additionally, since corporations often label independent contractors as employees to give an illusion of legitimacy in tax haven countries, changing the definition of “employee” for CBCR as one for whom the corporation pays payroll or other taxes would bring about even more transparency.

As the world grows increasingly concerned about the expensive problem of corporate tax avoidance, the U.S. should lead the fight for international transparency by adopting expansive CBCR that holds all multinational corporations accountable. 


How the Tax Code Subsidizes Lavish Executive Compensation to the Tune of $64.6 Billion


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A new report by Citizens for Tax Justice (CTJ) found that 315 Fortune 500 companies have managed to avoid $64.6 billion in taxes over the past five years due to a single tax provision known as the stock option loophole.

The loophole allows companies to deduct the market value of stock options provided to their employees, even though the provision of these stock options comes at no real expense to the company. In other words, issuing stock options allows companies to take a huge tax deduction, and thus significantly lowering their taxes, without expending any resources. This practice encourages companies to make already excessive executive compensation packages even larger.

Over the past few years, Facebook has become the poster child of the stock option loophole for its extensive use of the break. CTJ’s new report affirms this status, finding that the company received $5.7 billion in tax breaks over the past five years from this singular loophole. To put this in perspective, the stock option loophole allowed the company to slash its total federal and state incomes taxes by 70 percent and even pay nothing in taxes in 2012.

Facebook is no means alone in receiving a huge tax break from the loophole. Apple and Google received $4.7 billion and $1.9 billion respectively in tax savings from the loophole. While tech companies are some of the biggest recipients of the breaks, many financial firms take huge advantage of the break as well. For example, Goldman Sachs, JP Morgan and Wells Fargo received $1.8 billion, $1.7 billion and $1.5 billion in breaks from the loophole.

At a time when the average compensation for a company CEO is 335 times the compensation of the average worker, we need a tax code that curbs income inequality rather than making it worse. Eliminating the stock option loophole by no longer allowing companies to deduct stock options for which they pay no expense would raise much needed revenue and represent a positive step in countering income inequality.

Read the Full Report.


Google and Tax Avoidance: From the "Double Irish With a Dutch Sandwich" to "Delaware Alphabet Soup"


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You may have heard about Google Inc.’s restructuring last year, which resulted in the technology company becoming a wholly owned subsidiary of a new Delaware corporation called Alphabet Inc. What you may not know is how this restructuring can help the company potentially avoid millions in state taxes.

In a recent academic paper “Google’s ‘Alphabet Soup’ in Delaware”, the authors explain how Alphabet Inc. will allow Google to take advantage of the “Delaware loophole” to lower its corporate income tax. The Delaware loophole, which is detailed in the 2015 Institute on Taxation and Economic Policy (ITEP) report “Delaware: An Onshore Tax Haven”, is estimated to have cost states $9.5 billion in lost revenues over a 10-year period. It works like this:

A company sets up a “Delaware Holding Company,” which owns its intellectual property (IP), such as patents and trademarks. The company’s subsidiaries (in this case, Google Inc. and its affiliates) then pay royalties to the holding company (Alphabet Inc.) for the use of the IP. In Delaware tax law, corporations whose activities within the state consist only of managing “intangible investments” (including but not limited to stocks, bonds, patents, and trademarks) and collecting income from those investments are exempt from taxation on that income. At the same time, the corporation can deduct the royalty payments as a business expense on tax returns filed in other states where it has subsidiaries. Google’s restructuring provides Alphabet Inc. with the opportunity to exploit this strategy. For example, the company could artificially inflate the price of its IP and effectively shift all or most profits into Delaware where they won’t be taxed.

For states that use combined reporting, this profit shifting is not as worrying. The rule requires corporations with subsidiaries in multiple states to report the income of all of their subsidiaries for the purposes of determining their corporate income tax liability. In these states, Alphabet would have to report the royalty income of the Delaware holding company along with the income of all other subsidiaries, regardless of location, and apportion its total income among all the states where it is subject to tax. In contrast, states that use separate accounting, which allows corporations to report profits for each subsidiary independently, can see their tax bases significantly eroded as a result of corporations using this strategy. Adopting combined reporting is the best way that states can protect themselves from falling victim to the Delaware loophole and other tax-shifting strategies.

Should Google use this restructuring to avoid taxes, this wouldn’t be the first time it has employed complex accounting and paper work to reduce its tax bill: it funneled billions in profits to offshore tax havens through a series of foreign subsidiaries with a strategy that has been dubbed the “Double Irish With a Dutch Sandwich.” As of the end of 2015, Google had $58.3 billion in offshore “permanently reinvested” profits on which it pays no U.S. taxes, up from $47.4 billion in 2014.

In the press release announcing the restructuring last year, Google co-founder and Alphabet CEO Larry Page stated that the purpose of the restructuring was to allow more management scale and to “run things independently that aren’t very related.” Though we can only speculate about the degree to which the restructuring was motivated by tax considerations, it is undeniable that it has created new opportunities for tax avoidance.


Corporate Tax Watch: Icahn Enterprises, Airbnb and Coca Cola Enterprises


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Icahn Enterprises: How Much Would Carl Icahn Benefit From Tax Reform?

Billionaire investor Carl Icahn has pledged $150 million toward seeding a Super PAC to lobby Congress to help pass his version of corporate tax reform, which likely means the passage of corporate tax breaks like a repatriation holiday. While $150 million seems like a huge amount of money to spend, it’s possible that Icahn may simply be making yet another wise investment.

According to Icahn Enterprises’ financial filings, the company discloses holding a minimum of $962 million in unrepatriated profits offshore and has at least 28 offshore tax haven subsidiaries. If Icahn’s lobbying efforts for a repatriation holiday alone are successful, his company could potentially end up saving more than the $150 million he invested. For example, if Icahn Enterprises is paying the average foreign rate of 6.4 percent on its offshore earnings and the repatriation holiday rate was 5.25 percent (the rate in 2004), Icahn Enterprises could save a cool $234 million in taxes. It’s likely he’d personally profit even more from the repatriation holiday providing a break to companies that he’s invested in, to say nothing of tax breaks Congress might push through.

Airbnb: The Not Sharing Economy

According to a Bloomberg report, Airbnb has set up an “extensive web of subsidiaries” that will allow it to dodge taxes on much of its income. Specifically, Airbnb may be following in Apple’s footsteps by funneling its profits to an Irish subsidiary, which then allows it to escape taxation by shifting its intellectual property to a zero tax country (in this case the Isle of Jersey). Not only do such maneuvers allow Airbnb to get away without paying their fair share in taxes, they also give the company an unfair competitive advantage over more traditional lodging companies who are less able to shift their profits offshore. As more and more of the economy becomes dependent on intellectual property, it will become even more vital that lawmakers act to shut down this kind of offshore tax avoidance.

Coca Cola Enterprises: Earnings Stripping Provisions Already Having an Impact

A recent news report found that new Treasury rules targeting inversions may reduce the tax savings of Coca-Cola Enterprises’ proposed merger by as much $375 million. This report is one of the first instances of companies disclosing that Treasury’s crackdown on earnings stripping, a practice in which intercompany loans are used to shift profits to low- or no-tax jurisdictions, will have a significant impact on the projected tax benefits from a merger. While Coca-Cola Enterprises still plans to move forward with its merger, this report shows that the Treasury rules will help take away tax avoidance as a driver of such mergers.

 

 


A Dividends Paid Deduction is the New Front in the Push for Corporate Tax Cuts


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It seems that each year there is a new “it” tax break for which advocates for cutting corporate tax breaks and their supporters rally. Last year the “it” tax break was a patent box and a few years back it was a repatriation holiday. This year the tax break du jour is the dividends paid deduction.

A dividends paid deduction would allow corporations to deduct from their corporate income taxes the cost of the dividends that they issue to shareholders. In other words, companies would get a tax break for paying out dividends to shareholders. Taken alone, this deduction would cripple the corporate income tax at an estimated cost of roughly $150 billion annually. At a time of growing income inequality and government austerity, enacting a massive cut in one of our country’s most progressive revenue sources would be counterproductive, to say the least.

Advocates of the dividends paid deduction argue that this policy would help end the “double tax” on corporate earnings. The biggest problem with this argument is that it wrongly assumes these earnings are being fully taxed at either the corporate and individual level. On the corporate level, a study by Citizens for Tax Justice (CTJ) found that large profitable corporations pay just over half the statutory rate in federal income taxes, meaning that almost half of corporate income escapes taxation. On the individual level, so much of dividend income is paid to tax exempt shareholders that only 35 percent of dividends are taxable, which means that nearly two-thirds of dividends are escaping taxation on individual side as well.

In addition, there is no reason that many corporations should not be subject to a tax wholly separate from a tax on the individual level. For legal purposes, corporations are treated as separate entities with legal rights and responsibilities (such as paying taxes). Corporations are also granted a series of economic advantages such as limited liability and the ability to be publicly traded.

Advocates of the dividends paid deduction have found a new champion in Senate Finance Committee Chairman Orrin Hatch, who held a hearing on the subject this week and is working on draft legislation that would enact such a deduction. While the details of the proposal have not been made public or scored, it appears that Hatch’s proposal would attempt to stem the enormous cost of the break by enacting a withholding tax that in effect eliminates the tax break for dividends paid out to tax exempt shareholders (which as discussed above constitute nearly two-thirds of shareholders). Even with this withholding tax, Hatch’s proposal would likely cost tens of billions annually.

Rather than buying into the latest corporate tax break fad, lawmakers should instead focus on closing the many outrageous loopholes that pervade our tax system, such as the inversion and deferral loopholes. Closing such loopholes would not only make our tax system fairer, but would also help raise much-needed revenue for public investments. 


The Huge Disconnect Between Congress and the Public on Business Tax Reform


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If you are looking for an example of how corporate interests continue to dominate the agenda in Congress, a recent hearing on business tax reform held by the Senate Finance Committee is Exhibit A.

Over the past several years, the American public has watched as the media has continually reported on how major profitable corporations are using offshore loopholes and special interest tax breaks to get out of paying their fair share in taxes. These reports have left the American public rightly outraged. In fact, a Pew Research poll found that 82 percent of all Americans (including a majority of Republicans) say that they are bothered by corporate tax avoidance.

Given the unusually strong consensus on this issue, Tuesday’s Senate Finance Committee hearing should have focused on how to clamp down on offshore tax avoidance or curb the broad tax breaks that corporations receive. Instead, the discussion focused almost exclusively on how Congress could provide corporations with lower statutory tax rates, expanded loopholes and even bigger tax breaks.

Lawmakers are clearly disconnected from their constituents on this issue. They have bought into the enormous lobbying campaign by corporations touting the idea that U.S. corporations pay too much in taxes.

While it is true that the U.S. statutory tax rate is 35 percent, the wide swath of loopholes and breaks allow large profitable U.S. companies pay closer to 19.4 percent on average, with many companies paying nothing at all. A lot of the reason multinational corporations are able to pay such low rates is that they are allowed to avoid an estimated $695 billion in taxes on the $2.4 trillion that they hold offshore. In other words, the real problem with the tax code is not that U.S. multinationals are paying too much, but rather the fact that they are allowed to avoid so much in taxes.

Congress could shut down corporate tax avoidance and at the same time raise much-needed tax revenue tomorrow by ending the deferral and inversions loopholes. Instead, the Senate Finance hearing focused on how to enact substantial new tax cuts for corporations. For example, several participants discussed the need for the U.S. to move to a territorial tax system, a move that would dramatically increase, not decrease, the incentive for U.S. companies to shift more of their profits (and even real activities) offshore to avoid paying taxes. While this move alone would lose a huge amount of revenue, multiple panelists insisted that this tax break would not be nearly enough and that huge rate cuts would also be necessary to remain “competitive.”

If lawmakers insist on moving forward with policies that cut taxes for corporations there will almost certainly be huge policy and political consequences. Policy wise, lawmakers will find it impossible to raise enough revenue to make the public investments that are the true backbone of a competitive economy. Politically, lawmakers may find themselves on the side of hugely unpopular tax cuts that the vast majority of Americans oppose and may decide is reason enough to vote them out of office. 


GE and Verizon's Claims about Their Taxes Don't Stand Up


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Righteous indignation can be very effective, but sometimes it’s not all that righteous. Such is the case with recent op-eds penned by the CEOs of General Electric and Verizon, each of whom argue that contrary to the stump statements of presidential candidates, their companies do pay their “fair share” of taxes.

Verizon

Verizon CEO Lowell McAdam claims, in a recent op-ed and fact sheet, that it’s “just plain wrong” to assert that Verizon doesn’t pay its fair share of taxes and that the company paid a 35 percent tax rate in 2015. While McAdam doesn’t elaborate, he likely is tallying the company’s global taxes to make this claim. However, the annual taxes that the company pays to the federal government in recent years has been a lot lower than 35 percent and, thus, McAdam’s indignation is rather artificial.

In fact, over the past 15 years, Verizon has paid a federal tax rate averaging just 12.4 percent on $121 billion in U.S. profits, meaning that the company has found a way to shelter about two-thirds of its U.S. profits from federal taxes over this period. In five of the last 15 years, the company paid zero in federal taxes. While there is no indication that this spectacular feat of tax avoidance is anything but legal (the company’s consistently low tax rates are most likely due to overly generous accelerated depreciation tax provisions that Congress has expanded over the last decade), few Americans would describe the company avoiding tax on $78 billion of profits as “fair”.

GE

General Electric CEO Jeffrey Immelt takes a similar position in a recent op-ed. Immelt defends the company’s tax record simply by noting that the company “pay[s] billion in taxes.” This is true, but also meaningless for a company with earnings as gigantic as GE’s. In fact, over the past 10 years, GE paid an effective federal income tax rate of -1.6 percent on $58 billion in profits. Over 15 years, the company’s federal income tax rate was just 5.2 percent.

The company’s tax-avoiding ways extend to the state level, too. Over the past five years, the company paid an effective state income tax rate of just 1.6 percent. Immelt likely focuses on the dollar amount and not the company’s tax rate because there is simply no way of fudging the numbers to make the company appear to be paying income taxes at anything but a ridiculously low rate.

Congress Could End This

There is certainly room for righteous indignation in the ongoing debate over how to reform our corporate income tax. But the real source of such indignation should be the working families and small businesses that don’t have access to the congressionally sanctioned tax breaks used by Verizon, General Electric and other large multinational corporations.


How Treasury Could Take Action to Prevent Inversions


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Even as more large companies announce plans to take advantage of the inversion loophole to avoid taxes, Congress has refused to move on commonsense legislation that would put an end to inversions. Fortunately, as outlined in a new letter signed by Citizens for Tax Justice and 54 other groups, there are a number of additional actions that the Treasury Department could take without Congressional approval to stem the tide of inversions.

Although Treasury issued new regulations in response to the surge in inversions in 2014 and 2015, Pfizer’s planned inversion with Allergan demonstrates that the regulations so far have been inadequate to prevent this and similar planned inversions by Johnson Controls and IHS. Perhaps the biggest motivation for Pfizer’s planned inversion is that it could allow the company to avoid an estimated $40 billion in taxes that it owes on the $194 billion in untaxed earnings the company has offshore. Expatriating to Ireland through an inversion will allow Pfizer to avoid paying any tax on its offshore hoard through an accounting gimmick called a hopscotch loan, which effectively allows the new foreign parent company to reinvest its untaxed offshore earnings without triggering the US taxes it would normally owe.

Treasury’s earlier inversion ruling disallowed hopscotch loans in the case of inverted companies which are owned by 60 percent of the shareholders of the original US company, but Pfizer skirted this regulation by structuring its merger so that only 56 percent of the new company was owned by US shareholders. As the letter to Treasury lays out, Treasury should use its existing authority to change its threshold to 50 percent or even lower, which could have the effect of ensuring that Pfizer would not be able to take advantage of hopscotch loans to avoid the $40 billion that it owes and could prevent its inversion altogether. In fact, changing this regulation could not only stop Pfizer, but it could have the effect of stopping similarly structured inversions by IHS and Johnson Controls (both of which structured ownership to be just under the 60 percent threshold) as well as other companies considering following in their footsteps.

Even if Treasury does fully implement the proposal on hopscotch loans, the reality is that its authority to take on inversions is relatively limited, meaning that legislation is required to put a permanent stop to inversions and related tax avoidance. The most prominent piece of anti-inversion legislation is the aptly named Stop Corporate Inversions Act, which would no longer allow a newly merged company to claim to be foreign if it continues to be managed and controlled in the United States or if the new parent company is more than 50 percent owned by the shareholders of the original American company. In addition, legislators have taken direct aim at the tax incentives behind corporate inversions with legislation that would curb earnings stripping and legislation that would require companies to pay what they owe on unrepatriated foreign earnings before they become a foreign company. In other words, Congress has plenty of ways to stop inversions, they just need to stop sitting on their hands and take action before more revenue is lost to this egregious loophole.


Double Stuff Oreos, Double Whammies and Doubling Down on Dodging Taxes


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Nabisco, the purveyor of Oreos and ‘Nilla wafers, is facing renewed blowback over its decision to lay off 600 workers at its Chicago plant while shifting production to Mexico. But the loss of manufacturing jobs is not the sole reason the company’s activities deserve closer scrutiny.

A corporate spokesperson predictably explained that the layoffs were about automation rather than offshoring, but others have hinted that the very low worldwide tax rates paid by Nabisco’s parent company, Mondelez, might have played a role in the decision.

The real story is likely far more complicated. USA Today reports that Mondelez paid a worldwide tax rate of 7.5 percent last year. This is well below the United States’s statutory 35 percent corporate tax rate and also substantially below Mexico’s 30 percent rate. If Mondelez is avoiding taxes through its foreign activities, it is more likely that the company’s subsidiaries in the Bahamas and the Netherlands are responsible.

Call It a Double Whammy

While losing 600 jobs would deal a body blow to Chicago working families, the $6 billion of profits that Mondelez moved offshore in just the last year (and the needed tax contributions it is able to avoid because of this action) represent yet another way the company is harming working families.

Mondelez now has a total of $19.2 billion in “permanently reinvested” offshore profits, but the company refuses to disclose how much of those profits are being held in tax havens or whether any foreign tax has been paid on these billions of dollars in profits.

Several politicians have cried foul, including presidential candidate Hillary Clinton who responded to Nabisco’s move by proposing that companies moving jobs overseas should lose some or all of the tax breaks previously received for domestic job creation.

Such a plan could raise difficult implementation questions (for example, should Mondelez lose its tax breaks for domestic Triscuit production just because the company moves its Oreo production abroad?). Even so, the goal of “clawing back” undeserved tax breaks is a sensible one that has been achieved in a number of states, thanks in part to the work of watchdog group Good Jobs First. But a fiscally important reform would be taking away the incentive for corporations to shift their profits into offshore tax havens to avoid U.S. income taxes. 


Tax Breaks for Manufacturing.... Death?


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It’s no secret that federal tax breaks for manufacturing corporations aren’t very well targeted. Since Congress enacted a special tax deduction for companies engaged in domestic manufacturing back in 2004, we have deplored its use by companies “manufacturing” items as various as gift baskets, B movies and even restaurant reservations. Relentless efforts by aggressive corporate lobbyists have stretched the definition of eligible manufacturing income almost beyond recognition.

But sometimes the manufacturing deduction applies to activities that, while they should be considered to be manufacturing, are nonetheless not activities we want to encourage as a nation. Tobacco companies “manufacture” cigarettes—but do Americans, or lawmakers, really think it’s a good idea for the federal government to subsidize this activity? New financial reports from major corporations in this sector show that cigarette makers are enjoying substantial manufacturing tax breaks for producing products that kill people.

The Altria Corporation, maker of Marlboros, cut its federal taxes by $799 million over the past five years using the manufacturing deduction.  Reynolds American, maker of Camel cigarettes and Kodiak chewing tobacco, raked in $359 million over this period, with Lorillard enjoying $233 million in federal tax breaks. The three biggest U.S. tobacco producers cut their federal taxes by $1.3 billion over the last five years using this single tax break.

What makes this even more maddening is that these tax breaks fly in the face of other federal public policies designed to discourage the production and consumption of cigarettes. In the same year that the manufacturing deduction was enacted, Congress enacted a landmark tobacco buyout designed to encourage farmers to shift away from tobacco production. And of course, the substantial cigarette excise taxes levied at both the federal and state level are often viewed as a means of discouraging Americans from spending money on tobacco products.  

In a perfect world, Congressional tax writers would be asking hard questions right now about whether it makes sense to offer a special lower tax rate for manufacturing in the first place. But at a minimum, policymakers should be asking whether it makes any sense to subsidize an industry producing products that kill thousands of Americans a year. 

 


How Pfizer Could Get Away With Avoiding $35 Billion in Taxes


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Last year Citizens for Tax Justice (CTJ) published a report showing that the drug manufacturer Pfizer was holding (on paper) $74 billion of its profits offshore, declaring that these profits would be “permanently reinvested” abroad to avoid incurring even a dime of U.S. tax on those profits. Now a new report from Americans for Tax Fairness (ATF), based in part on CTJ research, finds that Pfizer has likely understated the size of its untaxed offshore stash by a factor of two. In fact, Pfizer may avoid paying as much as $35 billion on its offshore profits, if its proposed inversion goes ahead as planned.

How is this possible? The ATF report shows that Pfizer has been using accounting gimmicks for many years to systematically shift its profits to its offshore subsidiaries. While Pfizer officially declares that it has $74 billion in earnings offshore for tax purposes, its real offshore cash could be as much as $148 billion based on its deferred tax liabilities declared in the company’s annual financial report. This means that Pfizer could get away without paying an estimated $35 billion in taxes on this enormous stash of offshore earnings if it is allowed to complete its planned inversion. Pfizer’s planned inversion will allow it to permanently shift this enormous stash of offshore earnings out of the US tax system and therefore allow it to avoid the $35 billion in taxes that it currently owes.

The ATF report rightly asserts that the Treasury Department could take regulatory steps that could reduce the tax benefits of inversion for Pfizer and other tax-averse multinationals. By tightening its 2014 rules governing “hopscotch loans,” ATF argues, the Treasury could help take away one of the largest incentives for Pfizer and other companies to invert.

But as University of Southern California Professor Ed Kleinbard noted (PDF) in testimony before a House Ways and Means Committee hearing on international tax reform earlier this week, we shouldn’t have to depend on regulatory reforms to end this tax-dodging charade. Congress has a much more direct path to ending sham inversions. Sadly, many representatives at this week’s hearing appeared more interested in holding a show trial on the alleged flaws of our corporate tax system than in constructing a sensible policy strategy for ending corporate tax avoidance.

Read the Americans for Tax Fairness full report here


Corporate Tax Watch: PG&E, Manufacturing, and Owens Corning


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PG&E: Eight Straight No-Tax Years (And Counting)

California-based Pacific Gas and Electric (PG&E) continues its tax-avoidance hot streak. The company’s 2015 annual report shows that PG&E enjoyed $861 million in profits in 2015. Far from paying federal income taxes on this impressive haul, the company actually got a rebate of $89 million from the feds. This marks a remarkable eight straight years in which PG&E has completely zeroed out its federal income tax bill. Their untaxed profits during this period were over $10.8 billion.  As with many big utilities, accelerated depreciation tax breaks explain most of PG&E’s tax reductions.

There’s Manufacturing, and then There’s “Manufacturing.”

Since Congress passed a special lower tax rate for manufacturing income in 2004, corporate lobbyists and accountants have gradually widened the scope of what counts for “manufacturing” for tax purposes. What was originally envisioned as a strategy to save the rust belt now looks like it was designed to save Hollywood: Discovery Communications has cut its taxes by $99 million over the last two years using the manufacturing tax break, presumably for developing new shows for its “Animal Planet” and “Oprah Winfrey Network.” Walt Disney raked in $290 million in tax cuts from its movie-related “manufacturing” activities last year, and even World Wrestling Entertainment’s new 10-K shows them benefiting, for the third straight year, from the manufacturing deduction.

Owens Corning Continues to Offshore Profits to Tax Havens

Ohio-based Owens Corning continues to shift its profits offshore into low-rate jurisdictions. At the end of 2015, the company reported a total of $1.6 billion in “permanently reinvested” offshore profits, and estimates that it would pay over 35 percent in U.S. taxes if these profits were repatriated. Since the U.S. income tax on repatriated profits is 35 percent minus any foreign taxes already paid, this amounts to an admission the company is stashing its offshore profits in a zero-rate tax haven—possibly in one of its two Cayman Islands subsidiaries. 

 


Corporate Tax Watch: CMS Energy, Expedia, and Netflix


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February is a special time of the year for corporate tax watchdogs: it’s when hundreds of Fortune 500 corporations release their annual financial reports to shareholders, including potentially embarrassing details about their relationship with the U.S. tax system.

CTJ and ITEP’s corporate tax analysts will be knee deep in these reports for much of the next month, but will come up for air every now and then to give quick updates on their findings. Here’s a first take on what we’re seeing so far.

Perfecting the art of long-term tax dodging

A February 2014 CTJ/ITEP report highlighted 26 profitable corporations that paid no current federal income taxes over the five years between 2008 and 2012. The Michigan-based utility CMS Energy this week confirmed that its inclusion in this list was no accident: in the three fiscal years since CTJ’s original report, CMS has enjoyed $2.2 billion in U.S. profits—and hasn’t paid a dime in federal income taxes over this period. For those needing a scorecard, this means over the past eight years CMS has paid no federal income taxes on $4.6 billion in profits. Like many other big utilities, CMS appears to be relying on generous tax breaks for accelerated depreciation. With the resurrection of expired “bonus depreciation” measures in the December 2015 “extenders” package, the good times will likely continue to roll for CMS going forward.

Sending customers and profits all over the world

Washington-based Expedia is no stranger to arranging worldwide travel—and a side benefit appears to be that the company is adept at sending its own profits to exotic foreign climates. The company’s newest annual report discloses that Expedia is now declaring $1.5 billion of its profits to be “permanently reinvested” in undisclosed foreign nations. Taking advantage of a toothless provision in the Securities and Exchange Commission’s rules on corporate tax disclosure, the company refuses to divulge whether even a dime of income tax has been paid to foreign nations on these profits—but if their six Cayman Islands subsidiaries are any indication, a big chunk of these offshore profits may be enjoying the same beachfront view Expedia routinely provides its clients.

Changing the way we view television and avoiding tax at home and abroad

Not all corporations are as evasive about their offshore profits as Expedia: the Netflix corporation remains as open about their foreign and domestic tax avoidance as ever in its latest annual report. The company discloses that if it repatriated $65 million stashed offshore, it would face a tax bill of just a hair under 35 percent—which means that wherever its foreign profits are located, it’s someplace that levies about a zero percent tax rate. Domestically, the company is likely not too worried about that 35 percent rate since in 2015 it was able to use just one tax break, an unwarranted giveaway for executive stock options, to zero out all federal income taxes on its $95 million in U.S. profits.

 

 


A Fish Tale That's More Harmful Than Your Average Whopper


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The recently released annual report from the Celanese Corporation, a Fortune 500 manufacturer of engineering polymers, is a helpful reminder of why multinational companies should be required to report their earnings to tax authorities in countries where they claim to earn profits. In its 2015 annual report, Celanese discloses that its foreign income over the past three years totaled $1.46 billion, the bulk of which ($900 million) it reported earning in four tax havens: Bermuda, Luxembourg, the Netherlands and Hong Kong. This means the company is claiming that more than 60 percent of its foreign income, and an incredible 30 percent of its worldwide income, is earned in these tax-haven countries.

As we’ve argued in the past, country-by-country reporting is a vital tool for tax administrators in the United States and abroad to help them detect corporate tax avoidance schemes. The Internal Revenue Service has released rules implementing OECD recommendations for country reporting, but Rep. Charles Boustany, chair of the House Ways and Means Tax Policy Subcommittee, is doing whatever he can to postpone this effort in the United States.

Whether you’ve heard of Celanese or not, you’ve used a product created with raw materials manufactured by the company. Its customers are industries as varied as agriculture, pharmaceutical, electronics, aerospace and automotive. And while it profited handsomely over the last three years, the company’s claims about where it is earning its profits are, at best, questionable. Country-by-country reporting would provide much-needed transparency and, possibly, prevent the company’s elaborate tax-dodging scheme.

What makes the company’s income reporting seem implausible is that Celanese also discloses the location of its sales, property, plant and equipment—and remarkably little of it appears to be in any of these tax havens. [See CTJ’s report on tax haven abuse for a brief explanation of why corporations’ claims of massive profits in tax haven countries is unbelievable.]

In 2015, Celanese reports that $146 million of its $5.67 billion in worldwide sales are generated in a residual “other” category of countries, which includes but is presumably not limited to these four tax havens. These “other” countries also represent just $70 million of the company’s worldwide $3.6 billion in property, plant and equipment.

So how can it be that a small group of tax havens in which Celanese has at most 2.6 percent of its sales and 1.9 percent of its property is nonetheless generating 30 percent of its worldwide income?

The only information about the company’s Bermuda operations in its financial statement is the existence of a subsidiary, Elwood Limited. If the well-documented income shifting hijinks of other big multinationals are any indicator, Celanese’s Bermuda subsidiary exists solely to act as a home away from home for the company’s intellectual property, patents and trademarks, most of which were really generated in a country in which the company actually has sales, property and employees.

Rep. Boustany has argued that country-by-country reporting would result in foreign governments engaging in “fishing expeditions” to ferret out sensitive information about corporate practices. But even the limited disclosures made by Celanese show that in fact, the main effect of country-by-country reporting would be to put an end to the tall tales many corporations are creating about where they earn their profits. Like the proverbial “fish that got away,” the invisible manufacturing plants allegedly creating nearly a third of Celanese’s income in four tax havens are a whopper, but a far more harmful one than your average fish tale. 


International Speedway Reaps Benefits of Revived "NASCAR Tax Break"


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DaytonaSpeedwayTax laws were good to the International Speedway in 2015. The company released its annual report this week, which reveals it’s just as fine a purveyor of tax dodging as it is race car driving. The company reports earning $73 million in U.S. pretax income in 2015, a handsome profit on which it did not pay a dime of federal or state income taxes. In fact, the company got an $8 million federal tax rebate in 2015.

This tax avoidance is partly enabled by an obscure tax break for “motorsports entertainment complexes.” The provision quietly expired at the end of 2014, but Congress revived it in December as part of its multi-billion dollar tax extenders package.  

It’s likely that few Americans realized that the much-maligned “NASCAR tax break” for a brief period was no more. This shouldn’t be surprising, since relatively few of us have the wherewithal to build a racetrack in our backyards. But, as we’ve noted previously, for the handful of corporations that own and maintain racetrack properties, the “NASCAR” break has been a tax-cutting bonanza. Two leading beneficiaries of this tax break, International Speedway and Speedway Motorsports, have paid federal tax rates averaging 11 percent and 7 percent, respectively, over five years.

2015 could have been the year when that all changed: the NASCAR tax break was one of dozens of temporary “extender” tax breaks that expired at the end of 2014. But faced with a rare situation in which inaction is the best course of action, Congress decided instead to bring the extenders back to life in the waning days of its 2015 session, and in doing so extended the NASCAR tax break for another two years.

In the context of our growing budget deficits, the annual cost of the NASCAR giveaway is a drop in the bucket at less than $20 million, making it a small part of the $680 billion extenders package. But because its benefits are narrowly focused on a few privileged companies, the damaging effects of this tax break go way beyond its fiscal cost. The prospect of well-heeled corporate lobbyists driving their employers’ tax rates to zero is exactly the sort of thing that makes Americans lose faith in their leaders, and in government more generally. For those scratching their heads at the rise of presidential candidates whose popularity appears to be driven by anger and resentment, look no further than tax breaks like this one. 


Johnson Controls Attempts a Snow Job


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As the nation’s capital remained blanketed in nearly two feet of powdery snow Monday, Wisconsin-based manufacturer Johnson Controls announced its own attempt at a snow job: a proposed corporate inversion with Ireland-based Tyco (yes, that Tyco), which would move Johnson’s corporate headquarters, at least on paper, from Milwaukee to Ireland. A representative of the firm told the New York Times that while the plan will yield $150 million a year in tax benefits, the proposed merger is driven by “the operating potential of the two companies.”

Johnson Controls, like every other company that has shifted its corporate address to a tax haven locale, is downplaying the tax benefits.

It’s not immediately obvious why the company would need to make the shift as it routinely pays far less than the statutory 35 percent federal corporate tax rate. Between 2010 and 2014, Johnson reported just over $6 billion in U.S. pretax income, and it paid a federal income tax rate averaging just 12.2 percent over this period. This is actually lower than the 12.5 percent tax rate Ireland applies to most corporate profits.

But scratching just beneath the surface, the billions of reasons the company is seeking to renounce its U.S. citizenship are more apparent. At the end of 2014, Johnson Controls disclosed holding $8.1 billion of its profits as permanently reinvested foreign income, profits it has declared it intends to keep offshore indefinitely. Johnson discloses very little information about the location of its foreign subsidiaries, and refuses to disclose how much (if any) foreign tax has been paid on these offshore profits. But if the company is stashing these profits (at least on paper) in a zero-rate tax haven such as the Cayman Islands, then the tax stakes for Johnson could indeed be real.

Reincorporating abroad would allow Johnson Controls to avoid ever paying a dime in U.S. income tax on profits currently stashed in tax havens. And if the experience of prior inversions is any guide, an Irish-headquartered Johnson Controls will likely move aggressively to artificially shift even more of its U.S. profits into low-rate tax havens.

Johnson Controls, like the other recent high-profile inversion Pfizer, reaps substantial dollars from U.S. taxpayers. Between 2010 and 2014, Johnson and its subsidiaries received more than $1 billion in federal contracts—more than $210 million a year. And all indications are that post inversion Johnson will still act about as American as it’s always been. Corporate leaders are telling worried Wisconsinites that “we’ll remain committed to Milwaukee,” leaving the company’s operational headquarters in that city. Incredibly, this is the same path followed by the company’s inversion partner: Tyco was one of the first inverters over two decades ago, moving first to Bermuda and then Ireland, and even now the company maintains its operational headquarters in Princeton, New Jersey.

Yesterday presidential candidate Bernie Sanders berated Johnson Controls as “deserters,” arguing that “If you want the advantages of being an American company then you can’t run away from America to avoid paying taxes.” Sanders has introduced aggressive legislation to end offshoring of corporate profits. Hillary Clinton similarly called out Johnson Controls and has proposed an “exit tax” along with a few other targeted proposals designed to reduce the incentive for companies invert.

Republican candidates have defended corporate tax deserters and proposed rewarding tax dodging by cutting the statutory corporate tax rate—a rate the companies like Johnson Controls don’t even come close to paying as it is.

Proposing to cut the corporate tax as a solution to the inversions is problematic, for obvious reasons, the most obvious being that in a deficit environment, tax cut proposals should include pay fors.

The more fundamental problem with cutting the corporate rate is that as long as it’s possible for corporations to easily shift their profits into zero-tax jurisdictions, reducing the U.S. corporate rate will never put a stop to corporate inversions. Even if Congress could find a fiscally responsible way to drop the corporate rate from 35 percent to 25 percent—a cut that would require eliminating virtually every existing corporate tax break—25 percent is still a lot bigger than zero. The real solution must be taking away the incentive for corporations to reach for the zero tax rate by ending the ability of companies to indefinitely defer tax on their U.S. profits by using accounting fictions to pretend they’re being earned offshore.

 


Adobe Shifts Hundreds of Millions Offshore, Revealing, Like PDF Documents, Its Profits Are Portable Too


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While most computer users are likely familiar with Adobe products, they are probably not aware of the company’s tax-dodging practices.

The maker of the ubiquitous PDF reader and Flash software earlier this week released its annual report, which revealed the company is rapidly diverting profits offshore. Its stash of “permanently reinvested” foreign earnings jumped by $400 million in 2015, from $3.3 to $3.7 billion. The number alone is quite impressive considering the company’s total foreign income was just $284 million last year.

Adobe also disclosed that if it repatriated these offshore profits to the United States, it would pay about a 27 percent federal tax rate. This essentially is an indirect admission that wherever these paper profits are housed, the company is paying a foreign tax rate of just 8 percent (the difference between the 35 percent U.S. rate and the tax on these profits the company would face once it repatriates these earnings).

Very few countries have corporate tax rates of 8 percent or lower. What’s particularly deceptive about Adobe’s disclosures is that none of the countries where Adobe admits having legitimate foreign subsidiaries even approach this low tax level. This suggests the company is hiding behind lax Securities and Exchange Commission standards that only require companies to report “significant” offshore subsidiaries.

Of course Adobe is not alone in this brazen tax avoidance. Apple, Microsoft, Google, Nike, Pfizer and dozens of other big multinationals also gratuitously have shifted their profits out of the United States into no-tax or extraordinarily low-tax countries to dodge U.S. taxes.

In this context, the corporate “reforms” being pushed by lawmakers make no sense and are clearly no more than an ineffective giveaway. Republican leaders in the House and Senate signaled this week that they intend to seek international tax reform in 2016. The contours of the plan are familiar: offering companies with offshore holdings a special “tax holiday” to bring back their offshore profits at a sharply reduced rate, moving to a “territorial” system that exempts all foreign profits from tax, and a sharply lower tax rate on all domestic corporate profits going forward.

As always, what’s striking about this broad plan is how disconnected it is with the actual behavior of U.S. multinationals as revealed in their financial reports, and how it fails to acknowledge bigger-picture issues. If large corporations can achieve single-digit tax rates by pretending to earn their profits in tax haven countries, lowering the federal corporate tax to 30 or even 25 percent will not fix the problem. The only way to take away the incentive for corporations to pretend their U.S. profits are being earned in foreign tax havens is to end the deferral of tax on foreign profits. Sadly, that’s exactly the opposite of the path indicated by congressional tax writers. 


GE's Move to Boston Fueled by Hospitable Business Environment Not Tax Rates


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Ending months of media speculation, General Electric announced this week that the company will relocate its headquarters from Fairfield, Conn., to Boston, Mass.The company’s press release announcing the move explained that its choice is driven by amenities Boston and the state of Massachusetts offer, including its “diverse, technologically fluent workforce” and its emphasis on research and development.

Conspicuously absent from the announcement is any reference to tax-related reasons for the relocation. Earlier this year after the Connecticut legislature marginally increased business taxes, GE threatened to move and anti-tax advocates wrongly held up the state’s tax increases as a cautionary tale. GE’s choice of Massachusetts (New York was the company’s other consideration), hardly a tax haven for footloose corporations, demonstrates that a wide variety of factors, not simply the lowest tax rate, determine where businesses will locate. Boston and runner-up New York are recognized as centers of commerce and innovation. As GE said in its own press release, it chose Boston as its new corporate headquarters because of the broader “ecosystem” it offers.

It should be noted, however, that the biggest winner in this move is GE, not other taxpayers. The company has long been spectacularly successful in avoiding state income tax obligations as a Connecticut resident. In 2014, the company enjoyed $5.8 billion in pretax profits and didn’t pay a dime in state income tax on these profits. Over five years, the company paid just a 1.6 percent state income tax rate on $34 billion in U.S. profits, and it paid less than 1 percent in federal income taxes. The company is one of the nation’s most notorious tax dodgers.  

These hard facts haven’t stopped idle speculation over the role of recent Connecticut tax changes in prompting the move. GE CEO Jeffrey Immelt fanned the flames when he wrote a memo earlier in 2015 complaining about tax changes enacted by the state legislature last year. But it’s unlikely that these changes really factored into the company’s decision. After all, the “combined reporting” changes corporate lobbyists in Connecticut complained most vocally about have been in place in Massachusetts since 2008. Moreover, the Connecticut Legislature quietly enacted special new tax breaks for GE in November, and the company itself has been very clear that “GE's move is not being driven by tax policy. It's being driven by a major change in GE's strategy.” Further, the company’s press release admits that corporate leaders had “been considering the composition and location of its headquarters for more than three years,” long before Connecticut’s recent corporate tax changes saw the light of day.  

Long-time business leader Michael Bloomberg said that “any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long.” General Electric’s latest announcement strongly suggests that tax rates weren’t even a blip on the radar in the company’s relocation move. 


Dora the Tax Haven Explorer? Viacom Accused of Persecuting Tax-Avoidance Whistleblower


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Media giant Viacom is being sued by a former senior executive who claims she was fired for objecting to an unethical, and possibly illegal, offshore corporate tax dodge.

Viacom allegedly sought to avoid paying U.S. income taxes on the licensing rights for various Viacom TV shows and movies, including “Teenage Mutant Ninja Turtles,” “SpongeBob” and “Dora the Explorer.” Nataki Williams, a former vice president for financial planning at Viacom, alleges that her vocal objection to shifting the company’s intellectual property into a Netherlands subsidiary for tax purposes was the reason the company fired her.

So far Viacom’s hasn’t denied shifting its profits offshore through the use of offshore tax havens; instead, the company has claimed that it fired Williams for an entirely unrelated reason having to do with improperly claimed family benefits.

If Viacom isn’t pleading innocence in the court of public opinion on the charge of offshore tax dodging, it is plausible that this is because such a plea would seem laughable. After all, as a Citizens for Tax Justice report documented last year, Viacom’s most recent annual report discloses the existence of 39 Viacom subsidiaries located in known tax havens. These subsidiaries tend to be located in resort islands such as the Bahamas, Barbados and the Channel Islands.

It is, of course, possible that Viacom chose to locate its inscrutably named “Yellams LDC” subsidiary in the Cayman Islands to better capitalize on that tiny beachfront nation’s insatiable appetite for Dora the Explorer-themed flip flops and other such licensed products. But it’s far more likely that this subsidiary, and Viacom’s six other Cayman Islands subsidiaries, exist for one simple purpose: to funnel Viacom profits out of the United States and into jurisdictions with little or no taxes on intellectual property. Nataki Williams’ allegations suggest that the same may be true of the company’s 24 Netherlands subsidiaries.

Because Viacom and other multinationals aren’t required to disclose the location of their offshore cash, we can’t know just how much of the media giant’s $2.4 billion in permanently reinvested offshore earnings have been shifted into tax havens in the way alleged by Nataki Williams. The Securities and Exchange Commission should require this disclosure. 


Zero is the New Thirty-Five: Netflix Dodges Foreign as Well as U.S. Taxes


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Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stockNetflix Taxes option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 

Which raises an important question: is there any evidence that Netflix is playing similar games with its U.S. revenue? Our 2014 analysis of Netflix’ US tax bills suggested that the company was zeroing out its taxes through domestic tax breaks cheerfully approved by Congress: $168 million in tax breaks for executive stock options and $32 million in research and development tax credits go a long way toward explaining the company’s low-to-nonexistent U.S. taxes. Since Congress just made the R&D tax credit a permanent feature in our tax code, lawmakers presumably think Netflix claiming this credit for its “research” is perfectly fine. 
But there are hints that Netflix is avoiding taxes in ways that Congress might not approve of. The company now has $29.2 million in “permanently reinvested earnings”- offshore cash that the company says it’s not bringing back to the U.S. And the company estimates that it would pay about a 35 percent tax on these profits if they were repatriated, meaning that they have paid about a zero percent tax rate on these profits so far. 

Where exactly are these profits being reported? It’s impossible to know, in part because the company refuses to disclose the location of all of its foreign subsidiaries. (In a footnote to its disclosure of three foreign subsidiaries, Netflix coyly notes that “the names of other subsidiaries…. are omitted” because they don’t represent a significant share of the company’s revenue at this time.) But if Netflix is doing what CTJ recently found two-thirds of U.S. multinationals doing—creating mailbox subsidiaries in beach-island tax havens like Bermuda and the Cayman Islands—then future Christmases may find Netflix dodging U.S. taxes in the much the same way it appears to be pursuing abroad right now. 



 

Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stock option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 
Which raises an important question: is there any evidence that Netflix is playing similar games with its U.S. revenue? Our 2014 analysis of Netflix’ US tax bills suggested that the company was zeroing out its taxes through domestic tax breaks cheerfully approved by Congress: $168 million in tax breaks for executive stock options and $32 million in research and development tax credits go a long way toward explaining the company’s low-to-nonexistent U.S. taxes. Since Congress just made the R&D tax credit a permanent feature in our tax code, lawmakers presumably think Netflix claiming this credit for its “research” is perfectly fine. 
But there are hints that Netflix is avoiding taxes in ways that Congress might not approve of. The company now has $29.2 million in “permanently reinvested earnings”- offshore cash that the company says it’s not bringing back to the U.S. And the company estimates that it would pay about a 35 percent tax on these profits if they were repatriated, meaning that they have paid about a zero percent tax rate on these profits so far. 
Where exactly are these profits being reported? It’s impossible to know, in part because the company refuses to disclose the location of all of its foreign subsidiaries. (In a footnote to its disclosure of three foreign subsidiaries, Netflix coyly notes that “the names of other subsidiaries…. are omitted” because they don’t represent a significant share of the company’s revenue at this time.) But if Netflix is doing what CTJ recently found two-thirds of U.S. multinationals doing—creating mailbox subsidiaries in beach-island tax havens like Bermuda and the Cayman Islands—then future Christmases may find Netflix dodging U.S. taxes in the much the same way it appears to be pursuing abroad right now.

What Apple's Tim Cook Gets Wrong About Its Tax Avoidance


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Anyone watching Apple CEO Tim Cook on CBS’s “60 Minutes” last night would be forgiven for wondering why Congress and the IRS won’t just leave this nice man and his poor company alone. Cook fielded questions on a wide variety of topics from national security to the future of the “Apple car,” but generated the most headlines for his combative, evading and ultimately misleading comments on tax issues.

In response to a typically mild question from interviewer Charlie Rose — “How do you feel when you go before Congress and they say you’re a tax avoider” — Cook told Rose that “we pay more taxes in this country than anyone.” In fact, that’s true, by the tally of the bean counters at the Institute on Taxation and Economic Policy. Apple’s federal income tax bill — just over $8 billion in 2014 — is larger than any other Fortune 500 corporation reported in that year.  But as Rose gamely pointed out in response, this reflects the truly gigantic scale of Apple’s reported profits rather than an overdeveloped sense of patriotism. Focusing on the amounts of tax the company can’t avoid, rather than the taxes the company has successfully dodged, is a classic corporate PR strategy routinely practiced by even the most blatant tax avoiders. It’s also basically meaningless.

But Cook wasn’t done. Faced with Rose’s reminder that Congressional investigators had found that “Apple is engaged in a sophisticated scheme to pay little or no corporate taxes on $74 billion in revenues held overseas,” Cook shot back: “That is total political crap. There is no truth behind it. Apple pays every tax dollar we owe.”

Of course, the exhaustive 2013 investigation by the U.S. Senate’s Permanent Subcommittee on Investigations (PSI) that brought Apple’s tax avoidance practices to light never alleged that Apple’s practices were illegal. What the PSI found was that Apple had used loopholes in the tax laws to make legal, but ethically reprehensible, “cost-sharing agreements” with its insubstantial Irish subsidiaries that allowed the company to avoid paying tens of billions of dollars in income taxes. The question the PSI hoped to encourage Congress to consider as a result of these hearings was not whether Apple’s actions were illegal. It was whether the company’s brazen tax avoidance should be made illegal by closing these egregious tax loopholes.

Cook’s comment does bring up an important, uncomfortable point: fully two years after the PSI unveiled Apple’s Irish tax-avoidance strategies, Congress has done precisely nothing to act on the PSI’s findings. At the end of the day, it’s the responsibility of Congress to close the door on the blatant corporate tax avoidance practiced by Apple and other multinational corporations.

Until that day comes, Apple execs have signaled clearly that they will continue to stash their corporate cash in offshore tax havens. As ITEP found earlier this fall, Apple shifted a record $50 billion in cash offshore in 2014, and admitted paying a tax rate of just 2.2 percent on its offshore cash. The tens of billions of dollars in corporate taxes the company is not paying to the U.S. are making it harder to adequately fund roads, healthcare and schools. Cook was correct when he told a George Washington University commencement audience, in a speech excerpted in last night’s “60 Minutes” broadcast, that “[a] company that has values, and acts on them, can really change the world.” Too bad that company isn’t Apple.


Hillary Clinton's Tax Proposal is Right on Inversions, Wrong on New Tax Cuts


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Earlier this week, Hillary Clinton outlined a new plan to combat the growth of inversions, a loophole through which U.S. companies pretend to be foreign in order to avoid taxes. Taken together, her plan to enact an exit tax, limit earnings stripping and to change the ownership threshold for becoming a foreign company would likely stop inversions in their tracks. Unfortunately, Clinton’s inversion plan also includes a fiscally imprudent proposal to use all of the added revenue from shutting down inversions to pay for new corporate tax breaks.

Clinton’s inversion proposals come in the midst of the growing outrage over Pfizer’s plan to pursue the largest inversion in history. Unless action is taken, Pfizer will use a merger with the company Allergan to shift its headquarters, on paper, to Ireland, which some say could allow it to avoid paying U.S. taxes on as much as $148 billion in earnings that it is holding offshore. To be clear, Pfizer will continue to be managed in the U.S. and will still benefit from government contracts and services. But inverting will allow the company to get out of paying its fair share of taxes.

While some in Congress are weirdly using inversions as an excuse to call for lower taxes on multinational corporations, Clinton’s proposals show that inversions can easily be stopped without broader tax reform or tax cuts. For example, Clinton has proposed to curb earnings stripping, a practice in which a U.S. subsidiary is loaded up with debt and makes large interest payments to its foreign parent company in order to lower its U.S. income taxes. By inverting, companies can more easily use earnings stripping to shift income earned in the U.S. into offshore low-tax jurisdictions. Clinton’s plan apparently follows President Obama’s approach in this area, by limiting the share of interest expense that can be deducted by the U.S. subsidiary. Obama’s proposal would raise about $50 billion over 10 years.

Clinton has also proposed to limit inversions by treating a company resulting from a merger of a U.S. and a foreign company to be recognized as having a foreign tax domicile only if the resulting company is majority owned by shareholders of the foreign rather than U.S. company. Under current regulations, only 20 percent of the new company has to be owned by the foreign shareholders. This allows U.S. companies to merge with substantially smaller foreign companies and move their tax domicile. This proposal would raise an estimated $17 billion in tax revenue over 10 years.

Clinton’s third and potentially most powerful proposal to curb inversions would impose an “exit tax” on companies that change their tax domicile to a foreign jurisdiction. The exit tax would require companies to pay the U.S. taxes they have “deferred” on their accumulated untaxed foreign income. Clinton does not specify what rate her exit tax would impose, but the ideal rate would be the full 35 percent rate (minus foreign tax credits) that companies would normally owe upon repatriation.

As noted above, combating inversions would not only make our tax system fairer, but it could also produce desperately needed revenue. The bitter fights over how to pay for even popular spending like sequester relief or the highway bill show that our country has a huge revenue problem, which is largely driven by the irresponsible decision to make permanent 85 percent of the Bush tax cuts, at a cost of $3.3 trillion over a decade.

Sadly, however, Clinton is not proposing to use any revenue generated by closing the inversion loophole to make new public investments (or reduce the deficit). Instead, she proposes to use all of the revenue gained from inversion reform to give new tax breaks to corporations! This does not make any sense considering that U.S. corporate taxes are already near historic lows. Like so many others, she seems to miss the point of why we need corporate tax reform.


Trump's Criticism of Jeff Bezos as a Tax Dodger is Half-Right


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Earlier this week Donald Trump criticized Amazon chief Jeff Bezos for allegedly using his purchase of the Washington Post as a tax dodge. Trump’s claim that Bezos is using the Post’s losses to reduce Amazon’s profit is clearly wrong since the newspaper is owned by Bezos, not by Amazon. But by making this claim, Trump does draw attention to the fact that Amazon pays a low effective corporate tax rate and has dodged $1 billion in taxes thanks to various loopholes. In fact, Amazon has often incorporated tax avoidance strategies into its business plan.

For example, it’s well documented that Amazon’s growth as a retail giant was fueled by the company’s ability to avoid collecting sales taxes on its retail sales. Not collecting sales tax gave the company an immediate advantage over its brick-and-mortar competitors. For years, the company fought tooth and nail against sensible legislative efforts to put the company on a level playing field with mom and pop retailers. Yet, thanks to hard fought reforms in the states, this will be the first holiday season when Amazon will be collecting sales taxes in a majority of states.

Amazon has been equally adept at avoiding the corporate income tax. A 2014 Citizens for Tax Justice and Institute on Taxation and Economic Policy report found that Amazon paid just a 9.3 percent effective federal income tax rate over a five-year period between 2008 and 2012. In other words, the company found ways to avoid paying taxes on almost three-quarters of its U.S. profits during this period. The same report found that Amazon reduced its tax bills by $1 billion through an arcane tax dodge generated by lavish executive stock options—more than any Fortune 500 corporation other than Google, Facebook, ExxonMobil and J.P. Morgan.

Donald Trump has shown little evidence that he’s concerned about making our tax system more sustainable. But he’s likely correct about one thing: Amazon would not be where it is today absent the company’s long-term pattern of aggressively avoiding taxes at the federal, state and local levels. 


Memo to Mark Zuckerberg: Charity Begins At Home


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Facebook CEO Mark Zuckerberg made waves this week with his announcement that he will eventually giveaway virtually all of his wealth for charitable purposes. As Bloomberg’s Jesse Drucker noted, Zuckerberg appears poised to implement his plan through a new entity that, unlike more conventional charitable foundations, won’t actually be required to act philanthropically. 

But for those familiar with the tax avoidance tactics practiced by the Facebook Corporation in the U.S. and abroad, it should come as no surprise that Zuckerberg’s approach to philanthropy is set up to avoid any unnecessary tax liability.

Facebook has used an executive stock-option tax break to lower its taxes by $4 billion dollars over the past five years, allowing the company to pay a federal income tax rate of only about 8 percent during that time. Put another way, the company has been able to shelter almost eighty percent of its profits from tax during this period using just this one tax loophole. And Facebook has also been an unabashed user of a complex foreign tax dodge known as the “double Irish.”

These aggressive tax-avoidance maneuvers impose a real cost: every dollar of income tax that Facebook doesn’t pay is, ultimately, a dollar that must be made up by the rest of us, either through higher taxes on middle-income families or draconian cuts in infrastructure spending.

Since Andrew Carnegie, our country has had a long tradition of philanthropy among the wealthiest Americans. If Mark Zuckerberg ultimately lives up to his promise to donate his wealth to needy causes, his contributions could make a huge difference in the lives of many Americans. But we shouldn’t lose sight of the fact that his company’s pattern of aggressively reducing corporate income tax payments is making the lives of Americans worse right now, by shortchanging America’s tax system of needed revenues. 


Mapping the Benefit of Making Permanent the Expansions of the EITC and CTC


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Critical expansions to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) will expire without action from Congress, making life harder for working families already struggling to make ends meet. More than 13 million families (nearly 25 million children) would see their taxes go up by an average of $1,073 annually.

As Congress and the president negotiate an end of year tax deal, they should say yes to the working families’ tax credits and no to the tax extenders. At a time of record corporate profits and record income inequality, making permanent the expansions to the EITC and CTC, rather than more tax breaks for big corporations, is just plain commonsense.

Scroll over your state below to see the impact of the EITC and CTC expansions.

 



Impact of Expansions in EITC and CTC:

 

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Congress Should Embrace the International Consensus to Crack Down on Corporate Tax Avoidance


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Some U.S. lawmakers on Tuesday used a pair of hearings in the Senate Finance Committee and the House Ways and Means Committee to showboat for corporate special interests and oppose a growing worldwide movement to crack down on international tax avoidance.

Last month, leaders of the 20 largest economies in the world approved an action plan developed by the Organisation for Economic Co-operation and Development (OECD) that, if implemented, could help ensure that multinational corporations pay their fair share in taxes. Rather than embracing the OECD’s ideas, some lawmakers claimed that the plan would actually harm the U.S. tax base. During the House hearing, Rep. Mike Kelly (R-PA) alleged that countries are looking to pick the pocket of U.S. companies.

In reality, the U.S. government and the American public have the most to gain by enacting the OECD measures and leading the way in cracking down on corporate tax avoidance schemes. A recent report by international tax expert Kimberly Clausing found that the U.S. loses more revenue than any other country to offshore corporate tax avoidance. By her count, the U.S. lost $93.8 billion in revenue in 2012, representing about a third of all the revenue lost to international corporate tax avoidance. Similarly, a joint report by CTJ and U.S. PIRG found that members of the Fortune 500 were avoiding a stunning $620 billion in taxes by holding $2.1 trillion in earnings offshore.

The OECD action plan was born out of the dire budget constraints that governments faced after the international financial crisis. Following the crisis, activists and lawmakers throughout the world became outraged by the low tax rates many multinational corporations were paying at the same time that low-income individuals continued to face harsh austerity measures. The G-20 charged the OECD with developing a framework for international cooperation between countries to stop the “base erosion and profit shifting” (aka BEPS) that allow corporations to avoid paying taxes.

After a two-year process of research and discussion, the OECD released the details of a 15 point BEPS action plan in early October. Some of the best proposed measures in the action plan include action 2’s measures targeting hybrid mismatch arrangements, action 4’s proposal to limit excessive interest deductions and action 13’s proposal for country-by-country reporting of profits and tax information. While action 13 is a good step forward in that it would require country-by-country reporting of information to governments, this provision should be made substantially stronger in the future by requiring that companies make this information publically available.

Showing their backward approach to these issues, some lawmakers have argued that the best solution to offshore tax avoidance is to enlarge the existing loopholes and to enact massive new ones. For example, House Tax Policy Subcommittee Chairman Charles Boustany (R-LA) has called for the U.S. to move to a territorial tax system and a patent box. These measures would result in the loss of hundreds of billions of dollars in tax revenue and result in an unprecedented erosion in the U.S. corporate tax base.

The OECD plan represents a growing consensus on international tax avoidance, and the U.S. should certainly support it. But Congress does not need the international community to act now to stop tax avoidance by U.S. multinationals and raise much needed revenue.

The best way to shut down offshore shenanigans once and for all would be for Congress to end the deferral of U.S. taxes on foreign profits by requiring that companies pay the same tax rate at the same time on their foreign and domestic profits. Barring that, Congress could pass the Stop Tax Haven Abuse Act, which takes aim at a number of the worse gaps in the offshore tax system. Given that countries throughout the world are acting to curb offshore tax avoidance, now is the perfect time for the U.S. to keep pace. 


Congress Must Act Now to Stop Pfizer and Other Companies from Inverting


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On Monday, Pfizer and Allergan announced that they have reached an agreement to pursue the largest corporate inversion in history, a move which may allow Pfizer to avoid paying billions in taxes by pretending to be a foreign corporation.

The announcement came just days after the Treasury Department released a new series of regulations to curb corporate inversions. While the new regulations are helpful, Pfizer’s planned inversion is a stark reminder that to stop the flow of inversions, congressional, not just executive, action is required.

Pfizer’s move to invert is the latest in its long history of aggressive tax avoidance. As detailed in a recent report by Citizens for Tax Justice (CTJ), Pfizer is holding at least $74 billion in cash offshore to avoid taxes and discloses having 151 subsidiaries in known tax havens. Further, a new report by Americans for Tax Fairness on Pfizer’s tax dodging found that the company may have an additional $74 billion in earnings offshore, meaning that the company may be holding as much as $148 billion offshore. Unfortunately, the U.S. tax code enables corporations like Pfizer to pursue a business strategy of reducing taxes to as little as possible to boost their bottom line.   

While some lawmakers say that nothing short of full corporate tax reform is required to stop corporate inversions, the reality is that Congress could stop inversions tomorrow with a pair of simple pieces of legislation. First, Congress could pass the aptly named “Stop Inversions Act of 2015,” which would not allow companies to claim to be foreign if the company continues to be managed and controlled in the United States or if a majority of the “new company” is still owned by the former shareholders of the original American company. Second, Congress could pass legislation like Rep. Mark Pocan’s “The Corporate Fair Share Tax Act” or the “Stop Tax Haven Abuse Act,” both of which would curb the main advantage of inverting, the ability to strip earnings out of the United States and into lower tax jurisdictions.

Until Congress passes legislation to prevent corporate inversions, Pfizer and other bad corporate actors will continue to exploit U.S. laws to avoid paying their fair share in taxes.


Ted Cruz's Tax Plan Would Cost $16.2 Trillion over 10 Years--Or Maybe Altogether Eliminate Tax Collection


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Update March 9th, 2016: We have since revised downward our analysis from $16.2 trillion to $13.9 trillion, to reflect that Ted Cruz's staff has informed the media that the actual VAT rate will be 18.56 percent, rather than the 16 percent that he had been advertising. 

During Tuesday’s Republican presidential candidates’ debate, Sen. Ted Cruz (R-TX) made a claim that, in theory, shouldn’t be too hard to live up to. He said his tax plan is less irresponsible than plans put forth by his competitors, and he claimed the ten-year cost of his plan is less than a trillion. “It costs less than virtually every other plan people have put up here,” Cruz said.

Being less irresponsible than Jeb Bush, Marco Rubio and Donald Trump—each of whom have proposed tax plans that would cost $7 trillion or more over the next decade—is a low bar to hurdle. Yet contrary to his assertions, Cruz’s plan would be more costly than any of the other plans put forth by his competitors. A Citizens for Tax Justice (CTJ) analysis of the Cruz tax plan finds that it would cost $1.3 trillion in its first year alone and a staggering $16.2 trillion over ten years.

Cruz’s plan would eliminate the corporate income tax, the estate tax, and the payroll tax, digging an $18 trillion hole in federal revenues over a decade. He also proposes to sharply reduce the personal income tax, replacing the current graduated rate system with a flat-rate 10 percent.  Cruz’s plan would repeal most itemized deductions and tax credits, but it would leave the mortgage interest and charitable deductions largely intact, along with the Child Tax Credit and the Earned Income Tax Credit. On balance, these personal income tax changes would lower income tax revenues by 60 percent and add another $12.8 trillion to the plan’s 10-year cost.

Cruz proposes making up for the $31 trillion in lost revenue by introducing a regressive value-added tax (VAT), and, it seems, a healthy dose of magic pixie dust.

Cruz’s claim that his plan would cost “less than a trillion” depends critically on raising an enormous amount from his 16 percent VAT, which would apply to almost everything American consumers purchase. The remaining revenue shortfall would, in Cruz’s estimate, be offset by a supposed economic boom based on the discredited supply-side magic that has been part of the far right’s economic fantasies for decades.   

But Cruz’s math has a gigantic hole in it. He wouldn’t just make consumers pay his VAT, he would also make the government pay the tax (to itself) on all of its purchases, from warplanes to paper clips and the wages it pays to its employees. Cruz’s claim that the government can raise money by taxing itself accounts for a third of the alleged yield from his VAT.

Without this sleight of hand, Cruz’s overall plan would cost more than $16 trillion over a decade and reduce total federal revenues by well over a third.

Even this enormous amount may be a low-ball estimate since Cruz insists that he would “eliminate the IRS.” If he really means that, then he would apparently reduce total federal revenues by closer to 100 percent. After all, without a tax collection agency, why would anyone pay taxes?


Candidates' Tax Cuts Unequivocally Skew Toward the Wealthy


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As Citizens for Tax Justice (CTJ) outlined in a post last week, most major Republican presidential candidates have released tax proposals that would overwhelmingly benefit the wealthy and balloon the national debt. No one can refute this, but candidates and anti-tax, trickle-down economics supporters are trying to obscure the facts.

Last week, the business-backed Tax Foundation released a blog that chides reporters for using dollar amounts instead of percentages to inform the public about how generous candidates’ tax cuts would be for the top 1 percent.  They may as well dangle a shiny object. Shifting the debate toward an analytic discussion of percentages versus average dollars is a distraction. The real issue is why are candidates and their allies trying to convince the public that corporations and the wealthy need more budget-busting tax breaks in the first place?

Federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. How enormous tax cuts fit into this equation is a far better issue to debate than average dollars versus percentages or shares. Better still, why not call candidates on the carpet and ask them to explain why the nation needs massive tax cuts and what programs they would cut as a result of the lost revenue?

The tax cuts for “jobs creators,” and trickle-down, stimulate-the-economy argument is tired, shopworn and unproven. The public has previously been sold the vision of a future in which everybody—but mostly and especially the rich—gets a tax cut and the nation’s economy grows by leaps and bounds. It didn’t happen in the past, and no serious person thinks it will happen in the future.

When CTJ analyzes tax proposals, its tables show average tax changes in dollars by income group, tax changes as a share of income and the overall share of the tax cut that each income group would receive. Including all three columns of data reveals a complete picture of the distributional effects, as opposed to just the change in after tax income which, in isolation, can obscure the impact.

The most important figures regarding the GOP candidates' tax plans are the enormous revenue losses that each would incur. In the case of Sen. Marco Rubio, CTJ estimates it would lose $11.8 trillion over a decade. Jeb Bush’s plan would add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would blow a $12 trillion hole in the federal budget over a decade. An analysis of Rand Paul’s flat tax plan found it would starve the federal government of $15 trillion over a decade, and a forthcoming CTJ analysis of Ted Cruz’s plan likely will find it would be equally as devastating to the federal budget.

It is fair game to evaluate whether the nation can afford a tax proposal in which the biggest share and dollar amount flow to the wealthy.

CTJ director Bob McIntyre says criticisms of using dollars to evaluate candidates’ tax plan are a ruse.

“Why is anyone even talking about tax cuts?” McIntyre said. “We already don’t raise enough revenue to pay for existing programs, and as more and more Baby Boomers continue to retire, we’ll need a lot more revenue to pay back IOUs to Social Security, while maintaining other essential programs.”

By trumpeting tax cuts without talking about the consequence and then attempting to shift the public debate toward theoretical discussions about percentages versus whole numbers, candidates and anti-tax advocates are trying to obfuscate the real issue, McIntyre said.

Given the reality of our nation’s fiscal situation, neither dollars nor percentages can justify more huge tax cuts for the wealthy. That’s the substantive discussion we should be having.


How to Curtail Offshore Tax Avoidance


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In a time of fiscal austerity, it is breathtaking to learn that Congress has allowed Fortune 500 companies to avoid an estimated $620 billion in federal taxes on earnings they are holding offshore. While the inaction by lawmakers on this issue may create the impression that there is nothing to be done, the reality is that this tax avoidance could be shut down tomorrow if Congress decided to act. Making this point clear, Wisconsin Rep. Mark Pocan has proposed a pair of new bills this week that would substantially curtail offshore tax avoidance by U.S. multinational corporations.

To start, Rep. Pocan’s The Corporate Fair Share Tax Act takes direct aim at the driver behind the infamous corporate inversion loophole. Using this loophole, U.S. companies, like Burger King or Medtronic, merge with a smaller foreign company and then claim to be a foreign company for tax purposes. The primary advantage of this arrangement is that it allows these pretend foreign companies to engage in an accounting maneuver known as “earnings stripping,” wherein the U.S. subsidiary borrows money from its new foreign parent and then makes interest payments that have the effect of decreasing its U.S. income for tax purposes. To counter this maneuver, the The Corporate Fair Share Tax Act would no longer allow companies to deduct excess interest payments from their U.S. income. This measure would raise an estimated $64 billion in new revenue over 10 years according to the Joint Committee on Taxation (JCT).

The immediate need for this kind of anti-inversion legislation has become even clearer in recent days as Pfizer, one of the nation’s largest pharmaceutical companies, has indicated that it is seeking to invert and incorporate in Ireland to avoid potentially billions in taxes that it owes. Pfizer and a handful of other companies with inversions in the works this year confirm that congressional action is still needed, despite the improvements made to the law through an executive action by the Obama Administration last year.

Rep. Pocan’s second piece of legislation, the Putting America First Corporate Tax Act, would strike a blow at the heart of the offshore tax avoidance by requiring companies to pay the same tax rate at the same time on their foreign and domestic profits. Right now, the U.S. tax system allows companies to defer paying taxes on earnings that they book abroad (at least on paper) until they officially repatriate it back to their U.S. parent company in the form of dividends. This policy creates a huge incentive for companies to shift their U.S. profits to low- or no-tax jurisdictions in order to avoid taxes. IRS data show that U.S. companies are booking more than half of their (allegedly) foreign profits in known tax havens.

Rep. Pocan’s legislation would stop this practice by ending the ability of companies to defer paying U.S. taxes on their offshore income, meaning that they would pay the same tax rate at the same time on earnings regardless of whether they are booked in the United States or in the Cayman Islands. This legislation would not only level the playing field between multinational and purely domestic companies, but according to the U.S. Treasury Department, it would raise as much as $900 billion in critically needed revenue over 10 years.

Congress should take action against offshore tax dodging and an excellent place to start would be the passage of Rep. Pocan’s The Corporate Fair Share Tax Act and Putting America First Corporate Tax Act.


Tax Cut Crazy Talk


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Sometimes when presented with fantastical information, the only appropriate response is a heavy sigh and a plea to stop. Please. Just. Stop. 

Such has been the case time after time this year as presidential candidates have released tax reform proposals that promise to drastically slash taxes across the board and also generate strong, economic growth. Please. Just. Stop.

Earlier this week, Citizens for Tax Justice released an analysis of Republican presidential candidate Marco Rubio’s tax proposal, and the results are exasperating but not surprising. The senator’s plan reserves the greatest share (34 percent) of its tax cuts for the top 1 percent (average annual cut of $223,783), and it would balloon the national debt by $11.8 trillion over a decade.

If this story sounds familiar, well, it is.  

CTJ has analyzed other candidates’ tax plans, too. It found that Jeb Bush would give nearly half of his tax cuts to the top 1 percent and add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would target more than a third of his tax cuts to the top 1 percent, and, like Rubio, would blow a $12 trillion hole in the federal budget over a decade.

Sens. Ted Cruz and Rand Paul are offering flat tax proposals that would lower taxes for the rich, increase taxes on low-income people and cost even more than Trump or Rubio's plans. And Ben Carson has proposed a loosey-goosey “tithing” plan (at a rate of 10 percent or 15 percent, depending on when you ask him) with few details, but apparently with the highest revenue loss of all.

All of these candidates are telling the American public that they have the best interest of the middle class at heart. But a bit of simple math quickly refutes that falsehood.

Yes, most of the candidates claim they would cut taxes for all income groups (with the exception of Bobby Jindal, who fervently and explicitly calls for much higher taxes on the poor). But the superrich would be the greatest beneficiaries by far. And once enormous cuts in public services that these plans would require are taken into account, only the very rich would come out ahead.

To be sure, all of the candidates claim that their plans would produce an enormous increase in economic growth. For example, Bush, in a Wall Street Journal op-ed titled, “My Tax Overhaul to Unleash 4% Economic Growth,” stated, “By focusing on tax reform like I did in Florida, America can grow faster, too.” Likewise, Trump said his plan, "will create jobs and incentives of all kinds while simultaneously growing the economy.”

But these are just assertions with no backing. The candidates seem to have forgotten that the nation has tried trickle-down economic policies before without success.

When pressed about his deficit-busting plan on CBS’s Face the Nation, Rubio said, “It has to be a combination of things. You have to have the spending discipline on the mandatory spending programs and you need to sustain significant economic growth.”

Well, at least one candidate admits that we can’t have vast tax cuts and adequately fund the nation’s programs and services too.

Josh Barro at the New York Times compared the candidates’ plans to “puppies and rainbows.” Many others also have roundly criticized Republican promises of tax cuts without revenue consequence. You can read some of them here, here, here, here , here, and here.

Recall that George W. Bush promised the nation could cut taxes across the board — but especially for the rich — without budgetary fall out. Instead, Bush’s tax cuts turned surpluses into deficits, even with budget cuts. And as for boosting the economy, economic growth was poor throughout Bush’s presidency and toward the end saw the start of the worst economic recession since the 1930s. Even still, Republican candidates are proposing to double- and triple-down on Bush-era tax policies.

Please. Stop.

“These candidates don’t want to tell the American public the truth,” said Bob McIntyre, director of CTJ. “Taxes are already at historically low rates, and our nation cannot have more massive tax cuts and also meet our priorities. In fact, we need considerably higher taxes, especially on tax-avoiding corporations and wealthy investors.  Polls show that a large majority of Americans agree, which makes one wonder why the GOP candidates are calling for just the opposite.”

Today, federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. And this is with current tax rates. The answer to these very real complex national issues is certainly not crazy, fantastical tax-cut proposals that overwhelmingly benefit the wealthy.


After Failed Attempt to Become British, the Pfizer Corp. Now Wants to be Irish to Avoid U.S. Taxes


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How do you say Viagra in Gaelic? That’s an internal question the Pfizer Corporation may have to deal with if it’s successful in its latest attempt to avoid billions of dollars in taxes by trading its U.S. citizenship for an Irish passport in a process known as a corporate inversion.

The drug and consumer health products maker is attempting to buy Allergan, an Ireland-based firm, and assume that company’s Irish identity.

But that’s probably about as painful as the move would get for the New York-based pharmaceutical firm. When a company like Pfizer attempts to become a resident of Ireland or other tax haven countries, there generally aren’t a lot of moving trucks involved. Usually, corporate inversions are a purely paper transaction in which corporations shift their U.S. profits overseas for tax purposes without changing the way they do business. Inverting companies typically continue to rely heavily on the American education, transportation and healthcare infrastructure that have allowed them to prosper. The only real change is that post-inversion companies are no longer paying for the government benefits they consume. An inversion by Pfizer would very likely amount to pretending to be Irish, much like the Notre Dame mascot.

This is the second time in as many years that the company has attempted to renounce its U.S. citizenship. In 2014, the company attempted to trade its U.S. passport for a British one by acquiring the firm AstraZeneca.

The irony is that Pfizer has already been doing its best to pretend it’s a foreign corporation for some time. In each of the past seven years, Pfizer has reported losing at least a billion dollars a year in the United States while making money hand over fist in other nations. Between 2008 and 2014, Pfizer claims it lost $21 billion in the U.S. while enjoying $104 billion in foreign profits. Is it plausible that the maker of Viagra and ChapStick hasn’t made a dime of profits in the United States since 2007 even as it has averaged $15 billion a year in foreign profits?

A more likely explanation is that the company has been aggressively shifting its U.S. profits into foreign tax haven subsidiaries. A recent Citizens for Tax Justice report found that Pfizer has a stunning 151 subsidiaries in known foreign tax havens, more than all but five other Fortune 500 corporations. It’s probably no coincidence that the company also has been very aggressive in declaring its profits to be “permanently reinvested” offshore: at the end of 2014, Pfizer had $74 billion in offshore cash, fourth highest among the Fortune 500.

What makes Pfizer’s tax dodging especially galling is that its U.S. business plan heavily depends on federal government support. Over the past five years, Pfizer has received more than $5 billion in government contracts, each year making the list of the top 100 government contractors. In addition, Pfizer has profited directly from government-funded research by the National Institutes of Health (NIH) and rakes in billions of taxpayer dollars via government healthcare programs such as Medicare and Medicaid.

We don’t know how much of the company’s $74 billion is sitting in its Cayman Islands subsidiary, nor do we know whether the company has paid even a dime of tax on its offshore cash because the company refuses to disclose this information. But it’s a safe bet that if the company’s latest inversion attempt is successful, in practice Pfizer will remain as American as it’s always been since it was founded on U.S. soil in 1849.

 


Apple Shifts a Record $50 Billion Overseas, Admits It Has Paid Miniscule to No Tax on Offshore Cash


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For the die-hard fans who lined up to purchase Apple’s latest iPhone last month, it’s hardly news that the California-based company still lives up to its reputation for technological innovation. The world’s No. 1 smart phone manufacturer last week released its annual financial report revealing it also remains No. 1 in crafty tax avoidance strategies.

Apple moved a record $50 billion offshore in the last year, far more than any company has achieved in a single year. It now holds a staggering $186.9 billion in cash offshore.

The company's brazen exodus of cash is even more remarkable because it acknowledges it has paid virtually no tax to any nation on its offshore stash. Apple's recently released annual report indirectly admits the company has paid an effective tax rate of about 2.2 percent on its permanently reinvested foreign profits. This means the beloved iPhone maker has avoided $56.9 billion in federal income tax on its offshore cash.

Apple’s unsavory tax practices are well-documented. A 2013 Senate investigation conclusively demonstrated that the company artificially shifted its U.S. profits into foreign tax havens. And for much of the past year, European Union (E.U.) officials have focused on the special tax deals worked out between European tax haven countries and companies including Apple, Starbucks, Fiat and Amazon.

As Citizens for Tax Justice (CTJ) documented in a recent report, Apple is only part (albeit the biggest part) of the problem. Hundreds of Fortune 500 corporations admit owning subsidiaries in known tax haven countries, and most of these companies now claim to hold large amounts of cash abroad. CTJ’s sensible recommendation to end companies’ ability to indefinitely defer tax on allegedly foreign profits would very likely accomplish what public shaming of Apple’s tax avoidance clearly has not: putting an end to corporations’ use of offshore tax havens to avoid paying U.S. taxes. 


It's Not the Real Thing: Coca-Cola Hit with $3.3 Billion Tax Bill for Fake "Foreign Income"


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Last week the Coca-Cola corporation revealed that it may have to pay $3.3 billion in back taxes to the U.S. government. The disclosure, buried in a corporate filing, says that the reason for this tax hit is the company’s allegedly inappropriate use of transfer pricing to shift its intangible property out of the United States and into low-rate tax havens. Put another way, the company appears to be pretending, for tax purposes, that some of the income it earns each year in the United States was actually generated in another country.

The disclosure comes at a valuable time, because Congress is now focusing its attention once again on the problem of how to deal with the mountains of offshore cash held by Fortune 500 corporations – and Coca-Cola is a very big player in this debate. At the end of 2014, Coke disclosed having a whopping $33.3 billion in permanently reinvested foreign earnings – 16th highest among the Fortune 500. These are earnings that the company has stated its intention to keep offshore indefinitely, and for this reason it does not have to pay even a dime of U.S. tax on this $33.3 billion.

Even without the help of an official notice from the Internal Revenue Service, one could be forgiven for suspecting that all was not right with Coca-Cola’s statements about the location of its profits. In 2014, the company generated 43 percent of its worldwide revenue in the United States, but somehow that only translated into 17 percent of its income being in the U.S. And a 2014 CTJ report found that Coca-Cola had at least 13 subsidiaries in known foreign tax havens, including three in the Cayman Islands. These facts alone are not enough to show conclusively that Coke is aggressively shifting its U.S. profits into tax havens, but certainly the most likely reason for having three Cayman Islands subsidiaries is to shift profits there–and that is essentially what the IRS has accused them of doing.

Coke’s $33 billion in offshore cash is a decent chunk of the $2.1 trillion in permanently reinvested earnings that have captivated the minds of Congressional lawmakers. Lawmakers on one side claim these are legitimate foreign earnings that big corporations are yearning to bring back to the U.S., and that with a lower corporate tax rate they would immediately do so. Skeptics argue that these companies are simply moving their U.S. profits offshore on paper in hopes of reaping tax rewards. The latest disclosure from Coca-Cola strengthens the argument that this mountain of allegedly “foreign” offshore profits are not, in fact, “the real thing” at all. 


Congress Is Working to Revive Rules That Make Corporate Tax Avoidance Easier


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Update: The House Ways and Means Committee passed the extender bills on a party line vote, with Republicans in favor.

On Thursday, The House Ways and Means Committee will once again contemplate making permanent controversial tax breaks that overwhelmingly benefit big business at a cost of $380 billion over the next 10 years.

Known as tax extenders, these giveaways are a package of tax breaks that Congress must vote to restore every two years. Most of the tax breaks expired at the end of 2014, but many members of Congress are doing everything they can to resuscitate these ill-advised breaks before the end of this congressional session. 

Most notably, the committee will consider bills making permanent the “active financing” loophole and the CFC look-through rule. These esoteric names may mean something only to tax policy wonks and corporate accounting departments, but their impact on the federal budget has implications for us all. The active financing loophole allows multinational corporations to cook their financial books in a way that makes it appear that they are generating income in low-rate foreign tax havens while their costs are deductible in the United States. And the “CFC look-through” rule gives companies additional options for offshoring their profits on paper. An exhaustive Senate investigation into Apple’s international tax avoidance found that the CFC look-through rule is a key part of the company’s tax-dodging strategy.

The committee also will consider extending “bonus depreciation” rules allowing some companies to immediately write off their capital investments. Proponents attempt to justify this tax break by claiming it incentivizes businesses to invest more and create jobs, but the non-partisan Congressional Research Service has found  it to be a “relatively ineffective tool for stimulating the economy.” And depreciation tax rules are one of the main reasons big utilities and other corporations are able to avoid paying even a dime in federal and state income tax, despite being hugely profitable.

The committee meeting comes just a day after new Census data documented that wealth remains concentrated at the top, poverty remains at historical highs and real median income is less today than it was in 1999. But it’s not a hopeless situation. Tax policy can make a difference.  This hearing should have been an opportunity for lawmakers to renew the extender tax breaks that actually offer a meaningful benefit to low-income working families: the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) expansions that are set to expire at the end of 2017.

While corporate lobbyists and their congressional allies cannot back up their claims that these controversial business tax breaks stimulate the economy and create jobs, the EITC and CTC are proven to make a real difference in the lives of working Americans, lifting almost 10 million Americans above the poverty line in 2014. But the value of the EITC and CTC is set to fall substantially in just two years. If members of Congress truly want to focus on using the tax code to create widespread economic prosperity, they should make permanent these valuable tax provisions and stop their razor-sharp focus on helping big multinationals avoid paying their fair share. 

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
  Unrepatriated Estimated    
  Income Tax Bill Implied Implied Foreign
Company Name $ Millions $Millions Tax Rate Tax Rate
Hertz Global Holdings   $ 475  $ 184 38.7% 0.0%
Owens Corning  1,400 511 36.5% 0.0%
Safeway  180 65 36.1% 0.0%
Amgen  29,300 10,500 35.8% 0.0%
Qualcomm  25,700 9,100 35.4% 0.0%
Gilead Sciences  15,600 5,500 35.3% 0.0%
Wynn Resorts  412 144 35.0% 0.0%
Advanced Micro Devices  349 122 35.0% 0.0%
AK Steel Holding  27 10 34.9% 0.1%
Biogen Idec  4,600 1,550 33.7% 1.3%
Western Digital  8,200 2,700 32.9% 2.1%
Apple  157,800 51,615 32.7% 2.3%
Microsoft  92,900 29,600 31.9% 3.1%
Nike  6,600 2,100 31.8% 3.2%
PNC Financial Services Group  77 24 31.2% 3.8%
American Express  9,700 3,000 30.9% 4.1%
Oracle  32,400 10,000 30.9% 4.1%
FMC Technologies  1,619 492 30.4% 4.6%
Baxter International  13,900 4,200 30.2% 4.8%
NetApp  3,000 896 29.9% 5.1%
Symantec  3,200 918 28.7% 6.3%
Wells Fargo  1,800 513 28.5% 6.5%
Group 1 Automotive  17 5 28.1% 6.9%
Jacobs Engineering Group  26 7 28.0% 7.0%
Leucadia National  171 46 26.9% 8.1%
Clorox  186 50 26.9% 8.1%
Citigroup  43,800 11,600 26.5% 8.5%
Bank of America Corp.  17,200 4,500 26.2% 8.8%
Air Products & Chemicals  5,894 1,466 24.9% 10.1%
Northern Trust  1,100 255 23.2% 11.8%
J.P. Morgan Chase & Co.  31,100 7,000 22.5% 12.5%
Ameriprise Financial  180 40 22.2% 12.8%
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%
Walt Disney  1,900 377 19.8% 15.2%
Lockheed Martin  291 55 18.9% 16.1%
Goldman Sachs Group  24,880 4,660 18.7% 16.3%
Graham Holdings  58 11 18.3% 16.7%
Viacom  2,500 438 17.5% 17.5%
Tenneco  737 121 16.4% 18.6%
Sherwin-Williams  4 1 14.6% 20.4%
Gap  581 72 12.4% 22.6%
Cigna  1,800 218 12.1% 22.9%
Morgan Stanley  7,364 841 11.4% 23.6%
Murphy Oil  6,045 684 11.3% 23.7%
Caesars Entertainment  118 13 11.0% 24.0%
Paccar  4,100 400 9.8% 25.2%
Anixter International  679 52 7.6% 27.4%
Laboratory Corp. of America  30 2 6.4% 28.6%
W.R. Berkley  58 3 5.3% 29.7%
Ford Motor  4,300 200 4.7% 30.3%
PPG Industries  5,000 200 4.0% 31.0%
Rock-Tenn  240 9 3.7% 31.3%
Timken  487 10 2.1% 32.9%
Occidental Petroleum  9,900 140 1.4% 33.6%
Assurant  163 1 0.6% 34.4%
TOTAL   $ 590,926  $ 169,412 28.7% 6.3%
Source: CTJ analysis of companies' 10-Ks  
57 Companies That Disclose Likely Tax Payments from Repatriation  
  Unrepatriated Income $ Millions Estimated    
  Tax Bill Implied Implied Foreign
Company Name $Millions Tax Rate Tax Rate
Hertz Global Holdings   $ 475  $ 184 38.7% 0.0%
Owens Corning  1,400 511 36.5% 0.0%
Safeway  180 65 36.1% 0.0%
Amgen  29,300 10,500 35.8% 0.0%
Qualcomm  25,700 9,100 35.4% 0.0%

Congress and SEC Should Take Corporate Disclosure Rules One Step Further


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Earlier this month, the Securities and Exchange Commission finalized a new rule that will require most public corporations to disclose the ratio between CEO pay and median wages for rank-and-file employees. This rule will give shareholders and the public a clearer window on how corporate salary structures are affecting income inequality.

But while this rule represents an important step toward understanding how specific corporations are compensating ordinary workers compared to corporate executives, it also highlights the inadequacy of an even more fundamental way in which many corporations are likely undermining all middle-income working families: corporate tax avoidance.

Congress and federal regulators have it in their power to bring corporate tax dodging into the light just as they’ve done with executive pay, and should move quickly to do so.

Many of the biggest corporations avoid hundreds of billions of dollars in U.S. taxes in a way that is virtually impossible to glean from their public filings. Big corporations keep shareholders in the dark about whether they are using foreign subsidiaries to avoid paying their fair share of U.S. taxes. Corporate tax filings, for example, often omit disclosure of tax-haven subsidiaries and fail to acknowledge whether the company’s offshore cash is subject to any income tax by any country. Less corporate tax revenue has a direct and corrosive impact on economic inequality just as the executive pay levels do. This should matter to all taxpayers because every billion that a corporation dodges in taxes ultimately must be made up by either taxing individuals at higher rates or drastically cutting funding for vital government services and programs.

And the billions add up fast: a CTJ report earlier this year found that Fortune 500 firms are likely avoiding as much as $600 billion in federal income taxes through the use of offshore tax havens. As CTJ has noted before, there are straightforward steps Congress and the SEC can take that would allow shareholders to know when their investments are supporting tax-dodging corporate leadership.

Lavish CEO pay directly disadvantages a corporation’s middle-income workers, and the new SEC disclosure will hopefully help shame some big companies into treating all workers more equitably. But until the largest corporations are required to be transparent in their use of offshore tax havens, these companies will continue to erode the take-home pay of all working families in a way that is far less visible than the pay ratios public corporations must now disclose.


Will Etsy's Brazen Tax Avoidance Cost the Company Its "B Corporation" Status?


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The online craft website Etsy is facing new scrutiny for its recent decision to shift some of its intellectual property into a secretive Irish subsidiary. As Bloomberg reported last week, the company's Irish subsidiary has been made into an "unlimited liability corporation," a form that exists primarily to avoid disclosure of even the most basic financial information. This behavior might elicit yawns from a public weary of tax-avoidance tales from Apple to Xerox, except for one important detail: Etsy is one of the first publicly held corporations to structure itself as a "B corporation," or benefit corporation — and as such, is required to act in a socially responsible manner.

While the criteria for being a "B corporation" vary by state, the common theme is that a company claiming this status must keep in mind not just its bottom line, but also "workers, community and the environment." This is important because when corporate executives are called on the carpet to defend their tax-dodging ways, they routinely cite their fiduciary responsibility to their shareholders as the reason why tax avoidance is not only acceptable, but something they simply must do. B corporations were supposed to change all that. But apparently not: Etsy has engaged in a tax-avoidance two-step. First, like prominent tech corporations such as Microsoft, Etsy has found a way to move its intellectual property to a subsidiary in a low-rate tax haven. Then, on top of that, Etsy changed the legal form of its subsidiary so that it wouldn't have to disclose how much money it is funneling into its tax-haven Irish subsidiary.

When Google chooses "don't be evil" as its corporate slogan, it's just that: empty sloganeering. The company can, and should, face merciless scorn for the ways in which its tax-dodging practices violate that supposed ethos, but at the end of the day, as long as what it’s doing is legal, no one can stop them. In contrast, B corporations are, at least in theory, held to a higher standard. Yet already in the pages of Fortune, Etsy's behavior is being defended as "just being loyal to its shareholders." This raises the question of whether the B corporation’s mandate for social responsibility extends into the tax policy realm — or whether the folks at Fortune simply haven’t noticed that Etsy is a different kind of corporation.

The good news is that the organization responsible for B corporation certification, B Lab, is on the case. It turns out that a change in ownership, including an initial public offering (IPO), requires that companies with B corporation status must recertify their status. One of the questions Etsy must answer as part of its re-application for B corporation status is “[h]as the Company reduced or minimized taxes through the use of corporate shells or structural means." But as tax expert Robert Willens noted in the Wall Street Journal last week, “[t]here is nothing to be gained other than tax savings” from what Etsy has done.

The advent of the B corporation could be a welcome trend in corporate governance, opening the door for business leaders to think about important social policy outcomes, rather than just cold hard cash, in making their executive decisions. Responsible taxpaying is only one part of the high standards to which B corporations are held. But tax avoidance is a basic and fundamental betrayal of corporate citizenship. If Etsy is recertified despite persisting in its offshore tax hijinks, it will be harder to take seriously the “benefit corporation” label.


Microsoft to U.S. Government: Catch Us If You Can


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Puzzle this. Microsoft believes the U.S. government is trying too hard to prove that it’s avoiding federal income taxes. The latest legal salvo out of the company’s Redmond, Wash., headquarters alleges that the IRS improperly hired outside lawyers to help prosecute its tax avoidance case against the tech giant.

But the company’s newest annual financial report, released without fanfare late last Friday, inadvertently confirms that the IRS’s assertion that Microsoft is shifting its profits offshore for tax purposes is basically true.

Like other corporations, Microsoft is required to annually disclose its offshore “permanently reinvested earnings” — profits that it has declared, for tax purposes, to be foreign profits that the company has no intention of repatriating to the United States. Companies also disclose the amount of tax they would pay if these profits were officially repatriated to the U.S. If Microsoft wants to convince the IRS, or the American public, that it is innocent of the tax-dodging charges that have been leveled against it, these disclosures aren’t helping its cause.

Microsoft’s latest annual report discloses that the company now has a total of $108.3 billion in permanently reinvested offshore profits, an astonishing $15 billion jump over the $93 billion they reported at this time last year. But some things don’t change: the company says that its U.S. income tax on repatriation of these profits would be $34.5 billion, or a 31.9 percent tax rate.

Since the tax due on repatriation is 35 percent minus whatever tax has already been paid to foreign governments, this means that Microsoft has paid an effective income tax rate of just 3.1 percent on its $108.3 billion offshore hoard, the same tiny rate that it reported last year. This disclosure strongly indicates not only that Microsoft is offshoring its profits more aggressively than any other company except Apple, but also it is continuing to put these profits — at least on paper — in low- or no-tax countries. Of course, this is exactly what the IRS is accusing Microsoft of doing.

So here’s the inconsistency: In its annual financial reports, Microsoft dutifully admits that it is aggressively stashing its profits in offshore tax havens, even as it protests the vigor with which the IRS is trying to crack down on this tax-avoidance activity. Perhaps the company’s PR and accounting departments need to get on the same page.


Wherefore art Thou Permanent Subcommittee on Investigations?


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The U.S. Senate’s Permanent Subcommittee on Investigations (PSI) ain’t what it used to be. That’s the obvious conclusion to draw from Thursday’s hearing on the “Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs.”

Two years ago, the PSI, under the leadership of Sen. Carl Levin (D-MI), issued detailed investigative reports exposing the egregious tax avoidance practiced by Apple and Microsoft. But the committee’s new leaders are taking an entirely different tack. Committee chairman Rob Portman (R-OH), after listening sympathetically to corporate whining about the nation’s allegedly burdensome corporate tax system, lamented that “if there’s a villain in this story it’s the U.S. tax code.” This was in response to testimony from a number of corporate spokespeople who presented inaccurate pictures of how the tax code treats their companies.

A more critical audience (or a reader of CTJ’s recent memo to the PSI published in advance of yesterday’s hearing) might have drawn different conclusions from yesterday’s testimony. One invited witness, Boston Beer executive Jim Koch, complained that his company pays “a tax rate of about 38 percent” on its U.S. profits. A closer examination, however, shows that Koch’s estimate is hugely inflated.

To be sure, Boston Beer’s 2014 annual report does assert that its current and deferred federal and state income taxes were 38 percent of its U.S. income. But that figure is a fiction, for two reasons.

First, a large share of these so-called taxes were “deferred,” meaning that the company has not yet paid them, and may never do so. Second, Boston Beer benefitted handsomely from a tax break for executive stock options that, for arcane accounting reasons, is not reflected as a tax reduction in companies’ annual reports. Making these two adjustments shows that Boston Beer’s actual federal and state effective tax rate was only 15 percent.

This week’s PSI hearing confirms the analysis of Bloomberg reporters Jesse Drucker and Richard Rubin, who noted earlier this week that the new leadership of the PSI appears far more interested in investigating the U.S. government than in chasing down corporate tax dodgers. That’s a real shame.

Tax avoidance thrives on opacity, and the PSI’s previous in-depth investigations of convoluted international tax schemes brought to light important details of the tax dodges that real reform would bring to an end. The PSI’s new leadership would do well to follow the example set by Sen. Levin. But so far, it seems unlikely that they will do so.


Innovation Boxes and Patent Boxes: Congress Is Focusing on Corporate Tax Giveaways, Not Corporate Tax Reform


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After weeks of hinting about an “innovation box” tax proposal, U.S. Reps. Charles Boustany, Jr. (R-LA) and Richard Neal (D-MA) Wednesday released draft legislation that would provide a massive giveaway for high-tech and pharmaceutical companies as well as other industries that generate income from patents and copyrights. The details of the legislation raise the very serious concern that the “innovation box” could be the tax break minnow that swallows the corporate income tax whale.

The legislation would create a special low tax rate of 10.15 percent for income generated by intangible property such as patents, trademarks and copyrights. This is nearly a three-quarters discount on the 35 percent federal income tax rate.

The big question is how much such a low tax rate would cost. As we have argued, the patent box concept is ripe for exploitation and abuse, for two reasons. First, the legislative process, with immense lobbyists influence, will likely expand the definition of “income from intangible property” beyond recognition, and second, sophisticated corporate tax departments are certain to seek ways of undermining the system by reclassifying  as much of their income as possible to qualify for this tax break.

The federal tax code is littered with examples of a simple concept that morphed into an administrative nightmare once it went through the legislative process. The most salient example is the special lower corporate tax rate for manufacturing. When lawmakers floated this tax break in 2004, the ostensible goal was to lower U.S. manufacturers’ taxes. But when the dust settled, the final law expanded the concept of “manufacturing” to include roasting beans for coffee (an early example of the lobbying clout of Starbucks) and film and television production. When policymakers initially began discussing the manufacturing tax break, few would have imagined that the Walt Disney Company  would reap more than $200 million a year in tax breaks for “manufacturing” animated films.

In the 10 years that the “manufacturing deduction” has been in place, the business world has changed in ways that were unimaginable in 2004, and so has the tax break’s reach. Open Table Inc. now annually collects tax breaks for “manufacturing” reservations at your favorite local restaurant.

 It is reasonable to conclude that the legislative sausage making process will similarly contort the definition of “intangible property”. Even those who think a properly-defined “innovation box” is a good idea may shudder at the product that emerges from Congress.

The second concern with the proposed “innovation box” tax break is how corporations might seek to game the system once such a box is in place. It would be very difficult to disprove the claim that a dollar of corporate profit is generated by the research and development that yields patents and copyrights. Corporate profit is the function of many economic forces, of which corporate R&D expenses are only one. When big pharmaceutical corporations claim that huge chunks of their U.S. profits are generated by their investments in intangibles such as trademarks, evaluating these claims will require a huge enforcement effort by the Internal Revenue Service—a vital branch of government that already is finding its enforcement abilities hampered by funding shortfalls.

This second problem—namely, the endless inventiveness of corporations in finding ways of gaming the system to reduce their taxes—may be the reason Congress’s official bean counters at the Joint Committee on Taxation have been unable to produce a revenue estimate on the cost of patent box legislation.

A third huge problem would be the mismatch between the 35 cents on the dollar that deductions for the costs of producing patents, etc. would provide to companies and the 10 cents on the dollar that the profits from such property would be taxed. In effect, the government would pay for 35 percent of the costs, but get back only 10 percent of the profits in taxes. That’s a negative tax rate.

Few would argue directly that the biggest corporate tax dodgers should get a special prize for their tax-avoidance efforts—yet the innovation box would provide huge windfalls for companies such as Apple and Microsoft that appear to have saved billions by artificially shifting their intangible property into low-rate tax havens. The focus of corporate tax reform should be, first and foremost, to make sure that corporate scofflaws are held to account and made to pay their fair share. An “innovation box” would instead offer a brand new tax break for these companies.

At a time when federal corporate income tax collections are near historic lows as a share of the U.S. economy, the unanswered questions about the direction and enforceability of the proposed “innovation box” tax giveaway should, alone, be enough to stop this idea in its tracks.


Nike: Just Dodge It


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For fans of creative tax dodging, the release of the Nike Corporation’s annual report is always an enlightening occasion. As we noted two years ago, the company quietly acknowledges having stashed billions of dollars in low-tax offshore destinations, and has inadvertently given some signals about how it might be achieving this.

The company’s 2013 annual report disclosed the existence of a dozen subsidiaries based in Bermuda, almost all of which were named after specific brands of Nike shoe. A sensible inference is that these subsidiaries may exist solely to house the company’s intellectual property—patents, trademarks, logos and slogans, for example—associated with each of these brands.

In 2014 the company apparently got wise to the optics and abruptly stopped disclosing the existence of half of these subsidiaries, reducing to six the number of Nike shell companies allegedly doing “business” in Bermuda.

This shouldn’t be surprising. As has already been documented, technology companies like Microsoft and Google have stopped disclosing the existence of almost all of their offshore subsidiaries, and we now know that Wal-Mart never disclosed its offshore subsidiaries to begin with. This behavior is made possible by lax reporting requirements and abysmal enforcement by the Securities and Exchange Commission, which is tasked with ensuring that corporations submit transparent financial reports to their shareholders.

In 2015, the company’s latest annual financial report lists only three Bermuda subsidiaries. Does all this mean that the company has renounced its use of the “Nike Force,” “Nike Pegasus” and “Nike Waffle” subsidiaries it formerly disclosed? It’s possible—but don’t count on it. After all, the company added a breathtaking $1.7 billion to its stash of offshore cash in the past year and quietly discloses that it has paid a tax rate that is likely less than 5 percent on these profits. Tax rates that low are pretty hard to find outside the Caribbean.


Yes to Broadway, No to Blueberries: The Arbitrary and Bizarre Giveaways in the Latest Tax Extenders Bill


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This is how the tax code unravels.

The Senate Finance Committee, in a rare show of bipartisanship, took less than two hours Tuesday to approve the tax extenders, a hodgepodge of more than 50 temporary tax breaks that expired at the end of 2014. The extenders are primarily a giveaway to business and should remain expired­–an option that doesn’t require any congressional action–but on these corporate giveaways, the nation’s lawmakers agree.

This is bad enough — but it gets worse. Committee members presented a jumble of amendments that would broaden these tax breaks, and actually approved a handful of them. For example, one of the existing provisions gives a special tax break for film and television productions. Producers can immediately write off the costs associated with creating a film or TV show, instead of gradually writing off their investments over the life of the asset as required of most other businesses. But there are meaningless limits: production companies can only write off the first $15 million in costs per film or per television episode (which essentially means the entire cost of a single television episode could be fully tax deductible), and only the first 44 episodes of a TV series are eligible for the tax break. This, however, may reflect lawmakers’ awareness of the jumping the shark phenomenon rather than legislative restraint.

Committee Chairman Orrin Hatch decided that it’s unfair to give the producers of “House of Cards” a tax break without extending the same privilege to their counterparts on Broadway, and so the committee broadened the film and TV tax break to include “live theatrical productions.” This revision could have saved such gems as the big budget disappointment “Spiderman: Turn off the Dark,” and, if passed, would provide generous tax write offs for those who produce economically devastating Broadway duds in the future.

Discerning lawmakers decided a tax break for Broadway is one thing, but southern-grown blueberries went a step too far. Sen. Johnny Isakson (R-Georgia) offered an amendment to expand the “bonus depreciation” tax break to include expenses related to blueberry production. Georgia, it turns out, is the largest blueberry-producing state in the nation. Isakson’s proposal thankfully fell on deaf ears.

The committee’s actions Tuesday reflect a disappointing lack of legislative interest in achieving real tax reform. The tax fairness victory achieved by allowing this motley array of tax breaks to expire at the end of 2014 was purely accidental. The committee should have simply allowed the extenders to remain dead and buried. At the very least, they could have spent more than two hours on these corporate giveaways and taken the time to ask hard questions about each and every one of them.

Instead, they simply brought them all back to life in the legislative equivalent of A&E’s The Walking Dead. Of course, the enthusiasm of the members of the tax-writing committee for the extenders has nothing to do with good tax policy. Rather the tax   extenders are simply a periodic campaign fundraiser for senators and representatives at the expense of ordinary American taxpayers.


Like a Campy Horror Movie, the Tax Extenders Are Back


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Lawmakers are once again moving to pass a $96 billion package of controversial tax breaks that mostly benefit businesses under the pretense of incentivizing economic activity.

The Senate Finance Committee on Tuesday morning will hold a session to weigh the so-called merits of the tax breaks, widely known as tax extenders. Given that Sens. Orrin Hatch (R-Utah) and Ron Wyden (D-Fla.), respectively the chair and ranking member of the committee, have introduced bipartisan legislation to extend the tax breaks, the direction lawmakers are heading is clear.  

But as CTJ and others have repeatedly pointed out, the tax extenders are a motley array of ineffective corporate giveaways. To name a few, the extenders includes the research and development credit, the “active financing” loophole and the CFC look-through rule. The active financing loophole makes it easy for multinational corporations to cook their financial books in a way that makes it appear that they are generating income in low-rate foreign tax havens while their costs are deductible in the United States. And the “CFC look-through” rule gives companies additional options for offshoring their profits on paper. An exhaustive Senate investigation into Apple’s international tax avoidance found that the CFC look-through rule was a key part of the company’s tax-dodging strategy.

If committee members critically examine these and other tax breaks during tomorrow’s hearing, they will be in for a long day-- there are more than fifty of them. But it appears lawmakers are more concerned about quickly moving to pass the legislation.

Sen. Hatch has said moving fast is the only way to make sure these tax breaks will work, arguing that “these provisions are meant to be incentives, (and) we need to advance a package as soon as possible.”

There is a major problem with this argument: the bill would apply retroactively. The extenders generally expired at the end of 2014, and the Hatch-Wyden plan would reactivate the tax breaks as of Jan. 1, 2015. This would mean that the two-year extenders legislation would expire at the end of 2016, so a quarter of time covered under this plan has already passed. This makes the incentive argument less compelling: how can providing big corporations with a retroactive tax credit for past activity create an incentive?

The tax extenders, to be sure, include a few small provisions that would have some effect on middle-income families. The deduction for teacher expenses provides teachers with federal income tax liability the chance to reduce their tax slightly, and the deduction for state and local sales taxes allows upper-middle taxpayers a chance to deduct their sales taxes instead of state income taxes.

A thorough Finance Committee exploration of these tax breaks would allow Congress to evaluate whether these and other tax breaks serve any social purpose—and, importantly, whether the tax code is the appropriate policy tool to achieve these social goals.

But Congress doesn’t appear to be focused on weighing the individual merits of each of the extenders. And that’s a shame.


Congress Wants to Reward Corporate Tax Dodgers with Lower Taxes


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It’s well-documented that profitable Fortune 500 companies are stashing profits offshore to the tune of at least $2.1 trillion and avoiding as much as $550 billion in U.S. taxes.

But instead of taking steps to halt this brazen tax dodging, lawmakers have floated various misguided “reform” proposals that would actually reward these companies’ bad behavior. Whether it’s the territorial tax system proposed by a Senate working group last week or the repatriation tax breaks frequently proposed by lawmakers on both sides of the aisle, many tax writers appear oddly intent on lavishing more tax cuts on corporate tax dodgers rather than making them pay their fair share.

As a new Citizens for Tax Justice report makes clear, there are two major problems with the repatriation proposals discussed in recent months. Foremost, none of these proposals address the core problem: corporations can legally stash profits offshore with no consequence by taking advantage of a provision in our tax laws known as deferral. Second, Congress has been down this road once before eleven years ago, when a one-time repatriation holiday proved a boon for corporations but failed to abate offshore tax avoidance.

CTJ has written extensively about how deferral provides an incentive for corporations to play offshore shell games. Many large U.S.-based multinational cor­porations avoid paying U.S. taxes on significant profits by using accounting tricks to make revenue earned in the United States appear to be generated in corporate subsidiaries based in tax haven countries with minimal or no taxes.  

Some lawmakers have railed against this practice while others claim businesses are forced to be bad corporate citizens due to the U.S. corporate tax rate. With such disparate views, it’s no wonder that Congress has a poor track record in dealing with offshore corporate tax dodging.

In 2004, faced with the prospect of huge multinationals shifting their profits into beach-island tax havens, Congress offered them a carrot: corporations that repatriated their offshore profits could pay a low 5.25 percent tax rate on those profits, far below the 35 percent corporate tax rate our tax system normally requires. A number of corporations cheerfully took the carrot—and promptly resumed shifting their U.S. profits into foreign tax havens the following year. Furthermore, instead of using this boon to create jobs and invest in research and development, businesses laid off workers and used the tax break to enrich corporate executives.

Eleven years later, the problem of offshore tax avoidance is coming to a head once again, but there’s no reason to believe another repatriation holiday would yield a different outcome.  

Fortune 500 corporations now have declared over $2.1 trillion of their profits to be “indefinitely reinvested” abroad. The scale of this income shifting is ludicrous: a CTJ report found that U.S. corporations reported to the IRS that the profits their subsidiaries earned in 2010 in Bermuda, the Cayman Islands, the British Virgin Islands, the Bahamas and Luxembourg were greater than the entire gross domestic product (GDP) of those nations that year. In the Cayman Islands alone, U.S. multinationals claimed they earned $51 billion in profits in 2010, a year in which the entire economic output of the Caymans was only $3 billion.

But as CTJ’s new repatriation report outlines, neither political party’s leadership is pushing sensible ideas on how to deal with this scam. Congressional tax writers, incredibly, are once again backing a repatriation holiday. At a time when bipartisanship is a rarity on Capitol Hill, Sens. Barbara Boxer (D-CA) and Rand Paul (R-KY) are reaching across the aisle to offer a 6.5 percent tax holiday to companies that agree to repatriate their offshore cash.

Things aren’t much better in the White House, where President Barack Obama earlier this year included a “deemed repatriation” in his 2016 budget. Obama’s plan wouldn’t even require companies to bring their profits back—instead, he would apply a one-time tax to their offshore profits, also at a special low rate.

If Congress adopts either of these as stand-alone strategies, one thing is certain: big corporations will continue their long-standing charade of pretending their U.S. profits are earned in foreign tax havens. Neither of these reforms on their own would remove the harmful incentive for companies to play these offshore shell games.

But there is an option that could stop income-shifting cold. If lawmakers simply end tax deferral for offshore profits, corporations would find no tax advantage in pretending their profits were earned in a Caribbean island. But as long as our tax laws allow corporations to indefinitely avoid their income tax responsibilities by going through this pretence, they will continue to do so. All the “holidays” Congress can dream up will do nothing to stop it.


Bipartisan Senate Plan Confuses Real Tax Reform with Tax Cuts for Multinational Corporations


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Sens. Rob Portman (R-Ohio) and Chuck Schumer (D-NY) today released a long-awaited tax reform plan that reads like a wish list for multinational corporations. 

The Senate Finance Committee working group’s report provides recommendations for restructuring the federal government’s international corporation tax rules. The plan is long on misguided ideas and short on specifics. The heart of the plan is a proposal to move to a territorial tax system in which all corporate income reported in countries other than the United States–including notorious tax havens such as Bermuda and the Cayman Islands–would be exempt from U.S. corporate income taxes.

As Citizens for Tax Justice has noted, such a system would dramatically increase the incentive for U.S. multinational corporations to use accounting maneuvers and paperwork to shift their profits from the United States to offshore tax havens. At a time when corporations have accumulated more than $2.1 trillion in offshore holdings, much of which may be U.S. profits that are reported as “earned” in zero-tax jurisdictions such as the Cayman Islands, the first step toward corporate tax reform should be removing incentives to offshore profits, not providing even more.

European countries that have some form of a territorial tax system have found it impossible to halt the use of offshore tax havens, so it seems likely that a U.S. territorial system would be equally leaky. Yet the framework claims the new plan would supposedly make it harder for corporations to engage in offshore shenanigans.

Further, under the Portman-Schumer blueprint, chronic tax avoiders such as Apple, Microsoft and GE will have new ways to avoid taxes. Another feature of the plan is a “patent box” regime that gives companies a special low tax rate on profits generated from legal monopolies, such as copyrights and patents. As CTJ has explained, patent boxes give companies tax breaks that are, at best, linked only to research that has long since been completed, and at worst lets companies game the system by pretending that most or all of their income is related to intellectual property.

One member of the Senate working group, noted with approval that the plan represents “the first step toward the kind of ‘win-win’ situations that are all too rare in this town.”

The plan gives big multinationals new avenues for tax avoidance whether they report their income in the U.S. or shift profits to tax havens, which is truly a “win-win” for corporations seeking to avoid paying their fair share. But the broad outlines of the Finance Committee’s recommendations make it clear that the plan would be a big loss for the rest of us. 


Mylan to U.S. Government: We Want Everything for Free


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Last year at this time, more than a dozen U.S.-based corporations were threatening to move their legal residence to foreign tax havens in a paper transaction known as an inversion. Facing a wave of public opposition, some corporations abandoned these inversion attempts—notably, drugstore chain Walgreens put its plans on ice, and Pfizer could not  complete its inversion—but other corporations succeeded in shifting their corporate addresses abroad to avoid U.S. taxes.

One of these companies, the generic drug maker Mylan, successfully merged with a foreign branch of Abbott Laboratories earlier this year to form a Netherlands-based company, also named Mylan. The company's CEO made it clear that the prospect of paying an income tax rate “in the high teens” to its new Dutch homeland was a big driver in this decision.

Now the company is facing an unwanted hostile takeover bid from Teva Pharmaceuticals, and it has suddenly rekindled its love affair with Uncle Sam, or at least with the regulatory protections the U.S. government provides. Turns out that if Teva Pharmaceuticals had launched such a takeover a year ago at this time when Mylan still had a U.S. passport, the anti-trust division of the Federal Trade Commission (FTC) would have had to okay the deal for it to go forward. It now appears that the FTC is content to allow Mylan’s new Dutch benefactors to oversee the process. But Mylan’s leadership is now realizing, too late, that the FTC’s oversight authority could be pretty helpful.

Mylan’s leadership admitted last year that it was shifting its headquarters to the Netherlands for tax purposes, but now they are saying with a straight face that they’d actually like to remain American citizens in ways that don’t subject them to the U.S. corporate tax structure. They also really think there shouldn’t be any hard feelings. “We know the inversion has invoked a lot of emotional and political banter but the reality is we remain a U.S. issuer under all of the formal and informal guidelines,”  Mylan's CEO Heather Bresch said earlier this week in a Bloomberg news report.

Unintentionally admitting that its inversion was a farce simply for tax purposes, Mylan argued that “it should pass the test of being treated like an American company under federal regulations because its principal offices are in Canonsburg, Pennsylvania,” Bloomberg reported.

Even before Mylan renounced its U.S. citizenship, it was hardly a model taxpayer: a 2014 Citizens for Tax Justice analysis found that Mylan had 40 tax haven subsidiaries, from Bermuda to Switzerland, and was holding $310 million in profits offshore for tax purposes—income on which the company may have paid little or no tax to any country.

In years to come, Mylan’s leaders will hopefully discover the many joys of their new Dutch identity. But, like any other company that chooses to engage in chicanery to avoid U.S. taxes, Mylan should not expect access to the full legal protections offered by the U.S. government.

Moreover, Mylan’s inadvertent admission that its primary operations are still in the United States underscores the need for Congress to act to prevent corporations from changing their corporate addresses simply to dodge U.S. taxes.

 


Flaw in Connecticut's Budget Is Its Increase in Taxes on Working Poor- Not Corporate Tax Changes


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Connecticut’s legislature approved a two-year $40 billion budget last week with wide-ranging tax increases to help close a $1 billion budget gap. 

The changes include fully applying the sales tax to all clothes purchases and reducing a targeted property tax credit. But the two provisions that have received widespread attention are corporate tax reforms and increasing the personal income tax rate on the richest 5 percent of taxpayers.

Lawmakers included corporate tax reforms in the final budget despite objections from some of the largest corporations in the state, such as GE and Aetna.  In addition to higher taxes on computer and data processing services, the plan limits tax credits and specifies how business income can be reported.  Most significantly, Connecticut will join the majority of states in requiring corporations to file a combined report that treats subsidiaries of multistate corporations as one entity so they are taxed in aggregate.

General Electric (GE) threatened to relocate its headquarters and established an exploratory committee the day after lawmakers passed the final budget, and other major business interests have issued press releases conveying their discontent for the corporate- and personal income tax changes in the budget.  Gov. Dan Malloy has yet to sign the budget and has agreed to a sit-down meeting this week with the president of the Connecticut Business and Industry Association to discuss the corporate tax changes

GE and other corporations’ complaints have misrepresented the budget as a plan that only raises needed revenue by solely increasing taxes for the wealthy and profitable businesses. This is far from reality.  An ITEP analysis found that all income groups will pay more under this plan, and the lowest-income taxpayers in the state will experience the largest tax increase as a share of income.  Connecticut’s tax system is already upside down, and the tax changes included in the contentious budget deal would further exacerbate the gap between low-income and wealthy Connecticut taxpayers. 

Complaints about ‘combined reporting’ are also suspect considering that GE and other major corporations in Connecticut comply with the measure in almost every other state in which they currently operates.

GE is not exactly the best poster child for so-called high taxes. The company is notorious for paying low to zero corporate income taxes.  In 2014, an ITEP analysis found that GE paid an average state corporate income tax rate of negative 1.2 percent on its $5.75 billion in profits in the United States. Looking over the past five years, GE only paid a state corporate income tax rate of 1.6 percent, just about a quarter of the average weighted state corporate income tax rate of 6.25 percent.

Big business will undoubtedly continue to pressure Gov. Malloy into forgoing the good corporate tax changes included in the budget deal awaiting his signature.  The state is certainly in need of new revenue to protect critical public investments, yet if any part of the plan should give him pause it should be the tax increases on low- and moderate-income families rather than the small ask for wealthy taxpayers and profitable corporations to pay a little more.  


House Leadership Content to Balloon the Deficit for the Sake of Corporate Tax Breaks


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House Republicans today are planning to pass a deficit-financed tax cut that mainly benefits already profitable big businesses under the premise that the tax cut will spur innovation. The bill, which has bipartisan support, would expand and make permanent the research credit at a cost of $182 billion over a decade. If anything, the research credit should be significantly reformed or allowed to expire, rather than being made a permanent part of the tax code.

Corporate lobbyists and their allies in Congress argue the research credit provides companies with an extra incentive to invest in research that could provide positive benefits for society as a whole. While wanting to promote research and innovation seems as wholesome as apple pie, the research credit more closely resembles a cow pie.

One of the biggest problems with the research credit is that it largely subsidizes activities that no one would consider research that is broadly beneficial to society. For example, companies can receive the credit for “developing new packaging” and new “soft drink flavors.” To fix this problem, Congress could limit the credit to actual scientific research, by implementing the common sense regulations put forward by the Clinton Treasury, but withdrawn by the George W. Bush Administration.

Adding to this, the research credit does a poor job of incentivizing additional research of any sort. The most egregious example of this is the fact that companies are now allowed to apply for the tax credit retroactively by filing amended tax returns. It’s highly implausible that a company would do more research in response to a tax credit it didn’t know it was eligible for. A simple fix to this would be for Congress to disallow companies to claim the credit on amended returns.

Rather than making these critical reforms to the research credit, the House legislation would make matters worse by doubling the cost of the credit by increasing the percentage rate at which “research” is subsidized.

The House legislation is unpaid for so the $182 billion loss in revenue over ten years would directly increase the deficit. In fact, with the passage of the research credit, House Republicans will have approved more than $300 billion in deficit busting tax breaks for corporations and wealthy individuals since the start of the year.

While House Republicans appear content to add $182 billion in tax breaks for corporations onto the deficit, they have at the same time refused to make permanent expansions to the earned income tax credit (EITC) and the child tax credit (CTC), which would cost around $155 billion over the next decade. These credits are critical in helping working families get ahead, and if they are allowed to expire at the end of 2017, more than 13 million families would lose an average of $1,073 a year.

While the research credit has bipartisan support, there is likely enough opposition from President Obama and many Democrats to stop full passage of the legislation. In fact, the White House has issued a formal veto threat against the bill. The real concern moving forward is that in the push to renew the now-expired research credit and other tax extenders, lawmakers will try and make many of these provisions permanent as part of a large corporate tax giveaway package later this year.


Skechers' Sketchy Corporate Tax Disclosure Illustrates Need for Country-by-Country Reporting


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Interpreting corporate tax data shouldn’t be like playing “Where’s Waldo.” Analysts seeking to understand whether big corporations are engaged in tax-avoidance hijinks should be aided, not thwarted, by the information that companies make available in their annual financial reports. A long-brewing effort to require country-by-country (CbC) reporting of corporate income and taxes promises to help demysticize things a few years down the road. But meanwhile, a new, voluntary disclosure of detailed data on the location of offshore profits by the shoe manufacturer Skechers gives a tantalizing taste of just how helpful these disclosures might someday be in ferreting out offshore tax avoidance.

U.S. multinational corporations, in the annual financial reports they file with the Securities and Exchange Commission, generally report their income and taxes in two broad categories: “United States” and “foreign.” And even at this level, Skechers’ 2014 annual financial report raises red flags: how could a shoe manufacturer that says 89 percent of its property, plant and equipment (and 66 percent of its sales) are in the United States report that only 43 percent of its income is attributable to the U.S.?

But Skechers, in what to our knowledge is an unprecedented public disclosure, breaks out its foreign income further, to include the specific countries in which it reports substantial profits. It turns out that in 2014, 71 percent of what Skechers called foreign income, and 44 percent of its worldwide income, was apparently “earned” in the Bailiwick of Jersey. Yet the company reports having no meaningful sales, and no property, in Jersey. Composed of the Island of Jersey and surrounding uninhabited rocks, Jersey is generally recognized to be one of the more notorious foreign tax havens, and not a hotbed of shoe production or sales.

So why would Skechers volunteer this information? The simple answer is that the Securities and Exchange Commission (SEC) asked them to. When the SEC sent a letter to Skechers asking for more detail on the company’s foreign income, the company obliged. Having made this disclosure in a public letter to the SEC, the company presumably saw no point in not also including this information in their annual report.

Would we see similar bombshells if Apple, Microsoft, General Electric and other corporate titans were required to disclose CbC data? CTJ’s research findings on the use of offshore subsidiaries certainly suggest so. A June 2014 CTJ report found that 72 percent of Fortune 500 corporations admit having subsidiaries in known tax havens, and  a May 2014 CTJ report found that American corporations are collectively stashing more than half of their subsidiaries’ profit in just 12 known tax havens. These garish statistics pretty much have to be the product of some aggressive acts of tax dodging.

As we have noted previously, the movement for CbC reporting is gaining steam, at least abroad. And if the recent disclosure from a second-tier shoe manufacturer is any indication, lawmakers interested in real corporate tax reform should be pushing the Securities and Exchange Commission to mandate CbC disclosure for all U.S-based corporations. 


Good - and Bad - Ways to Fund Infrastructure


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With funding for the Highway Trust Fund (HTF) set to expire yet again on May 31st, many states are already delaying much needed infrastructure projects due to concerns over the fund's ongoing solvency. Such delays and the fund's impending expiration are putting fire to the feet of congressional lawmakers to find a solution to the perennial lack of dedicated revenue, due to our out-of-date gas tax, needed to pay for all of the infrastructure projects supported by the fund. In looking for a way to bridge the gap in funding, Congress should reject proposals to patch the HTF using some form of a tax on the repatriation of offshore profits and instead focus on a more permanent fix through the modernization of the gas tax.

Good: Raising the Gas Tax

Why does the HTF always seem to be in constant and dire need of additional funding? The answer is that lawmakers have repeatedly refused to update and reform the federal gas tax, the primary funding source of the HTF. The federal gas tax has not been increased since 1993, and the 18.4 cent-per-gallon tax has lost more than 28 percent of its value due to construction cost inflation and fuel efficiency in the time period since being fully dedicated to transportation in 1997.

With the HTF deadline again nearing, many Democrats and Republicans finally seem to be catching on to the need to increase the gas tax to make up for its longtime loss in value. Last week for example, a bipartisan group of House members proposed increasing the gas tax by indexing it to inflation, and scheduling further gas tax increases to occur in the future unless lawmakers agree on another funding mechanism.

Now would be an especially advantageous time to increase the gas tax given that gas prices have dropped to relatively low levels in recent months. These lower prices would make it easier for consumers to absorb the impact of a gas tax increase since they are already experiencing the benefit of the significantly lower prices.

The bipartisan push for increasing the gas tax and indexing it to inflation also makes a lot of sense given that it’s the only viable approach offered so far that would provide a long term solution to the HTF's constant funding problems. In addition, the gas tax is a sensible way to fund transportation infrastructure because it generally requires those who use our infrastructure the most, by driving long distances or heavy vehicles, to bear most of the responsibility of its upkeep.

Bad: Repatriation

Besides modernizing the gas tax, the most often talked about way to fill in the gap in funding for the HTF has been either a voluntary or mandatory tax on profits held offshore by corporations. The problem with such proposals is that they would reward and encourage offshore tax avoidance, while at best only providing a temporary fix to the gap in funding.

The worst form of these proposals is a repatriation holiday, such as the one recently proposed by Senators Barbara Boxer and Rand Paul. Under their repatriation holiday proposal, multinational corporations could voluntarily bring back profits held offshore by paying a tax rate of 6.5 percent rather than the 35 percent rate they would normally owe.

On its face, this and other similar repatriation holiday proposals cannot be used to fund the HTF, or anything else, because they would actually lose revenue instead of raising it. In fact, the nonpartisan scorekeepers at the Joint Committee on Taxation (JCT) found that a proposal similar to the Boxer-Paul proposal would lose $96 billion over 10 years. The reason behind this is that the holiday would encourage companies to hoard even more of their profits in offshore tax havens moving forward in anticipation of another holiday, and much of the money repatriated under a holiday would have been eventually repatriated at a higher tax rate anyway.

In contrast to a repatriation holiday, many lawmakers have also proposed raising revenue to fund infrastructure through a mandatory or deemed repatriation tax on profits held offshore by corporations as part of a broader corporate tax reform. For example, President Obama has proposed to pay for infrastructure using a 14 percent mandatory tax on unrepatriated profits as part of a broad corporate tax reform that would include a 19 percent minimum tax on foreign profits moving forward. Similarly, Representative John Delaney has proposed a mandatory tax rate of 8.75 percent and would default to a tax system with a minimum tax of 12.25 percent on corporation's foreign profits.

The trouble with either proposal is that they would reward companies for their current offshore tax dodging with a rate lower than the current rate of 35 percent, and over the long term would put in place international tax regimes that continue to incentivize companies to shift operations offshore. In addition, while both proposals would raise a substantial amount of revenue, they would only patch the HTF for a limited number of years, after which lawmakers would have to find another funding sourcing to pay for the gap in infrastructure funding. Finally, using revenue gained from taxing offshore profits to bridge the gap in the HTF would mean that this revenue would not be available for a variety of other important public investments where this revenue could be used.


The Case for Closing the Loophole that Allows Corporations to Defer Taxes on Offshore Income


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While the problems with our international tax system are complex, the solution is relatively simple: U.S. corporations should pay the same tax rate, at the same time, on their domestic and foreign profits.

The ranking member of the Senate Finance Committee, Sen. Ron Wyden, made the case for this reform earlier this week in a Senate Finance Committee hearing on the international tax system by calling for an end to the deferral of taxes on foreign profits. Wyden has made ending deferral one of the central planks of his bipartisan tax reform legislation.

The root of the problem with the United States’ international tax system is multinational corporations’ ability to defer paying taxes on their foreign profits until these profits are repatriated to the United States. This creates a strong incentive for companies to shift their foreign profits and use accounting gimmicks to move U.S. profits to tax havens, where they will owe little to no tax. Without the ability to defer taxes on their offshore income, there would be no incentive to hold earnings in tax havens because companies would owe U.S. taxes on this income either way.

Exactly how much do companies avoid paying in taxes due to our system of deferral of taxes? According to the non-partisan scorekeepers at the Joint Committee on Taxation (JCT), deferral will allow U.S. companies to avoid paying some $418 billion in federal income taxes over just the next five years.

For its part, in its latest budget the Obama Administration proposed a 19 percent minimum tax on foreign profits. While this proposal is praiseworthy for ending deferral, the fact that the minimum tax rate would be lower than the tax rate on foreign profits means that it would still leave in place a system that incentivizes corporations to shift profits offshore, either on paper or by shifting real operations.

During another Senate Finance Committee hearing on simplification, Professor Mihir Desai, by no means a foe of multinational corporations, noted in his testimony that he thinks it is preferable to explicitly repeal deferral given that a minimum tax "creates numerous opportunities for planners that have resources that far eclipse the ability of the government to police them." Reinforcing this point, the JCT estimates that Obama's minimum tax would only capture about a third, $130 billion over five years, of the revenue lost due to deferral of taxes on foreign profits.

Unfortunately, much of the push for international tax reform is coming from advocates of a territorial tax system, which would actually exacerbate the problems we currently face with offshore tax shifting by exempting much of U.S. corporations’ foreign income from taxation. In other words, rather than making the U.S. more "competitive" as companies claim, a territorial system would just make it even more beneficial for U.S. companies to move jobs and profits offshore.

Looking at the big picture, tax professor and former corporate tax practitioner Stephen Shay argued before the Senate Finance Committee that the Wyden proposal to end deferral was the "first best choice" to reform the international tax system because it is the best way to address base erosion and profit shifting by multinational corporations. Senate Finance Committee members should take the recommendation of Professor Shay, Ranking Member Wyden and an increasing number of advocates to heart as they develop proposals for international tax reform going forward. 


Head of Consortium of Leading Corporate Tax Avoiders to Testify on Benefits of a Balanced Budget


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The head of a consortium of businesses that includes multiple profitable companies that consistently pay no or abysmally low federal taxes has been tapped to testify Wednesday at a Senate Budget Committee hearing on the "Benefits of a Balanced Budget."

Former Michigan Gov. John Engler heads the Business Roundtable and is the hearing’s lead witness. It’s not clear whether the long-term decline of our corporate income tax—and the budget deficits this decline has helped create—will be a topic of conversation at the hearing, but if it comes up it’s pretty clear what Engler will say. The Roundtable has been among the loudest voices calling for cutting the corporate tax rate from its current 35 percent. We have noted previously that the Roundtable’s position is based on erroneous claims that U.S. corporations are paying uncompetitively high tax rates domestically.

Yet it’s hard to see just what the Roundtable members have to complain about. One prominent member of the Roundtable is Xerox, a company that has long featured prominently in our regular surveys of Fortune 500 corporate tax avoidance. As it happens, Xerox released its 2014 financial report last week. The report suggests that Xerox shouldn’t be too worried about our corporate tax rate being too high, since it has been phenomenally successful at avoiding it. The company reported $629 million in pretax 2014 U.S. earnings, and it didn’t pay a dime in federal income tax on those profits. In fact, the company received a tax rebate of about $16 million last year.

And 2014 was no anomaly. Over the past five years, the company has paid an effective tax rate of just 5.4 percent on $3.6 billion in U.S. profits.

Xerox is not alone in undercutting the Roundtable’s case for corporate tax cuts. Our February 2014 magisterial survey of tax avoidance by profitable Fortune 500 corporations found that the Business Roundtable’s membership is riddled with tax avoiders: American Electric Power paid zero income taxes in three of the five years between 2008 and 2012. FedEx had two zero-tax years in the same period, as did Honeywell and International Paper. General Electric avoided all income taxes in three of five years. Goldman Sachs only managed to zero out its income taxes in one of five years—still an impressive feat given that in their zero-tax year, it reported $4.8 billion in U.S. profits. And Boeing and NextEra Energy topped them all by paying no income tax in four of five years, despite being consistently profitable in each of those years.

Few would disagree with the idea that deficit reduction is a worthy goal. But John Engler and the Business Roundtable seem not to realize that their tax avoidance is a real impediment to achieving this goal. One can only hope that the Senate Budget Committee can convince them to help achieve the “Benefits of a Balanced Budget” by actually paying their fair share of income taxes. 


Imagination at Work? GE Once Again Pays Less Than 1% in Federal Taxes


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Notorious tax dodger GE recently released its annual financial report and the only thing eye-raising about the company’s paltry 0.9 percent federal income tax rate is that it's marginally higher than the 0.4 percent average rate it paid over the past decade.

Released without fanfare late in the afternoon last Friday, GE’s latest annual report shows the company enjoyed $5.8 billion in pretax U.S. profits in 2014, but paid just $51 million in federal income taxes. In other words, GE remains a champion tax dodger. Whether it can continue to avoid taxes may depend upon what Congress decides to do about one of the misguided tax breaks that helps make GE’s tax avoidance possible, a tax break that expired at the end of last year.

The tax break in question, the “active financing exception,” has come back from the dead before.  Repealed as part of the loophole-closing Tax Reform Act of 1986, Congress temporarily reinstated the active financing exception in 1997 after fierce lobbying by GE and other multinational financial companies. Since then, lawmakers have extended it numerous times, usually for one or two years at a time and often retroactively.

This tax loophole allows American corporations to indefinitely defer paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income. That’s because these types of income are easy to shift from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this “exception,” companies like GE can indefinitely avoid paying taxes to any nation on much of their financing income, by claiming that they earned the profits in in offshore tax havens.

The active financing exception has been repeatedly extended as part of the so-called “extenders” —   legislation that Congress enacts every couple of years to continue a package of (ostensibly temporary) tax breaks for business interests, and is one of dozens of “extenders” that expired at the end of 2014.

GE won’t disclose just how valuable the active financing rule is to its bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. In GE’s annual reports to shareholders, it notes that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”

It’s hard to know what “significantly” means to a company that pays virtually nothing in federal income taxes. But at a time when both President Barack Obama and Democrats in the House are proposing sensible strategies for increasing taxes on the financial sector, it’s worth remembering that the active financing exception plays a significant role in the ability of many large U.S.-based financial institutions besides GE to pay low effective U.S. tax rates.

With the lobbying power of GE and the financial services industry, it will sadly be no surprise if congressional lawmakers ride to the rescue of low-tax multinationals once again. But the $5 billion a year price tag of the “active-financing exception” should be a good reason for Congress to sit on its collective hands and let this tax giveaway stay dead. GE will undoubtedly survive if its tax bill goes up a bit.


Netflix is a Real-Life Frank Underwood When it Comes to Tax Breaks


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Political nerds and TV binge watchers of all stripes will gather around the TV (or laptop) this weekend to watch the much anticipated release of Season 3 of the Netflix original series House of Cards. While the show follows the shadowy manipulations of Frank Underwood, the company and producers behind the show have done some manipulating of their own to get millions in generous tax breaks from the state of Maryland for the production of its third season.

Last year, the producers of House of Cards played hardball with Maryland lawmakers by threatening to “break down our stage, sets and offices and set up in another state" if they did not receive millions more in tax credits. Pairing this stick with a carrot, the House of Cards producers brought in Kevin Spacey to meet with "star-struck" lawmakers and push for the passage of more tax breaks for the TV series.

The trouble for Maryland lawmakers is and continues to be that the film tax credit program lavishing House of Cards with millions in tax breaks provides very little economic benefit to Maryland taxpayers—in fact, the entire program has cost the state $62.5 million since 2012. A recent study by the Maryland Department of Legislative Services found that the film tax credit in Maryland only brings in 10 cents for every dollar that it provides in economic benefits.

Unfortunately, the lawmakers in Maryland are reflective of lawmakers across the nation, who keep falling for the siren call of film producers and ponying up ever larger tax credits to companies in hopes of creating a lasting film industry in their state. Leading the pack, Louisiana spent over $1 billion on its film tax credit program from 2002-2012, yet the state still has very little to show in terms of permanent jobs and economic development benefits from the program.

In spite of all of the evidence against film tax credits, Maryland lawmakers, fearful of "losing" the Netflix series, decided to give in and increased the size of the credits for House of Cards, bringing the total amount of tax breaks that the show has received to a whopping $37.6 million. What makes these tax breaks particularly galling is that Netflix is already exploiting the stock option loophole to such an extent that it paid nothing in federal or state corporate income taxes on its $159 million in profits, even before it received the new cache of tax breaks.

The tax swindle that Netflix is running with the production of House of Cards would be enough to make Frank Underwood proud. 


Is the Starz Network Series "Spartacus" a Jobs Creator?


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One of the many problems with the copious tax breaks that Congress showers on corporations is that they provide perverse incentives for businesses to expand the definition of what they do so they can claim certain tax deductions, even if they haven’t changed anything about their business in practice.

An egregious example of this is Starz, the publicly traded media company best known for its cable channels Starz and Encore. The company’s annual report, released earlier this week, “concluded that its 2014 and 2013 programming packages met the… criteria” for a special tax break for manufacturers. In plain English, this means the company claimed the manufacturing deduction and reduced its federal income taxes by $20 million over two years because it “manufactured” original television productions such as Spartacus, Outlander and Da Vinci’s Demons.

We’ve criticized corporate tax breaks before for being so loosely written that corporations flout the intent of the law and claim the breaks for dubious activities. Even putting cynicism aside and conceding some tax credits for businesses could be a good idea, the manufacturing deduction is an example of how good intentions can lead to bad policy.

The U.S. Senate’s Finance Committee on Tuesday held a hearing, Tax Reform, Growth and Efficiency. In her testimony, Jane Gravelle of the Congressional Research Service singled out several corporate tax breaks that clearly make the U.S. economy less efficient. Among them was the “qualified production activities” deduction, otherwise known as the manufacturing deduction.

When congressional tax writers in 2004 declared their intention to provide a lower corporate tax rate for manufacturing to keep companies from moving production offshore, lobbyists from dozens of industries descended on Capitol Hill to convince lawmakers that their activities should fall within the legal definition of “manufacturing.” As a result, companies such as Starbucks are now able to say with a straight face that they’re eligible for the manufacturing tax break when they grind coffee beans, and Starz can join the charade and claim its “manufacturing” programming.

Gravelle told the Senate Finance Committee that Congress could “reduce distortion” in the corporate tax code by eliminating tax breaks, such as the manufacturing deduction, that “[favor] certain kinds of industries over others.” She also suggested that in lieu of repealing the manufacturing break, Congress could simply “confine it to corporate manufacturing.”

This is a polite way of suggesting that when most Americans think of the “manufacturing” capacity they want to see preserved in the United States, they don’t envision include Hollywood shoots featuring loincloth-wearing actors. Either of Gravelle’s suggestions would be a welcome improvement on the current corporate tax system—but outright repeal would be the simplest and most straightforward fix.  


Too Big to Pay Its Fair Share of Taxes?


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Goldman Sachs’s latest financial report shows that the company avoided paying federal income taxes on almost half its United States profits in 2014. In fact, the company paid an effective tax rate of just 18.6 percent on $6.8 billion in U.S. profits.

Most of Goldman's low tax rate (about half the statutory rate of 35 percent) can be attributed to a tax break that allows corporations to write off the so-called cost of issuing stock options to their executives in lieu of salaries. Goldman disclosed saving a whopping $782 million in income taxes through this break in 2014.

The stock option tax break allows corporations to give lavish compensation to employees in the form of undervalued stock and then take a tax write off for the difference between the stock option and its true value (e.g. give an employee stock at $10/per share stock for a stock ultimately valued at $18 per share). As we have noted, Goldman is just one of hundreds of Fortune 500 corporations benefiting from this scheme.

Tax reformers on Capitol Hill have had financial institutions such as Goldman squarely in their sights for higher taxes. Rep. Chris Van Hollen’s proposed financial transaction tax seeks to reduce the volume of financial speculation. And President Obama recently announced a plan to tax liabilities of “too big to fail” banks. While these proposals have merit, there are more straight-forward ways to ensure financial institutions are paying their fair share: close egregious loopholes, including the stock options break, that allow banks and other corporations to whittle away their federal tax bill. 

Another window into Goldman Sachs’s tax minimization strategies comes from its tax haven subsidiaries. The company has subsidiaries in 20 foreign countries, including nine in the Cayman Islands, that levy little or no corporate taxes. These subsidiaries may harbor much of the company’s large and growing stash of permanently reinvested foreign earnings—profits on which Goldman has not withheld U.S. taxes because, it says, it intends to keep these earnings offshore.  In the past year, Goldman added more than $2 billion to its offshore hoard, bringing its total permanently reinvested offshore profits to $24.9 billion. The problem with this, of course, is too often companies claim they have reinvested the profits through a subsidiary that does no real business—an obvious tax dodge.

Eliminating the excess stock option tax break, and ending the ability of U.S. multinationals to indefinitely defer paying U.S. taxes on domestic profits they’re hiding in beach-island tax havens, would help restore the federal income tax rates paid by Goldman and other profitable Fortune 500 companies to something resembling the tax rates paid by many middle-class American families.


A "Tax Extenders" Provision Has Allowed Highly Profitable PG&E to Pay Zero Taxes the Last Seven Years


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Another year, another pass from the federal income tax for the profitable California-based utility giant Pacific Gas & Electric (PG&E).

The company’s annual report released earlier this week discloses it earned $1.8 billion in U.S. profits in 2014—and didn’t pay a dime in federal income taxes. In fact, the company received an $84 million federal tax rebate, which means its federal tax rate for the year clocks in at a healthy negative 4.6 percent.

For corporate tax observers, this is about as surprising as the sun rising in the east: PG&E has now avoided paying any federal income tax for seven straight years. That’s right, the last time PG&E wrote an income tax check to the federal government was during the administration of George W. Bush. Over this seven-year period the company enjoyed $9.99 billion in U.S. profits and received an astonishing net federal income tax rebate of $1.48 billion.

It’s not always easy to understand how companies get away with tax avoidance as extensive legislative hearings over Apple and Google have demonstrated.  But in PG&E’s case, it’s clear as day: it pays no corporate income taxes because Congress continues to pass tax policies that essentially mean it doesn’t have to.

… about those tax extenders

Like many utilities, PG&E zeroes out its corporate tax by claiming large “accelerated depreciation” tax breaks, which allow the company to write off the cost of its capital investments (such as machinery and other equipment) much faster than they actually wear out. In each year since 2008, the company has taken advantage of the tax code’s “bonus depreciation” provision introduced as a stimulus measure by Bush--and continually extended by Congress and President Obama as part of a larger package of so-called tax extenders-- to further drop its tax bill.

The good news? The “bonus depreciation” provision expired two months ago at the end of 2014. So if Congress can restrain itself from once again resurrecting this giveaway during the ongoing debate over various corporate “tax extenders,” federal taxpayers—and Californians—can look forward to not having to pay for PG&E’s extended tax-free holiday. But incredibly, congressional leaders seem poised to extend not just bonus depreciation but a whole raft of other misguided temporary tax breaks in the months to come. PG&E is a highly profitable company. Its seven-year tax break should help jog lawmakers back to their senses. 


Yahoo Transparent on Plan to Exploit Loophole to Dodge $16 Billion in Taxes


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Investors were jubilant last week as Yahoo CEO Marissa Mayer announced the company is moving forward with a plan to unload its $40 billion stake in Chinese company Alibaba without paying the $16 billion it would otherwise owe in federal and state corporate taxes.

While such a transfer would normally trigger corporate income liability, Yahoo is exploiting Section 355 of the tax code (which includes the cash-rich split-off loophole) to avoid paying this tax.

Congress originally created Section 355 to allow companies to spin off part of their business into a separate company still owned by its current shareholders. For example, the drug company Merck used to own the online pharmacy Medco. Merck spun off  Medco to its shareholders in a tax-free transaction. This was okay, because Medco was an active business.

But in Yahoo’s case, the new company, SpinCo, is not actively engaging in business, rather it is a phantom company that is simply made up of Alibaba-owned stock with a tiny active business attached. Unfortunately, Section 355 lacks a provision requiring that active business activities constitute a significant portion of the spinoff company, meaning that Yahoo and other companies can create a spinoff company that is made up almost entirely of stocks or other investments.

To be sure, SpinCo would be liable for the tax on the Alibaba stock if it distributed it to its shareholders. But apparently, the plan is for SpinCo to be taken over by Alibaba, in exchange for giving Spinco’s shareholders Alibaba stock that they would own directly. Such a transaction would apparently also be tax-free at both the corporate and shareholder levels. In contrast, when Yahoo sold $10 billion of its Alibaba stock last year, it paid a $3 billion in taxes, a tax bill that activist stockholders are pushing the company to avoid this time around.

It’s hard to imagine that Congress intended Section 355 to exempt Yahoo from paying tax on the huge gain in its Alibaba stock. Yet savvy tax lawyers have crafted a way for Yahoo to get away with this tax dodge.

A straightforward way for Congress to close this loophole would be to require that at least 90 percent of the spinoff company’s assets be used in an active business. Such a reform would stop companies from making a mockery of the corporate capital gains.

While Yahoo's plan is unique in terms of the sheer scale of its tax avoidance, it is certainly not the first time a large multinational corporation has used variations on the cash-rich split-off loophole. Last year, Berkshire Hathaway, the investment company owned by Warren Buffet, announced a deal that would allow it to avoid $400 million that it would have otherwise owed while essentially selling its $1.1 billion in Washington Post stock to Graham Holdings.

Congress should not allow Yahoo to dodge as much as $16 billion in taxes, enough money to pay for one year of universal pre-k across the country. Congress should amend the law and stop future corporations from following Yahoo’s lead.


Facebook's Record-Setting Stock-Option Tax Break


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Facebook reduced its federal and state taxes by a record-breaking $1.87 billion in 2014 by granting lavish stock options to its executives.

The company has used this tax break in the past to zero out its federal and state income-tax bills. But this year it set a record, claiming hundreds of millions more than any other Fortune 500 company has previously disclosed receiving from this tax break.

In 2014, Facebook enjoyed U.S. pretax profits of $4.9 billion and paid federal income taxes of just $260 million, for a federal income tax rate of just 5.3 percent. The stock option tax break explains basically all of the difference between the company’s single-digit tax rate and the 35 percent statutory tax rate.

As we have previously documented, Facebook is hardly alone in using this tax giveaway. Between 2010 and 2012, 280 companies in the Fortune 500 disclosed reducing their tax rates using this dubious loophole. More than 20 companies, including Facebook, managed to cut their taxes by a quarter billion dollars or more during this period.

But none of these corporations enjoyed tax breaks even approaching what Facebook’s newest report discloses.  Even Apple, the previous king of the stock option tax break, has never received more than $1.1 billion a year in stock option tax cuts.

Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit.

The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. For example if a company gives an employee the option to purchase stock at $10 a share but it’s actually worth $18 a share when the employee buys the shares, the corporation can deduct the $8 difference.

In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.

Lawmakers on both sides of the aisle have opposed this loophole. 2013 Legislation sponsored by Democratic Sen. Sheldon Whitehouse would have pared back the stock option tax break. The Cut Loopholes Act would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive. And retired Republican Sen. Tom Coburn called for closing this loophole.

The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.

Allowing high-profile tech companies to zero out or substantially lower their taxes to single-digit rates their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.

 


Tax Rate for Richest 400 People at Its Second Lowest Level Since 1992


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New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.


Congress Should Pass the Stop Tax Haven Abuse Act to Combat International Tax Avoidance


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Each year U.S. multinational corporations avoid an astounding $90 billion in corporate income taxes by booking their profits on paper through international tax havens. At a time of growing inequality and budget austerity, it is outrageous that we allow the world's richest companies to get away with not paying their fair share in taxes.

What can be done to combat this flagrant abuse of our tax system? One new approach would be the passage of Sen. Sheldon Whitehouse (D-RI) and Rep. Lloyd Doggett's (D-TX) Stop Tax Haven Abuse Act, recently reintroduced legislation that would significantly curb rampant tax avoidance by many multinational corporations. Tightening offshore tax rules and enforcement as the act proposes could generate an estimated $278 billion over the next decade in much-needed revenue.

While the Stop Haven Abuse Act would significantly improve our international tax system, it does not go quite as far as proposals that would "end deferral" of taxes on foreign profits, which would end international income shifting by corporations full stop by ensuring that U.S. companies pay the same tax rate at the same time on their foreign and domestic profits.

In previous Congresses, the Stop Haven Abuse Act has been very closely associated with tax fairness champion Sen. Carl Levin, who retired at the end of the last Congress. While the new legislation is largely the same as the previous bill of the same name, the latest version includes significant new provisions to curb corporate inversions (which have also been proposed separately as part of the Stop Corporation Inversions Act) and earnings stripping.

The key provisions of the Stop Tax Haven Abuse Act include:

  • The act would take aim at corporate inversions by treating the corporation resulting from the merger of a U.S and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).

  • The act would disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called "earnings stripping," a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation in order to wipeout U.S. income for tax purposes.
  • The act would require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors generally.
  • The act would deny companies the ability to deduct the expenses of earning foreign income from their U.S. taxable profits until those foreign profits are subject to U.S. tax.
  • The act would limit the ability of corporations to apply excess foreign tax credits from high tax jurisdictions to offset taxes in tax haven jurisdictions.
  • The act would repeal the "check-the-box" rule and the "CFC look-through rules" that allow companies to shift profits to tax havens by letting them tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist.

Adobe Products' Acrobatic Tax-Dodging Skills


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Despite its throwback name, Adobe Products is a cutting-edge technology company whose products—notably, PDF files—are used by millions of Americans every day. As it turns out, Adobe’s tax-avoidance technology is pretty 21st century too. 

The company’s newest annual financial report, released earlier this week, discloses that Adobe is currently holding more than $3 billion of its profits abroad in the form of “permanently reinvested” foreign earnings, and it has paid very little tax on these profits to any country—a clear indication that much of these profits are likely in foreign tax havens.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of “permanently reinvested” profits. But these standards also provide a loophole allowing companies to claim they can’t calculate this tax because it is “not practicable.” In other words, companies must report the tax they would owe on this offshore income, but if they claim it's too difficult then they don't have to worry about doing so. 

As we have previously documented, the vast majority of Fortune 500 corporations disclosing offshore cash use this egregious loophole to avoid reporting their likely tax rates upon repatriation, even though these companies almost certainly have the capacity to estimate these liabilities.

Refreshingly, Adobe is one of only a few dozen companies that actually admits how much tax it would owe if it repatriated its foreign cash. The latest report says it would owe $900 million, which equates to roughly a 27 percent tax rate. Since the tax it would pay on repatriation is equal to the 35 percent U.S. tax rate minus any foreign taxes paid, the clear implication is that Adobe’s $3 billion offshore stash is largely being held, for tax purposes anyway, in a tax haven country with a tax rate in the single-digits.

While a 2013 investigation by the Financial Times uncovered evidence that the company was using subsidiaries in Ireland (which has a 12.5 percent corporate tax rate) to reduce its effective tax rate, this doesn’t explain how the company has managed to pay an even lower rate on its offshore profits to date. Mysteriously, Adobe’s annual report doesn’t disclose the existence of any foreign subsidiaries in countries with tax rates lower than Ireland—even though it is supposed to publish a list of all its “significant” subsidiaries.

When the hubbub over President Barack Obama’s recently announced plan for reforming capital gains taxes dies down, tax reform talk in Congress this year likely will refocus on the hot topic of corporations that move their profits (or corporate address) offshore for tax purposes. The new Adobe data illustrate perfectly the difficulty Congress faces. Members are under immense pressure from corporate-backed lobbyists and their allies to lower the 35 percent corporate tax rate. But all manner of loopholes and offshore profit shifting enable corporations to substantially lower and in many cases erase their U.S. tax liability. It shouldn’t be too much to ask for these companies to disclose where they're stashing their offshore profits and whether they’re paying any taxes.   


New Brief: Representative John Delaney's New Proposal Lets Corporations Off Easy


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A new brief from Citizens for Tax Justice explains how Rep. John Delaney's (D-MD) new repatriation bill let's companies escape paying their fair share in taxes:

"On Dec. 12, 2014, Rep. John Delaney (D-MD) proposed a new version of his “repatriation holiday” tax plan. The latest version would require multinational corporations to pay a token amount of taxes on their accumulated offshore profits and exempt those profits from any further U.S. income tax.

Delaney’s new plan differs from his previous proposal, which would have allowed corporations to choose to pay a small tax on their offshore profits in exchange for tax-exemption in the future.

The biggest problem with Delaney's repatriation proposal is that it would allow companies such as Apple and Microsoft, which have parked hundreds of billions of dollars of U.S. profits in offshore tax havens, to pay a U.S. tax rate of no more than of 8.75 percent, instead of the more than 30 percent tax they should pay on these profits."

Read the Full Brief


CTJ Director Robert McIntyre: "Tax Extenders Bill a Tale of Corporate Influence"


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The 113th Congress concluded by passing a $42 billion, deficit-financed tax extender bill that mostly benefits businesses. CTJ’s director Robert McIntyre’s op-ed in The Hill argues that the tax package illustrates how savvy lawmakers can enact legislation that has almost no support from the general public. 

“These temporary tax provisions are a caricature of legislative backroom dealing and corporate influence. They include a tax credit for “research” defined so loosely that it includes the development of machines by Chili’s to replace staff in their kitchens and the development of new flavors by Pepsi. They include the “active financing exception,” a tax break for the offshore lending done by companies such as General Electric, a superstar at dodging taxes even by the standards of corporate America.”

Read the full op-ed.


New Trove of Leaked Luxembourg Documents Point to Disney, Koch Industries Tax Schemes


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A month after the International Consortium of Investigative Journalists (ICIJ) revealed leaked documents demonstrating that Luxembourg allowed Pepsi, IKEA, FedEx and 340 other corporations to use the country as a tax haven, ICIJ has now announced new evidence that Disney, Koch Industries and 33 additional companies are also in the game.

The new trove of leaked documents shows that Disney and Koch Industries have, like the other companies, obtained private tax rulings from Luxembourg’s Ministry of Finance that bless complex business and accounting structures shifting profits from countries where actual business is done into Luxembourg, and then in some cases into other countries.

The revelations further demonstrate the need to end the U.S. tax code rule allowing American corporations to defer paying U.S. income taxes on profits that they report to earn offshore. The ability to defer these taxes for years or forever creates a powerful incentive for corporations to use accounting gimmicks to make it appear as though profits are earned in countries where they won’t be taxed — like Luxembourg, thanks to the private tax rulings it hands out like candy to big corporations.

Ernst & Young advised both Disney and Koch Industries to set up a financial subsidiary in Luxembourg that lends money to the other subsidiaries, which then send their profits in the form of interest payments to the lender in Luxembourg.

Disney’s lending subsidiary in Luxembourg reported 1 billion Euros in profits from 2009 through 2013 and paid just 2.8 million Euros in income tax to Luxembourg, for an effective income tax rate of less than one percent.

ICIJ explains that Disney may use the “check-the-box” loophole in U.S. tax law, which allows corporations to simply assert (by checking a box on a form) whether its foreign-owned entities are separate corporations or merely branches of the U.S. company. This would allow Disney to tell the IRS that its payment to the Luxembourg lender is a deductible interest payment to a separate company, even while the Luxembourg lender tells its own government that it’s merely a branch of Disney receiving an internal company payment, which is not taxable. The result is that the profit is not taxed in any country.

The lending exists only on paper and the financial subsidiary is a shell company. It and four other subsidiaries of Disney’s in Luxembourg are all housed in one residential apartment and have one employee.

Koch Industries’ private tax ruling from Luxembourg’s Ministry of Finance blesses a tax-dodging scheme for its subsidiary Invista, a company that produces Lycra-brand fiber and Stainmaster-brand carpets. Invista publicly says it is headquartered in the U.S., but Koch owns it through a holding company incorporated in the Netherlands.

A Luxembourg subsidiary called Arteva facilitates loans from one subsidiary of Invista to another. Arteva reported profits of $269 million from 2010 through 2013 and paid just $6.4 million in income taxes to Luxembourg over that period, for an effective income tax rate of just 2 percent. Its highest effective rate in any one of those four years was just 4.15 percent. Like Disney, Koch may have exploited the check-the-box loophole to pull this off.

One section of Koch’s private tax ruling explains how $736 million would be shifted from one subsidiary to another until an American branch would become “both the debtor and creditor of the same debt, which is canceled at the level of the American branch.”

A huge amount of complex planning goes into these tax avoidance schemes. The article notes that Ernst & Young’s office in Luxembourg racked up $153 million in revenue last year, probably by peddling these tax dodges. A lot of this scheming could be brought to an end if Congress enacted tax reform ensuring that all profits of American corporations, regardless of where they are earned, are taxed when they are earned. If Disney and Koch Industries could not defer U.S. corporate income taxes on profits booked offshore, they would have little incentive to use these tactics to make profits appear to be earned in Luxembourg or other countries.


CTJ Report: Extenders Bill Is a Wasteful Corporate Giveaway


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After President Barack Obama’s veto threat last week ended discussion of a $450 billion package of tax breaks mostly benefiting businesses, the House of Representatives on Wednesday approved a smaller bill, H.R. 5771, that would extend most of the tax cuts for one year at a cost of $42 billion.

A new report from Citizens for Tax Justice explains that while the President deserves credit for stopping a much bigger corporate giveaway, even the $42 billion bill is an absurd waste of money from a Congress that has been unable to find a way to fund basic public investments like highways and bridges.

Here are just a few of the problems with H.R. 5771:

Most of the tax breaks fail to achieve any desirable policy goals. For example, they include bonus depreciation breaks for investments in equipment that the Congressional Research Service have found to be a “relatively ineffective tool for stimulating the economy, a tax credit for research defined so loosely that it includes the work soft drink companies put into developing new flavors, and a tax break that allows General Electric to do financial business offshore without paying U.S. taxes on the profits.

The tax breaks cannot possibly be effective in encouraging businesses to do anything because they are almost entirely retroactive. The tax breaks actually expired at the end of 2013 and this bill will extend them (almost entirely retroactively) through 2014. These tax provisions are supposedly justified as incentives for companies to do things Congress thinks are desirable, like investing in equipment or research, but that justification makes no sense when tax breaks are provided to businesses for things they have done in the past.

The bill increases the deficit by $42 billion to provide tax breaks that mostly benefit businesses, even after members of Congress have refused to enact any measure that helps working people unless the costs are offset. The measures that Congress refused to enact without offsets include everything from creating jobs by funding highway projects to extending emergency unemployment benefits.

 

Read the full report.


White House Faces Opposition After Nominating Corporate Inversion Adviser to Treasury


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File this in the category of you can’t make this stuff up. The U.S. Treasury Department’s next high-ranking political appointee may be Antonio Weiss, a Wall Street dealmaker who helped orchestrate major corporate inversion deals. This comes just two months after the administration announced regulatory changes to address the inversion crisis. Needless to say, the nomination is not sitting well with some Democratic lawmakers.

On Wednesday, Senator Elizabeth Warren of Massachusetts took to Huffington Post to tear into the Obama administration for nominating Weiss to serve as Under Secretary for Domestic Finance. Warren has many objections to Weiss, but the one that stands out is that he “helped put together three of the last four major corporate inversions that have been announced in the U.S.” One of these deals was Burger King’s pending acquisition of Tim Hortons, the Canadian coffee and donut chain, for the purpose of claiming that the newly merged corporation is based in Canada rather than the U.S.

Warren is not satisfied with the Administration's response to criticism:

“The response from the White House to these concerns has been two-fold. First, they say that Mr. Weiss was not involved in the tax side of the Burger King deal. But let's speak plainly: This was a tax deal, plain and simple. It was designed to reduce Burger King's tax burden, and Weiss was an important and highly-paid part of the team. Second, the White House claims that Mr. Weiss is personally opposed to inversions. Really? Did he work under protest, forced to assist this deal against his will? Did he speak out against tax inversions? Did he call out his company for profiting so handsomely from its tax loophole work?”

Prompted by public outcry over multiple major corporations’ inversion deals, the administration on September 22 announced regulations intended to slow or halt inversions by making them less financially enticing. The nomination re-enforces Warren and others’ concerns that Wall Street bankers are over-represented in senior administration positions.

On Thursday, Senator Richard Durbin of Illinois, an outspoken advocate of legislation to stop corporate inversions, joined the chorus. Anyone in corporate America who hoped that the lame duck Congress is too distracted to be angry about inversions might be very disappointed.


"Research" Tax Credit Used to Develop Soft Drink Flavors and Machines to Replace Workers


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The tax extenders legislation that Congress enacts every couple of years to extend dozens of tax breaks for businesses has been criticized from the right and the left as pork for special interests. Yet Congress is considering making some of these tax breaks permanent. The leading candidate--the research tax credit--is one of the most problematic of the bunch. The credit  subsidizes everything from the development of new soda machines to the invention of kitchen equipment that replaces staff in fast food restaurants.

Many business activities qualifying as “research” are ones that Americans would not want to subsidize. For example, the accounting giant Deloitte openly advertises its services to help the food industry receive the credit for “developing new packaging” or “redesigning existing packaging.” Deloitte tells potential clients, “Developing new product flavors, appearances, textures, health benefits, and extending shelf life are all potentially qualifying activities.”

A Long Island firm is more specific, explaining that the credit can help companies improve “kitchen science” and then lists several activities that presumably qualify for the credit: “PepsiCo researchers utilize ‘flavor fibers’, small chemical sensors, in the test kitchen.” Coca-Cola developed the “Freestyle” soda machine. Using newly developed kitchen equipment, “Chili’s will be able to cut out 40 hours of labor each week.”

The firm even boasts how these activities can allow restaurant chains to replace workers with machines to save costs.

“In addition, many states are considering raises to the minimum wage, including the wage of tipped workers. Meanwhile, fast food workers in cities like New York have staged protests and walk-outs regarding issues of compensation. The ability to reduce labor needs through machine innovation is therefore a major way restaurants can continue to maintain margins.” 

As explained in CTJ’s 2013 report on the research tax credit, one of the major problems is that the definition of qualifying research has never been sufficiently clarified through regulations. Efforts to resolve that at the end of the Clinton years were thwarted by the incoming Bush administration, and have not been revived by the Obama administration.

House Bill Would Expand and Make Permanent the Research Credit without Examining Its Effects

Of course, none of this means that the research credit always goes toward questionable activities. It simply means that lawmakers should look into the matter, particularly as they debate expanding and making it permanent.

Unfortunately, most members of Congress have endorsed legislation that would at least extend the wasteful tax break for two years. Earlier this year the Senate Finance Committee approved, with bipartisan support, a tax extenders bill euphemistically called the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. It would extend for two years more than 50 tax breaks, including the research credit. CTJ described this bill as a legislative travesty because it would increase the budget deficit by $85 billion to provide unnecessary tax breaks for businesses.

But the approach taken by the House of Representatives makes the Senate bill look like a model of fiscal responsibility. The House this year approved several bills that would increase the budget deficit by hundreds of billions of dollars by making some of these business tax breaks permanent. The one that seems to have the most support would make the research credit permanent — and double its cost by increasing the rate at which activities qualifying as “research” are subsidized. This proposal would increase the budget deficit by $156 billion over the coming decade.

The Obama administration sensibly indicated that the President would likely veto the bill if it came to his desk because its costs are not offset.

But some members of the House insist that they will not approve any tax extenders bill unless it also makes the research credit permanent. The implicit threat seems to be that if the House’s demands are not met, Congress will go home without enacting a tax bill and no Democratic member or Republican member will get to extend any of their cherished tax breaks. To which we say, what’s so bad about that?


Starbucks Latest Corporation to Face Scrutiny over Special EU State Deals


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As you sip your morning latte, you should know that Starbucks has joined the list of multinational corporations whose tax-avoidance deals with European Union member states are being challenged by the European Commission, EU’s governing body. The Commission released a report last Friday stating that Starbucks’ tax arrangement with the Netherlands constitutes illegal state aid to the company.

The report focuses on two aspects of Starbucks’ Dutch subsidiaries: the intellectual property it holds, like the “coffee-roasting process,” which other subsidiaries pay royalties to use, and the way it determines the price of green coffee beans it purchases from its Swiss subsidiary (the transfer price). Both arrangements appear to improperly strip earnings from other countries and shift those profits to jurisdictions (in this case, the Netherlands) where Starbucks has negotiated extremely low tax rates.

The Starbucks report is the latest in a series of EC challenges to special deals between multinational corporations. We commented earlier on the investigations into Luxembourg’s deals with Amazon and Ireland’s deals with Apple. Luxembourg, Ireland, and the Netherlands are three of the top twelve tax havens used by U.S.-based multinationals, as we noted in our report earlier this year.

The arrangements challenged by the EC appear to be the same deals which prompted a U.K. parliamentary committee to summon the Starbucks’ executives to a hearing (along with Google and Amazon) over their “immoral” tax-dodging ways. Shortly after that hearing, Starbucks promised to review its U.K. tax position and later announced that it would move its European headquarters from the Netherlands to London. Whether Starbucks has meaningfully restructured its tax-driven strategies remains to be seen.

Aside from the Commission’s investigations into the effects on EU member states, it’s likely that the Netherlands and Luxembourg subsidiaries are also being used to shift profits out of the U.S. The IRS should be challenging these arrangements, too. Congress, meanwhile, should close some of the loopholes that make this kind of tax dodging possible, without waiting for tax reform.


Leaked Documents Reveal How Luxembourg Facilitates Corporate Tax Dodging


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On November 5, the International Consortium of Investigative Journalists revealed leaked documents demonstrating that Pepsi, IKEA, FedEx and 340 other multinational corporations received special deals from the government of Luxembourg allowing them to use the country as a tax haven.

The documents are private tax rulings from Luxembourg’s Ministry of Finance to specific corporations pledging to respect complex arrangements that shift profits from normal tax systems into Luxembourg and, in some cases, then shift those profits on to zero-tax countries like Bermuda. The deals were negotiated by PricewaterhouseCoopers, the big accounting firm with a history of facilitating tax avoidance and defending corporations against attempts to change the system.

The European Union is already investigating whether such deals made between Luxembourg’s government and Amazon and Fiat violate EU rules barring state aid that unfairly benefits some companies over others.

There are many ways such private rulings can benefit specific corporations that make their profits appear to be earned in a country where they won’t be taxed. The ruling might bless a scheme involving loans from one part of a company to another, which results in interest payments paid into the country where they won’t be taxed. This type of earning stripping is an accounting gimmick given that the parties involved are really all part of the same company. Or a ruling might bless a particular approach to transfer pricing, for example by allowing a company to “sell” a patent or copyright at a very low price to its subsidiary in a zero-tax country and then pay large royalties to that subsidiary to make it appear that profits are all earned in the tax haven.

Luxembourg apparently provides several breaks that take this sort of tax dodging to a whole different level. The article explains that the country exempts 80 percent of royalty income earned on intellectual property.

It also allows hybrid debt instruments, meaning a corporation in a normal tax jurisdiction might make a payment that is considered a deductible interest payment there, but it’s received by a subsidiary in Luxembourg where it’s considered a dividend paid out of offshore profits. The latter would not be taxed at all under Luxembourg’s territorial system.

It is therefore no surprise that many corporations set up subsidiaries in Luxembourg that are only mailboxes. They do no real business but accounting tricks make it appear, to tax authorities, that profits are earned there.

"Office buildings throughout the city are filled with brand-name corporate nameplates and little else. Some have offices and no visible employees. One building at 5 Rue Guillaume Kroll is home to more than 1,600 companies; another at 2 Avenue Charles de Gaulle houses roughly 1,450; and a building at 46A Avenue J.F. Kennedy is home to at least 1,300…"

Even if the EU is successful in cracking down on this nonsense, there may always be countries willing to facilitate this type of corporate tax dodging. As we have argued before, the only way to really stop American corporations from exploiting such offshore tax havens is to make sure corporate profits are taxed at the same rate whether they are earned domestically or offshore.


New Filing This Week Reveals Apple Continues to Divert Profits to Tax Havens


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The media may be abuzz with Apple CEO Tim Cook’s essay in BusinessWeek yesterday, but they also should be paying attention to the company’s Securities and Exchange Commission filing this week. In its annual 10-K report, Apple reveals that, despite congressional hearings on its offshore tax dodging, the company continues to divert profits to tax havens.

The 10-K reports that Apple increased its offshore profits by $16 billion last year, which brings its total hoard to $137 billion. The company also discloses that it would pay a U.S. tax rate of 33 percent if it repatriates those earnings, down only slightly from prior years. Because the US tax would be reduced by any foreign tax the company has already paid, that means the company has paid almost no tax on the foreign income despite having substantial sales in countries where the corporate tax rate is in the mid-20s.

How does Apple do that? By shifting profits, through the use of tax haven subsidiaries, to countries that have little or no corporate income tax. Apple Operations International (AOI), the subsidiary which heads up the foreign group, was incorporated in Ireland but the company claims it is not resident in Ireland for tax purposes. In fact, the company claims that AOI isn’t “tax resident” anywhere in the world, so AOI files no corporate tax returns and pays no corporate tax. Apple has also negotiated a super-low tax rate for other subsidiaries in Ireland of only 2 percent—an arrangement that is under investigation by the European Commission as illegal state aid.

And speaking of other subsidiaries, the subcommittee memo from the Senate hearing identifies fifteen foreign subsidiaries associated with the company’s European operations (and that’s only Europe), yet Apple’s 10-K lists only four subsidiaries in its annual report. Apparently the company takes the position that the other subsidiaries aren’t “significant” under the SEC rules, not even its big Singapore subsidiary Apple South Asia Pte, Ltd. where it books sales in Asia and the Pacific. The company did list Braeburn Capital in Nevada, which helps Apple avoid state income taxes, but they forgot that Luxembourg subsidiary that helps them avoid income and value-added taxes all over Europe, Africa, and the Middle East by booking its iTunes sales there. Oops.

For goodness sakes, one clear finding of the Senate’s investigation was that Apple’s subs in offshore tax havens are playing a vital role in its tax avoidance. And yet even after this, the company persists in not disclosing the existence of these subs in its 10-K. There needs to be a higher standard for disclosing tax haven subs. Where is the SEC? Where is Congress?

CEO Cook’s very personal essay expresses his wish that he can be an inspiring example to people with similar struggles. We only wish Apple aspired to be an example of a good corporate citizen—one who contributed to the common welfare by paying its share of tax.


Obscure Law Allows Wealthy Professional Sports Team Owners to Reap Tax Windfalls


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San Francisco Giants fans, giddy from their team’s third World Series win in five years, would be forgiven for scoffing at the notion that their team’s reputation will be worth nothing in 15 years.

Yet an obscure federal tax law allows professional sports team owners to make just that assertion—and to financially benefit from it. A new analysis from the Financial Times suggests part of the impetus behind the L.A. Clippers’ absurd purchase price—at $2 billion, more than 3 times the previous record for an NBA franchise’s sale price—is that new owner Steve Ballmer may be able to receive a tax write off worth more than half of his purchase costs. The source of Ballmer’s tax break, which FT pegs at a cumulative $1 billion, is an obscure tax rule, enacted in 1993 and expanded a decade ago under former Texas Rangers owner George W. Bush, that lets Ballmer reduce his taxable income by the value of something called “goodwill.”

In this case, goodwill is the difference between the $2 billion Ballmer paid for the Clippers and the value of the team’s tangible assets, such as the ballpark and the land it sits on. Goodwill represents intangible assets as varied as media rights, the value of the Clippers logo, and the team’s reputation. Any company with a recognized logo, from Coca-Cola to Burger King, likely has some “goodwill” value associated with the logo and the company’s reputation.

Before 1993, companies were not allowed to gradually write off the value of intangible assets (goodwill) in the same way that they could write off the cost of machinery and equipment. This approach generally made sense because there’s no reason to assume the value of logos and trademarks will decline, let alone disappear. But in 1993, Congress made goodwill an amortizable expense—something to be gradually written off in the same way as items such as heavy machinery, which lose value over time.

The 1993 law allows companies to write off the goodwill of companies they acquire over the fifteen-year period following the acquisition. The law, a boon for corporations, explicitly excluded professional sports teams from using this tax break. But in 2004, President George W. Bush’s American Jobs Creation Act made sure that sports teams were invited to the party, extending the same treatment to sports team owners that had already been given to most other businesses.

The path from the 2004 law to the historically mediocre Clippers’ absurd purchase price seems clearer when one considers Ballmer may be able to get a tax break worth half the cost of the team.

It’s bad enough that the goodwill tax rule allows companies to deduct costs they may never incur—but it’s even worse that wealthy team owners can bid up the asking price of their teams as a tax shelter. In addressing this disturbing practice, Congress could certainly start by reversing the 2004 change allowing sports team owners to use the goodwill tax break, but a more complete response would be to gut the 1993 law.


Senator Rob Portman: Case Study in Radical, Rightwing Arguments for Slashing Corporate Taxes


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Ohio Sen. Rob Portman’s recent Bloomberg op-ed about corporate taxes reads like a catalogue of Chamber of Commerce talking points. He uses one misleading and inaccurate statement after another to argue that corporations will flee the United States unless we slash our corporate tax and adopt a so-called territorial tax system.          

The Nature of Corporate Inversions

Toeing the corporate line, Portman pretends that corporate inversions involve companies  physically leaving the United States. He writes that, “When companies leave the U.S., they take along jobs and investment, so inversions must end,” and he complains that the anti-inversion regulations issued by the Treasury Department on Sept. 22 do not address “the flaws in our tax system that drive our companies overseas.”

The Chamber of Commerce headquarters in Washington, DC.

Inversion is actually a maneuver by which a corporation claims to the IRS that it is newly based offshore for tax purposes even though nothing about where the business is managed or located has changed. Congress can easily change the laws that allow this pretense, even if lawmakers are unable to settle on a broader overhaul of the tax system.

America’s Corporate Tax Rate

Portman makes use of the old canard that we have “the highest corporate tax rate in the developed world,” which is untrue or at best misleading. The U.S. may have the highest statutory corporate income tax rate among OECD countries, but the effective corporate income tax rate is quite low. CTJ and ITEP examined Fortune 500 corporations that were profitable each year from 2008 through 2012 and found that collectively they paid just 19.4 percent of their profits in corporate income taxes. A third of the companies paid less than 10 percent.

Even more interesting, the study also examined corporations that report earning at least a tenth of their profits offshore and found that two-thirds of these corporations actually paid lower effective rates in the United States than they paid in the other countries where they do business.

Of course, there are countries that have a much, much lower corporate tax rate than the United States or any OECD country. Bermuda and the Cayman Islands have corporate income tax rates of zero percent. Existing loopholes allow our corporations to claim that their profits are earned in these zero-tax countries (or to invert to countries like Ireland that make it even easier to do so). Lowering the U.S. tax rate from 35 percent to 25 percent as Portman advocates, would not solve that problem at all.

Worldwide vs. Territorial Taxation

Portman’s business-backed proposal would actually make corporate tax avoidance worse. He advocates for a territorial tax system, which would exempt corporations’ offshore profits. He ignores that fact that the territorial systems adopted by other OECD countries have caused a crisis of corporate tax avoidance that spurred the OECD’s Base Erosion and Profit Shifting (BEPS) project.

He further toes the corporate line by complaining that the United States imposes its corporate income tax “not only on income companies make at home, but also on income earned around the world,” but fails to mention the tax credit that prevents double taxation of these profits. He notes that corporations are allowed to defer U.S. tax on offshore profits until those profits are repatriated (brought to the U.S.). But his solution, a territorial system, would only expand deferral into an exemption for offshore profits, which is an even bigger break for any company that can make its profits appear to be earned in tax havens.

$2 Trillion Sitting Offshore

Another favored argument among corporations and their allies is to describe offshore profits as “trapped” outside the American economy by our tax system. Portman claims that “$2 trillion that could be reinvested in the U.S. economy sits in foreign bank accounts or is spent in other countries” and apparently the only solution is the sort of tax overhaul he advocates. Actually, the profits that could be repatriated are largely invested in the U.S. economy already, so any attempt to lure them here with lower taxes would be foolish. A December 2011 study of 27 corporations most likely to benefit from such a break concluded that in 2010, 46 percent of the profits held offshore were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments. Other offshore profits are invested in the assets of the offshore business and thus are not likely to be repatriated.

Short-term v. Long-term Revenue Effects

President Obama has said that tax reform overall should raise revenue, but the part affecting corporations and businesses should be “revenue-neutral,” meaning revenue saved from closing loopholes would be used to pay for tax rate reductions. Given that Congress used an alleged budget crisis to enact automatic spending cuts (which will be fully in effect again in 2016) to everything from Head Start to medical research, it’s utterly ridiculous that the President does not seek more revenue from corporations.

Portman wants to be even more generous to corporations than Obama. He complains that Treasury Secretary Jacob Lew has been “saying that the traditional, 10-year budget window shouldn't apply” to the official estimates of any tax reform proposal. This may seem arcane, but it actually means that President Obama and Secretary Lew are trying to stop the sort of tricks included in the tax reform plan proposed by House Ways and Means chairman Dave Camp in February, which Camp claimed was revenue-neutral. CTJ concluded that the plan was revenue-neutral in the first decade but would then loose $1.7 trillion in the second decade.  

Who Pays the Corporate Income Tax?

The most unconvincing piece of Portman’s argument is that that the nation should want to lower the corporate income tax because it’s ultimately paid by working people. But in fact the Joint Committee on Taxation, which provides all official tax estimates used by Congress, concluded in 2013 that 75 percent of the corporate income tax is ultimately paid by owners of corporate stocks and other business assets (the owners of capital). This makes it a progressive tax.

Corporations are capturing a growing share of U.S. income while paying an ever-shrinking percentage of U.S. taxes. Quarterly after-tax U.S. profits have exponentially and continually increased since 2000, only falling briefly during the recession and now raising to the highest levels on record. The U.S. may have a corporate tax problem, but contrary to Portman and his corporate allies’ claims, the problem is not that we’re taxing corporations too much.


Senators Defend LIFO, a Tax Break that Obama and Camp Want to Repeal


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On October 21, fourteen Senators, including nine Republicans and five Democrats, sent a letter to Treasury Secretary Jacob Lew pleading to save a business tax break known as last-in, first-out  (LIFO) accounting, which both President Obama and Republican House Ways and Means Chairman Dave Camp have proposed to repeal as part of tax reform. Over 100 members of the House sent a similar letter to Camp in May. Here’s why defenders of LIFO are wrong.

LIFO is an inventory accounting method that allows some businesses to make their income for tax purposes look smaller than it otherwise would. We tend to think of profit this way: A company creates or purchases products at a cost of $90 and sells them for $100, resulting in a profit of $10. But consider a company that has built up an inventory of, say, barrels of whiskey at different points in time. The barrels it created or purchased five years ago may have cost $80, while those obtained this year cost $90. LIFO allows the company to tell the IRS that the barrels it sold today for $100 were those it most recently obtained (resulting in a $10 profit) rather than those it obtained five years ago (which would result in a profit of $20).

President Obama has proposed to repeal LIFO in his budget plans. Dave Camp, who will be retiring from Congress at the end of this year, included repeal of LIFO in the tax reform plan he released in February.

One reason is that LIFO is an unwarranted tax subsidy. When corporations that use LIFO report profits to their shareholders, they use normal accounting, not LIFO. In the example above, the company would tell shareholders that it made a profit of $20, so why should it be allowed to tell the IRS that it made a profit of just $10?

A second reason is that LIFO complicates tax and accounting rules. A third reason is that LIFO is not permitted under the International Financial Reporting Standards that have been adopted by several countries to streamline the rules for multinational companies, and thus is an obstacle to adoption of these rules by the United States.

The letter from the fourteen Senators supporting LIFO includes a couple of misleading statements. For example, the letter claims that “one of the most troubling effects of the proposed reform is the retroactive tax. If this reform is passed, the penalty to the businesses that used LIFO could extend decades into the past, forcing companies to pay off the ‘reserve’ to which they had legally been entitled.”

When supporters of LIFO talk about “LIFO reserves,” that’s a euphemism for untaxed profits. Returning to the example above, the company that has really profited $20 from selling a barrel of whiskey but is allowed under LIFO to tell the IRS it only had $10 of profit has a “reserve” of $10. In theory, the tax on this reserve is only being deferred, given that the goal of such a business is to sell all of its inventory eventually.

The letter goes on to state that subjecting these “reserves” to normal accounting and tax rules would be a “retroactive” tax increase. Because the idea of a retroactive tax increase seems unfair to most people, opponents of taxes have stretched the term “retroactive” to apply to any tax increase they want to stop. But in this case, the new rules proposed by Obama and Camp would apply to sales going forward. What would change is that a company would use normal accounting rules and assume that it has sold its oldest inventory, rather than its newest inventory. If one thinks of the difference between LIFO and the normal accounting rules as “reserves,” then it is true that companies will have to pay taxes they have deferred on these reserves as companies continue to earn profits from sales going forward.

But a retroactive tax on profits would, in contrast, be something like an increase in tax rates applied to previous years’ income so that additional taxes must be paid this year for income earned in the past — even for a company that has no profits at all this year.

Further, neither the Obama proposal nor the Camp proposal would come fully into effect immediately. Obama’s proposal would be phased in over ten years while Camp’s proposal would be phased in over four years starting in 2019.

LIFO should be repealed as Obama and Camp propose. But one should not overstate the importance of this reform. While Obama’s LIFO-elimination proposal would raise over $100 billion in the decade after enactment according to the Joint Committee on Taxation, it would raise considerably less revenue in years after that.

Because LIFO is largely a way to defer taxes rather than avoid them completely, repeal of LIFO mostly moves forward tax payments that would have otherwise occurred further out in the future. Some estimates suggest that in later years LIFO would raise around only $2 billion a year. Of course, lawmakers have bickered over far less than that.


What Horrors Await Us in Congress after the Election?


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There are two types of tax legislation Congress may enact after it returns to Washington for its lame duck session in November: bad policy and extremely bad policy. 

The Least Bad Scenario

Let’s start with the least terrible scenario, which would involve Congress enacting the Expire Act, the “tax extender” legislation approved by the Senate Finance committee in April. This bill would extend for two years a list of tax breaks so long that almost no one understands them all. (Except us, of course, see our report explaining them.)

The bill is an $85 billion deficit-financed handout to businesses at a time when lawmakers refuse to provide any help to working people hit hard by the recession unless the costs are somehow offset.

You want to extend emergency unemployment insurance? That must be paid for. Want to undo the automatic spending cuts that slashed Head Start and medical research before Congress curbed them last year? Savings were found elsewhere to prevent an increase in the deficit. But businesses get a free pass as Congress shovels another $85 billion in deficit-financed tax cuts at them. If Congress continues this tradition of extending these breaks every couple of years, the cost over the next decade will be around $700 billion.

The tax extenders are also mostly bad policy. Some provide subsidies to businesses for doing certain things, like investing in research or equipment, that they would have done anyway, resulting in a windfall for companies and no clear benefit to the rest of the taxpayers. As our report explains, some of the extenders even encourage offshore tax avoidance by corporations.

However, the damage of this bill pales in comparison to what the House of Representatives has pursued this year.

The Very Bad Scenario

Not satisfied with the Senate’s approach, the House voted to make several of these provisions permanent, which of course has a much bigger price tag and eliminates the possibility of ever getting rid of them, or at least reforming them. The question on everyone’s mind is whether or not House Republicans will demand that tax legislation enacted during the lame duck session must include at least some of these permanent provisions.

Research Credit

One tax break the House has voted to make permanent is the research credit, at a cost of $155 billion over a decade. CTJ has assailed the research credit for subsidizing activities that most Americans would not consider “research.”

“In fact, the definition of ‘research’ is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing ‘research,’ to a software company who was advised to claim that its purchasing manager was doing ‘research.’”

Bonus Depreciation

Another tax break the House has voted to make permanent is “bonus depreciation,” which is a significant expansion of existing breaks for business investment, at a cost of $269 billion over a decade. The Congressional Research Service's (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions and is an ineffective way to stimulate the economy.

Members of the House majority might clamor for some other tax cuts that they also approved this year.

Repeal of the Medical Device Tax

Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. It’s interesting that the House is so eager to award the medical device company Medtronic, which has lobbied for repeal of the tax, even while the same corporation plans to “invert,” and claim to the IRS that it is a foreign company that is mostly not subject to U.S. corporate income taxes. 

Ban on State Taxes on Internet Access

While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services.

Before leaving Washington, the House voted to combine these provisions into a staggering half-trillion-dollar giveaway as part of the so-called Jobs for America Act.

Wild Cards

Corporate Inversions

If Congress is going to throw $85 billion in tax cuts at corporations, it would seem logical to at least attach one of the proposals that would end the worst tax dodging we have seen in years: corporate inversions. Corporations are basically claiming to be foreign companies to avoid taxes. In a spectacular failure to take responsibility, Congress went home to campaign without closing the loopholes that make inversions possible. The chairman of the Senate Finance Committee, Sen. Ron Wyden, is said to be negotiating with the committee’s ranking Republican, Sen. Orrin Hatch. Sen. Hatch has declared that he could not agree to any anti-inversion legislation unless it met a list of impossible and bizarre conditions, including absolutely no revenue raised and steps taken towards a territorial tax system. A deal between Wyden and Hatch seems unlikely, but it could happen.

Two Offshore Corporate Tax Breaks

The House has not voted to make permanent the two tax extenders that provide breaks for corporations’ offshore profits — but there is reason to wonder if they will try before this Congress ends. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.


Ireland's Soft Pedaling Tax Avoidance Crack Down


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The Irish government’s announced plans to  phase out the infamous "Double Irish" loophole represents a significant victory for tax justice advocates worldwide who have sought to end this practice, but also leaves an opening for corporations to find new tax avoidance schemes.

The loophole — used by companies like Apple and Google to dodge billions in taxes — allows multinational corporations to route international profits to Irish subsidiaries and then tell Irish authorities that these subsidiaries actually have tax residence in a tax haven such as Bermuda or, in the case of Apple, have no tax residence at all. Irish lawmakers have proposed requiring corporations registered in Ireland to also be tax residents of the country.

The move comes just two weeks after the European Commission ratcheted up pressure on the country by announcing that the special tax deal that Apple cut with Ireland could violate the European Union's trade rules. This crackdown came on top of last year's blockbuster U.S. Senate hearing, where Sen. Carl Levin laid out the breathtaking audacity of Apple's tax avoidance scheme, including its use of Irish subsidiaries to pay nothing in taxes on tens of billions in profits.

The use of Irish subsidiaries to dodge taxes is widespread. A joint 2014 report by CTJ and U.S. PIRG found that more than 30 percent of Fortune 500 companies had at least one Irish subsidiary. While not every company with an Irish subsidiary is necessarily using it to dodge taxes, IRS data indicates that the amount of income being reported as earned in Ireland by U.S. companies is laughably implausible considering that it would constitute as much as 42 percent of the country's overall GDP.

While Ireland's current move appears to be more substantive than the empty gesture it proposed last year in an effort to assuage critics, there is still much to be desired about the proposal. To start, it keeps the loophole in place for all companies currently using it until 2020, which leaves plenty of time for companies to find new tax avoidance schemes or for the country to reinstate the loophole. In addition, Ireland’s announced plans to close the loophole coincided with Irish lawmakers announcing they would enact a new "patent box" tax break, which, depending on the details, could mean creating a substantial new loophole for companies to use.

Though Ireland's decision to close its most egregious tax loophole shows that international pressure can push tax haven countries to change course, such reforms do not fundamentally change the incentive for U.S. multinational corporations to find other offshore tax loopholes to exploit. The way to end this incentive once and for all would be to end the rule allowing corporations to indefinitely defer U.S. taxes on their offshore profits. Short of ending deferral entirely, Congress should pass the Stop Tax Haven Abuse Act, which takes aim at the worst abuses of deferral. At the very least, Congress should not expand deferral by renewing the active financing exception and CFC look-through rule as part of the tax extenders package.


Steris, the latest to renounce U.S. Citizenship, Only Paid a 16.3% Tax Rate Over Three Years


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After announcing Ohio-based Steris Co.’s plans to become British for tax purposes on Monday, CEO Walter Rosenbrough later said on a conference call, “We’re not typically users of aggressive tax policies and I don’t think we are here.”

That’s his story, and he’s sticking to it. But even a cursory look at the company’s financial reports tells another story. Like so many other U.S.-based multinational companies, Steris pays nowhere near the 35 percent statutory federal rate. But early coverage has pointed to Steris’s potential financial benefits due to Britain’s lower 21 percent statutory tax rate.

A Bloomberg story estimates that Steris “set aside about 32 percent of its pretax earnings to pay taxes” over the past three years, and the Wall Street Journal pegs the company’s most recent tax rate at 31.3 percent. This, of course, provides much fodder for anti-corporate tax advocates who argue inversions and other tax shenanigans are justified because the U.S. corporate tax is too high and is what’s driving Steris (and other poor, defenseless health care giants and multinationals) to abandon their U.S. citizenship.

But Steris isn’t writing a check for 32 percent of its profits to the U.S. government. The Bloomberg and Wall Street Journal numbers are both worldwide tax rates. This means the figure includes income earned in other nations, and the foreign taxes the company paid on those earnings. It also includes not just the current taxes the company actually pays in each year, but also deferred taxes, which the company does not pay.

The tax rates that actually matter in the debate over corporate inversions—the current federal taxes, as a share of pretax U.S. profits, that Steris reports each year— paint a starkly different story. Steris’s average tax rate for the last three years was 16.3 percent, less than half the 35 percent statutory federal income tax rate that the company presumably uses at least some of its lobbying muscle to complain about.

In fact, over the same three-year period, Steris reported a foreign tax rate of 28.5 percent, which is well above its 16.3 percent U.S. tax rate. All of this suggests that Steris’s activities in developed nations with real tax systems around the world are generally being taxed at rates at or above those it faces in the U.S.

As we noted Tuesday, it’s clear that prior to its announced inversion, Steris already engaged in foreign tax hijinks, contrary to its CEO’s claims that the company doesn’t aggressively exploit tax policies to its maximum benefit.

Even though about 75 percent of the company’s profits and revenues are earned in the United States, and roughly 90 percent of its assets are stateside as well, the company discloses, in a Houdini-esque flourish, that fully 94 percent of its worldwide cash somehow now resides outside the country, possibly in its tax-haven subsidiaries in the British Virgin Islands and Mauritius.

And that’s probably what Steris’ inversion is all about: the company has gradually accumulated $222 million in offshore cash, much of which is likely U.S. profits in disguise, on which it would prefer to not pay any U.S. tax.

More than three weeks ago, the U.S. Treasury Department announced regulations intended to crack down on corporations seeking to invert to dodge U.S. taxes. But the Obama Administration can only do so much through regulatory action. Congress should take steps to make sure that Steris’s offshore profits—much of which may be untaxed—and offshore profits of other companies seeking to renounce their citizenship are brought back to the United States and fairly taxed.  

 


European Commission Crackdown on Special Tax Deals


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The European Commission’s recent action to crack down on special deals some European Union governments offer to corporations could be a blow to multinational corporations’ tax-dodging strategies.

As we noted in a report earlier this year, three European countries (Ireland, Luxembourg and the Netherlands) are among the top twelve tax haven countries for U.S.-based multinationals. Corporations use these and other tax havens to artificially shift their profits to foreign jurisdictions and avoid U.S. tax.

Now it seems these European tax havens are offering additional tax deals to corporations that may amount to unfair competition, according to the European Commission. During the past week, The EC notified several multinational corporations that some of the special tax deals they have made with EU member states may not survive. The EC has characterized the arrangements as illegal “state aid” to the companies.

European Union rules do not prohibit member states from offering lower tax rates to lure companies. But they do prohibit countries from making special deals that aren’t available to all companies. The Commission’s investigations appear to focus on transfer pricing – the way multinational corporations price goods and services transferred between members of the affiliated group of companies. According to the EC, tax authorities in Ireland, Luxembourg, and the Netherlands (so far) have agreed to transfer-pricing practices that improperly allow certain multinationals to reduce their tax rate.

Apple. Last Tuesday the EC released to the public a letter sent to the Irish government in June regarding the country’s tax agreements with Apple. If the Commission’s decision stands, the company could owe billions in back taxes to Ireland and possibly other countries.

The EC is challenging what is, in effect, an advance pricing agreement between the Irish tax authority and Apple that allows the company to shift profits to subsidiaries that are not taxable in Ireland—in fact, taxable nowhere in the world. Apple has avoided billions in tax through these arrangements.

Amazon: Discover Anything Any Way to Avoid Tax. This Tuesday the EC revealed that it is investigating Amazon’s deal with Luxembourg. Joaquín Almunia, the Commission’s vice president responsible for competition issues, said the investigation involves a web of Luxembourg subsidiaries and an agreement that capped Amazon’s Luxembourg tax regardless of the amount of its European profits.

Starbucks. The EC has also opened an investigation into Starbucks’ agreements with Netherlands. The company’s Dutch subsidiary charges other subsidiaries for use of  intellectual property it holds, such as the “coffee roasting process,” the recipes, and the Starbucks brand. These payments move earnings from high-tax jurisdictions to the Netherlands where they are taxed at a very low rate.

A New Era. The EC’s actions are potentially quite a blow to multinational corporations’ European tax-dodging strategies. Multinational corporations can’t avoid the EC crackdown by simply moving headquarters outside the European Union. For many reasons, including tax, trade, and currency issues, it’s important for companies to have  European operations headquartered in an EU country. If the EC is successful in undoing the tax agreements, it will severely hamper multinationals’ ability to shift profits out of the EU to low-tax jurisdictions.

The Commission’s actions may signal the beginning of the end for this kind of tax competition among member states. But Congress will have to act to solve profit-shifting out of the U.S.  


New Report from Global Witness: Anonymous Company Owners and the Threat to American Interests


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What do a Manhattan skyscraper secretly purchased by the Iranian government, a Louisiana Congressman hiding half a million dollars in bribes and a Russian crime boss stealing $150 million from investors all have in common? All were made possible by shell companies incorporated in the United States, according to a new report from Global Witness.

It explains that some states in the U.S. require less identification from people forming corporations than they require from those applying for a library card. We have long noted that one result is the use of anonymous corporations formed in the U.S. for tax evasion by Americans and by people from all over the world, which in turn makes it much more difficult to persuade other countries to cooperate with the U.S. in stamping out tax evasion.

On the bright side, there is a bill — with Democratic and Republican cosponsors in both the House and Senate — that would address this problem. The Incorporation Transparency and Law Enforcement Assistance Act would require that each state finds out and records who is incorporating each company and make that information available for law enforcement purposes.

Arguably this information should be made public for all, but this bill would nonetheless vastly strengthen efforts to crack down on tax evasion, money laundering, terrorist financing and other crimes.


Why Congress Still Needs to Act on Corporate Inversions


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The Obama Administration’s action on Monday to crack down on corporate tax dodging by companies claiming to be foreign (corporate inversions) is the right decision, but Congress needs to act to address the significant problems that remain.

Current tax law blocks only the most outrageous attempts by American corporations to claim a foreign address for tax purposes. The administration's actions enforce the law more effectively but do not strengthen it in any fundamental way.

For example, after a U.S.-foreign merger, the law treats the resulting merged company as domestic if it is 80 percent owned by former shareholders of the U.S. company. The new regulations will prevent corporations from avoiding this rule by, for example, making a party to the merger appear smaller or larger than it really is to create the appearance that the 80 percent threshold is met.

But Congress should fundamentally strengthen the law by lowering the threshold from 80 percent to 50 percent, which the Stop Corporate Inversions Act would accomplish. Under this approach, an American corporation could no longer merge with a foreign company and claim to be a new corporation based abroad even though the majority of its ownership has not changed.

It is also important to eliminate tax benefits that American corporations receive if they become foreign for tax purposes, which motivate inversions. One relates to profits earned in the past (and booked offshore) while another relates to future profits that can be shifted offshore through earnings stripping. Tax experts like Stephen E. Shay, Victor Fleischer and others agree that the plain language of our tax law gives the administration the power to address both of these. Unfortunately the administration’s regulatory action addresses the first problem (avoiding tax on profits earned in the past and booked offshore) but not the second (earnings stripping on future profits).

Congressional action can fully address both problems. First, Congress should require any U.S. corporation that inverts or becomes foreign to pay U.S. taxes it has deferred on profits held offshore. This rule would be similar to the one requiring individuals to pay the income tax they have deferred on capital gains when they renounce their U.S. citizenship.

Second, Congress should end corporations’ ability to strip earnings out of the United States by enacting the strong proposal first introduced by President Obama in his fiscal 2015 budget and recently introduced as legislation by Rep. Mark Pocan of Wisconsin.

These steps, combined with the Stop Corporate Inversions Act introduced by Rep. Sander Levin and Sen. Carl Levin in May, would put an end to the inversion crisis.

While Citizens for Tax Justice agrees with lawmakers that the ultimate goal of Congress should be to enact comprehensive tax reform, the cost of waiting for both parties to come to a sensible agreement is too high.

Congress should immediately enact the anti-inversion reforms outlined here. A decision to wait is a decision to allow more American corporations to pretend that they are foreign simply because loopholes in our tax laws allow it. The victims of inaction will be ordinary patriotic Americans, who pay their taxes every year.


New Proposals from Congressman Pocan and CTJ to Stop Corporate Inversions


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The crisis of corporate inversions remains unresolved in Congress, but some new proposals could set the stage for a resolution.

An August report from CTJ explained that the inversion crisis really consists of three related problems. The first is that American corporations are able to use mergers with smaller foreign corporations to claim a foreign address for tax purposes even though almost nothing has changed about their business, management, or ownership. This problem would be addressed by the Stop Corporate Inversions Act introduced by Rep. Sander Levin and Sen. Carl Levin in May.

The second problem is that those corporations claiming to be based abroad (and corporations that really are based abroad) are able to use “earnings stripping” to make profits earned in the United States appear to be earned in countries where they will be taxed more lightly or not at all. This problem would be addressed very effectively by a new proposal from Congressman Mark Pocan of Wisconsin, and less effectively addressed by a proposal introduced by Senator Charles Schumer last week.

The third problem is that profits American corporations earn offshore through their subsidiaries are supposed to be taxed by the U.S. when they are brought to the United States, but after becoming “foreign,” corporations are able to use accounting tricks to escape that rule. An op-ed from Citizens for Tax Justice and Americans for Tax Fairness explains how this problem can be resolved by requiring corporations that give up their American citizenship to pay taxes they have deferred on these profits, just as individuals who give up their American citizenship must pay any tax on capital gains they have deferred. A CTJ report also explains this idea in detail.

The following describes these proposals in more detail.

Earnings Stripping

As CTJ’s August report explained, earnings are stripped out of the U.S. when a U.S. corporation (which after inversion is technically the subsidiary of a foreign parent corporation) borrows money from its foreign parent corporation, to which it makes large interest payments that wipe out U.S. income for tax purposes. The loan is really an accounting gimmick, since all the related corporations involved are really one company that is simply shifting money from one part to the other.

The August report explained that the strongest proposal to address this is the one President Obama proposed as part of his fiscal year 2015 budget plan — which has now been introduced as legislation for the first time by Rep. Pocan. When the President proposed this provision, the Joint Committee on Taxation estimated that it would raise $41 billion over a decade.

It would, with good reason, apply to all corporations, not just those that have inverted. It would allow a multinational corporation doing business in the U.S. to take deductions for interest payments to its foreign affiliates only to the extent that the U.S. entity’s share of the interest expenses of the entire corporate group (the entire group of corporations owned by the same parent corporation) is proportionate to its share of the corporate group’s earnings (calculated by adding back interest deductions and certain other deductible items). A corporation doing business in the U.S. could choose instead to be subject to a different rule, limiting deductions for interest payments to ten percent of its income.

Sen. Schumer’s proposal is much more similar to the one that President Obama included in his previous budget plans, which is much weaker. Schumer’s proposal only applies to inverted corporations. Most importantly, it would bar an inverted American corporation from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its income. The current rule sets the limit at 50 percent.

Accumulated Offshore Profits

The U.S. theoretically taxes all the profits of American corporations, including the profits earned by their offshore subsidiaries. (The U.S. corporate income tax is reduced by whatever corporate income tax has been paid on these profits to foreign governments.) But U.S. corporations are allowed to defer paying U.S. tax until these profits are officially brought to the U.S., which may never happen. As a result, one of the key questions is what will become of the offshore profits that American corporations’ subsidiaries have accumulated offshore after they invert.

In The Hill, CTJ and ATF point out that deferral is a break we give American corporations, supposedly to help them compete with corporations based in other countries. It therefore makes no sense to continue giving corporations this break once they declare that they are no longer American. In other words, the profits held offshore by a corporation that announces a new foreign address should be subject to U.S. taxes as if they are repatriated to the U.S. at that point. This would only be fair, and would certainly discourage inversions. 


Will the OECD's Recommendations to Stop Corporate Tax Dodging Actually Work?


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On September 16, the Organization for Economic Cooperation and Development (OECD) released the first part of its recommendations to implement its 2013 “Action Plan on Base Erosion and Profit Shifting.” Base erosion and profit shifting, or BEPS as it’s known among international tax experts, is the fancy way of describing tax dodging by corporations that use offshore tax havens. CTJ criticized the action plan in 2013 for not going far enough, and it remains to be seen how much good can be accomplished with the reforms that OECD now recommends.

At the same time, the OECD recommendations are surely a step in the right direction. This is important because many members of Congress, including the top Republicans on the House and Senate committees with jurisdiction over taxes, consider even the OECD’s mild reforms to be asking too much of corporations. Rep. Dave Camp and Senator Orrin Hatch issued a statement in June making clear that they would likely oppose enacting OECD’s recommendations into law. Neither has issued any further statement on the matter.

According to one international law expert, it will likely be five to ten years before many countries enact the recommendations into law. But some countries, like the U.K., France and Australia are expected to be early adopters of the changes, and corporations would need to change their reporting methods in order to comply at least in those countries. This could make it easier for other governments to follow.

Some of the significant recommended changes include the following:

—End the ability of corporations to take advantage of loopholes like the U.S.’s “check-the-box,” which essentially allows a company to characterize a tax haven subsidiary in different ways to different governments so that the profits funneled there are taxed by no government at all. (Such tax haven entities are often euphemistically called “hybrid instruments.”)

For example, right now an American corporation can have an Irish subsidiary that pays royalties to its own subsidiary in Bermuda, which it characterizes as a separate corporation for Irish tax purposes so that it can deduct the interest payments from its Irish taxable income. But the American parent company can tell the U.S. government that the Bermuda subsidiary is just a branch of the Irish company and the payment was a payment internal to the company, meaning there is no profit to be taxed.

—End the shifting of corporate profits through certain countries to take advantage of tax treaties in schemes like the “Dutch sandwich.” In the example above, the Irish government might apply a withholding tax to payments made to Bermuda, but not if they are first routed through a country like Netherlands that has a tax treaty with Ireland precluding such withholding taxes. In theory, developed countries have negotiated such treaties with countries they trust to not facilitate tax avoidance. But the system has obviously broken down, as parties to such treaties including Ireland and the Netherlands are now facilitating tax avoidance by huge corporations like Google and Apple.

—Require country-by-country reporting of sales, profits and taxes paid by corporations to tax authorities, who would then have a better handle on when and how these tax avoidance schemes are being carried out. While it would be helpful to have this information made available to tax authorities who do not currently have it, a much stronger reform would make this information public for all to see. In the U.S., the I.R.S. already collects this type of information (which is necessary for certain purposes like the calculation of foreign tax credits in the American system). Providing information to the government makes a difference only to the extent that corporations are doing something that is actually illegal, but the entire point of the BEPS project is that corporations are able to abuse the system legally, thanks to various tax loopholes. The success or failure of the OECD’s attempts to close those loopholes will be known only to the extent that tax reformers, lawmakers and the public can actually see where profits are booked and what taxes are paid by multinational corporations in different countries.

—Implement new rules determining how intangible assets (like patents and royalties) are valued for transfer pricing. This is intended to address one of the thorniest questions and one that the OECD may not be able to solve without more dramatic reforms. When the OECD’s action plan was first released in 2013, CTJ was skeptical that it could work because

“…the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.”

Transfer pricing rules require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should, in theory, charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But this system has broken down. As we have argued before, when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

A more dramatic reform could eliminate the problems associated with transfer pricing. For example, CTJ’s tax reform plan would end the rule allowing American corporations to defer U.S. profits on its offshore subsidiaries’ profits. With deferral repealed, an American corporation would pay the same tax rate no matter where its profits were earned and would therefore have no incentive to make profits appear as if they were earned in a zero-tax country.


New CTJ Report: Congress Should Require Inverting Corporations to Pay Up Taxes They Owe on Profits Held Offshore


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A new report from Citizens for Tax Justice explains that Congress should change our tax laws to require inverting corporations to pay the taxes they owe, but have deferred paying, on profits they accumulated offshore before inverting. As the report explains, requiring inverting corporations to pay taxes they have deferred on offshore profits would be akin to the existing rule that individuals who renounce their citizenship must pay taxes they have deferred on unrealized capital gains (on appreciation of assets they have not sold). This reform would complement others that have been introduced in Congress to address inversions.

Americans and their lawmakers are increasingly alarmed by corporate inversions, in which an American corporation merges with a smaller foreign one and then claims the foreign country as its address for tax purposes even though little or nothing has changed about where the business is conducted or managed. Burger King’s plans to declare itself Canadian and Pfizer’s stated commitment to pursuing an inversion are only the latest evidence of the crisis.

Under current law, both individuals and corporations are allowed to defer paying U.S. taxes on key parts of their income, but wealthy individuals are required to give up this benefit when they renounce their American citizenship, while corporations are not. Individuals are allowed to defer paying income taxes on capital gains until they sell their assets. But upon renouncing their U.S. citizenship, wealthy individuals are required to give up that benefit and must pay tax on their unrealized capital gains.

Corporations, on the other hand, are allowed to defer paying income taxes on their offshore profits until those profits are officially brought to the United States, and continue to enjoy this benefit even after renouncing their U.S. citizenship. After becoming a foreign company for tax purposes, a corporation is likely to use accounting tricks to ensure those profits are never subject to U.S. taxes.

The CTJ report explains there is no reason to continue granting this tax break to corporations that declare they are no longer American. This is especially true given that after inverting a corporation can often route these offshore profits through its new foreign parent company to get them into the hands of U.S. shareholders without triggering the U.S. taxes that would normally be due upon repatriation.

The most straightforward solution is to change the tax code so that these offshore profits are taxed as if they are repatriated at the point when the company inverts.

This is the one part of the inversion crisis that, so far, is not addressed by any legislation before Congress. A bill introduced in May by Rep. Sander Levin and Sen. Carl Levin would stop inverted companies from being treated as foreign for tax purposes. Legislation introduced this week by Sens. Charles Schumer and Richard Durbin would prevent inverted companies from dodging taxes on future profits through the practice called earnings stripping.

Left unaddressed is the part of the problem described in CTJ’s report — the ability of inverted companies to avoid taxes on the profits they have already earned and hold (at least as an accounting matter) offshore. Edward Kleinbard, former chief of staff to the Joint Committee on Taxation, argues that avoiding U.S. taxes on these profits is one of the major reasons why corporations invert.


Burger King Reduced Worldwide Tax Rate by 60 Percent After Private Equity Takeover


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Burger King's recent decision to pursue a corporate inversion to Canada is the culmination of years of maneuvering to dodge paying its fair share in corporate taxes. In fact, Burger King was able to cut its average worldwide effective tax rate by more than 60 percent over the past few years likely through complex accounting maneuvers.

How did Burger King accomplish such a substantial tax cut? The first key point to know is that Burger King only owns a small percentage of its thousands of restaurants worldwide, with the overwhelming majority of its restaurants owned by franchisees who pay Burger King for use of its intellectual property. From the beginning of 2010 (when private equity firm 3G Capital purchased the company) through the end of 2013, Burger King went from owning about 12 percent of its worldwide restaurants (1,422), to owning less than half a single percent of its worldwide restaurants (52).

Unlike physical properties such as restaurants, stores or even factories, it's relatively easy to shift the location of income-generating intellectual property from one jurisdiction to a different low- or no-tax jurisdiction. This may explain why, after its purchase by 3G Capital, Burger King reorganized its business structure by shedding ownership of nearly all the individual restaurants that it owned.

Because a substantial portion of Burger King's income is generated through rents and fees that it charges these franchisees for use of its intellectual property, much of its business structure is akin to infamous tax-dodging companies like Apple and Google.

A 2012 investigation by Tom Bergin confirmed that Burger King had been following in Apple and Google's footsteps by shifting the income it generates across Europe to a low-tax subsidiary (in this case in Switzerland), instead of allowing it to flow back to the United States where its income-generating intellectual property was created in the first place. While the rest of its international tax structure has not been publicly disclosed, the company does admit to having subsidiaries not only in the infamous tax haven of Switzerland, but also in Singapore, Luxembourg, Hong Kong and the Netherlands.

Burger King's strategy of profit-shifting and relying more heavily on intellectual property came to fruition in 2013, when it was able to lower its worldwide effective tax rate to a mere 11 percent. For purpose of comparison, the company's average worldwide effective tax in the three years before it embarked on its aggressive tax dodging maneuvers was nearly 28 percent, meaning that company was able to lower its tax rate by 60 percent over just a few years.

The company’s decision to merge with Canadian coffee and donut chain Tim Hortons would allow the company to continue its tax avoidance strategy by never having to pay U.S. taxes on income that it has shifted to its offshore tax haven subsidiaries and providing it even more opportunities for profit shifting in the future because Canada has a territorial tax system, which does not require companies to pay taxes on their foreign earnings.

Burger King is one of several U.S.-based companies that is under scrutiny for announcing plans to undergo a corporate inversion. These plans have stoked public outrage and even prompted legislative fixes that so far have gone no where.

At a minimum, Congress needs to enact legislation proposed by Sen. Carl Levin and Rep. Sander Levin to stop Burger King and more than a dozen other companies with plans this year to take advantage of the corporate inversion loophole. In addition to the Levin legislation, several other proposals described in a recent CTJ report would ensure the tax code does not reward companies like Burger King for inverting. 


Everyone Who Calls for Repealing the Corporate Tax Is Wrong


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Every now and then something happens — a Senate investigation into Apple’s tax dodging, Burger King’s plan to become Canadian — that demonstrates that our corporate income tax is very ill. Every time, pundits debate how to cure this disease, offering various tax reform proposals. And every time, a few suggest we shoot the patient, that is, repeal the corporate income tax, which is expected to raise $4.6 trillion over the coming decade.

The idea of repealing the corporate tax seems to have just one virtue, which is that it’s simplistic enough to fit into a blog post or op-ed. In every other way this idea is terrible.

The argument made is usually some variation of the idea that corporate profits are eventually paid out as stock dividends to shareholders who pay personal income taxes on them, so there is no need to also subject these profits to a corporate income tax. But in real life that’s not how things usually work.

CTJ published a fact sheet last summer that explained three very important reasons why we need the federal corporate income tax.

First, a corporation can hold onto its profits for years before paying them to shareholders. This means that if the personal income tax is the only tax on these profits, tax could be deferred indefinitely. It also means that people with large salaries could probably create shell corporations that would sell their services. Their income would then be transformed into corporate income and any tax would be deferred until they decide to spend the money, which could be decades later, if ever.

Second, even when corporate profits are paid out as stock dividends to shareholders, under our current system about two-thirds of those stock dividends are paid to tax-exempt entitles, such as pensions and university endowments which are not subject to the personal income tax. In other words, a lot of corporate profits would never be taxed if there was no corporate income tax.

Third, our tax system overall is just barely progressive and it would be a lot less progressive if the corporate income tax were repealed. The corporate income tax is a progressive tax because it is mostly paid by the owners of capital — people who own corporate stocks (which pay smaller dividends because of the tax) and other business assets.

Some have tried to argue that the corporate tax is mostly borne by labor because it chases investment out of the United States, leaving working people with fewer jobs and/or lower wages. But corporate investment is not perfectly mobile and, as a result, the Treasury Department has concluded that 82 percent of the corporate income tax is paid by owners of capital, and consequently, 58 percent of the tax is paid by the richest 5 percent of Americans and 43 percent is paid by the richest one percent of Americans. Congress’s Joint Committee on Taxation has reached similar conclusions.

There are various ways Congress could conceivably repeal the corporate income tax and get around these problems but each presents so many complications and uncertainties that one wonders what could possibly be gained in the effort. One proposal that has received attention would partly offset the cost of repealing the corporate income tax by taxing dividends and capital gains as ordinary income (repealing the lower rates for those types of income) and taxing the gains on corporate stocks each year rather than only when they are realized when the stocks are sold. Those are all fine ideas in themselves, but they don’t make up the revenue loss from repealing the corporate income tax. The net effect of the proposal, as its proponents acknowledge, would be to lose about half the revenue raised by the corporate income tax.

Congress could make additional changes, for example, ending the tax-exempt status of those pensions and university endowments that receive so many stock dividends without paying any tax on them, but that seems politically unrealistic to say the least.

Moreover, repealing the corporate tax could create worrisome problems of tax compliance. For example, Jared Bernstein has noted that we do, of course, have many businesses structured as “pass-through” entities whose profits are subject only to the personal income tax and not the corporate income tax, but these businesses are linked to even greater tax compliance problems.

"One study found that the tax gap — the share of taxes owed but not collected — was 17 percent for corporations and 43 percent for business income reported by individuals. That research is over a decade old, but more recent tax gap research found that business income taxed at the individual level was the single largest source of the gap, and that sole proprietors report less than half of their income to the I.R.S."

The bottom line is that repealing the corporate income tax is a seemingly simple answer that would create far more problems than it would solve and would almost surely result in less revenue, a more regressive tax system, and even more complexity and compliance problems than we have now.


Will Congress Let Burger King's Shareholders Have It Their Way?


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Burger King’s statement that its planned merger with the Canadian donut and coffee chain Tim Hortons is not about avoiding taxes might be one of the biggest whoppers we’ve heard about corporate inversions.

The merger will allow Burger King to claim for tax purposes that it is owned and controlled by a smaller Canada-based company. We’ve heard this song before — several times in the last three months (Medtronic, Mylan, Walgreen and Pfizer) and 13 so far this year. Corporate bosses and their lobbyists continue to claim that they are doing nothing wrong. Gaping loopholes in the law allow them to do this, and without action from Congress or the administration, there is no incentive for corporations to stop exploiting those loopholes. 

Corporate inversions have made so many headlines lately that even people outside the tax world know how big businesses are using the practice to game the system: Buy a smaller foreign corporation, maintain the same executives, continue managing the firm from an office in the United States, maintain most of the same shareholders, but file a bit of paperwork and claim the company is based in a foreign county. In the case of Burger King, that country is Canada. The most likely motivation for this sleight of hand is tax avoidance.

Inversions are confusing partly because corporations pursue them for different reasons. For example, some corporations invert to avoid paying U.S. taxes on the profits they have already earned (or claimed to have earned) offshore. After inverting, corporations can get this offshore cash to their shareholders without paying the U.S. tax that would normally be due. This may not be relevant for Burger King, which has little offshore cash compared to other corporations.

But another reason corporations invert is to avoid paying U.S. taxes on profits earned in America in the future, and this is relevant for a company like Walgreen’s (which was considering inversion until recently) or Burger King. This can be accomplished through earnings stripping, a practice that effectively shifts profits earned in the United States to another country where they will be taxed less. So for Burger King, this means it could continue to earn profits off the burgers and fries its sells to Americans yet use accounting tricks to shift those profits to Canada so they will not be subject to U.S. taxes.

Looking past the technical details, the bottom line is this: It’s insulting that the company intends to continue profiting by selling a quintessentially American product to U.S. consumers but then pretend to be Canadian when the time comes to pay taxes.

Of course, the real insult is that a majority of our elected members of Congress have so far not closed the loopholes in our tax laws that allow this nonsense to continue. Several proposals, which have been described by Citizens for Tax Justice, would accomplish this.

Sadly, our lawmakers’ motto regarding big, powerful corporations seems to be “Have it their way.”


Kinder Morgan Doesn't Want to Be a Limited Partnership Anymore--But They're One of the Few


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Last week the energy giant Kinder Morgan Energy Partners announced that it will restructure itself into a traditional C corporation, moving away from the “master limited partnership” (MLP) structure it helped to popularize almost a quarter century ago. While C corporations pay corporate income tax on their profits, the income of MLP’s is passed through to its individual partners and taxed (at least in theory) under personal income tax rules, so these companies can bypass the corporate income tax entirely.

Unlike most partnerships, MLP's are publicly traded. Soon after the first MLP was created in the early 1980s, Congress clamped down on the use of this form: a 1987 law treats most publicly-traded partnerships as corporations for tax purposes. But lobbyists for the extractive industries got an exception for energy companies, including those engaged in exploration, refining and even “fracking.” IRS private letter rulings have gradually expanded the scope of the energy-related activities that MLP’s can engage in, and as a result the number and value of these tax-exempt entities has grown dramatically

Kinder Morgan appears to be swimming against this tide. By all accounts, the company’s sheer size is making the MLP form too unwieldly, and may even be hindering the correct valuation of their assets: Kinder Morgan actually forecasts that moving to the C form will constitute a smart tax move, apparently because they expect many of their depreciable assets to be given a sharply higher valuation after the deal goes through. Or maybe there's more that we don't know. Perhaps the merger to a corporate form will be followed by an inversion transaction or just more aggressive offshore profit-shifting.

Kinder Morgan’s announcement came on the same day that a Treasury Department spokesperson signaled Treasury’s concern about the growing number of MLP’s and its effect on future federal tax revenues. The Obama administration’s concern about MLP’s is understandable: earlier this year, a General Accounting Office (GAO) report found that, because of the complexity of partnerships, the Internal Revenue Service simply doesn’t have the resources to audit these business structures, even when they suspect them of wrongdoing.

Treasury seems to be considering halting the gradual expansion in the scope of these partnerships. Maybe it's time for Congress to shut them down altogether. For every Kinder Morgan abandoning the MLP form as too complicated, there are dozens of others lining up to take advantage of this hole in the tax system. Companies, particularly large publicly-traded ones, shouldn't be able to just restructure to take advantage of the tax-dodge flavor of the day. At a time when the corporate tax is under siege from companies seeking to invert to tax havens, spinning off REITs, or just agressively shifting profits offshore, the MLP invasion is a clear example of a tax break that Congress could stop in its tracks.

 


New CTJ Report: Proposals to Resolve the Crisis of Corporate Inversions


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The ongoing wave of American corporations inverting, or reincorporating as offshore companies to avoid U.S. taxes, has resulted in a bewildering variety of solutions being debated in Washington and in the editorial pages. A new report from Citizens for Tax Justice explains how these proposals differ and which are most effective.

The proposals vary in several ways. Some target inversion by stopping the IRS from recognizing the “foreign” status of a corporation that has not actually moved abroad except on paper, while others target the tax dodging practices that inversion facilitates and which provide its true motivation.

Contrary to corporate lobbyists’ claims, corporations do not seek to become foreign for tax purposes simply because other countries have lower statutory corporate tax rates. They do it because inversion makes it easier to use accounting tricks to dodge U.S. taxes. For example, an inverted company can strip earnings out of the American business by making large interest payments to the ostensible foreign company that owns it, and it can use accounting tricks to move offshore profits into the U.S. without triggering the tax normally due when U.S. companies repatriate offshore profits.

An American corporation can accomplish these feats after it creates, through inversion, the pretense that it’s owned by a foreign company, even if this change exists only on paper. So, in addition to changing the basic rules about when an American corporation will be recognized as having become a foreign one (the basic proposal to crack down on inversions), many people in Washington are also thinking about ending these two tax dodges to eliminate the incentives to invert.

Another difference between the proposals being debated is that one approach would do this through legislation while another would accomplish this through regulatory changes under existing law. The regulatory route is important in case Congress fails to provide a legislative solution — which seems increasingly likely given some of the impossible conditions key lawmakers have placed on approving any legislative solution.

There is nothing inevitable about corporate inversions. There is no fundamental reason why corporations that are American in every sense and that benefit from taxpayer-funded services should be allowed to pretend they are foreign when it comes time to pay taxes. Congress and the White House have the tools to solve this problem, and simply need to choose the right ones.


Congress Wants to Give Businesses a $276 Billion Tax Break That CEOs say Doesn't Spur Investment


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All is quiet in the streets of the nation’s capital as members of Congress have fled to their home districts for their annual August recess. But as is the case every August in recent years, our elected officials left a lot of unfinished business.

Among this incomplete work is the future of “bonus depreciation,” which is as contradictory as it sounds. This huge tax break allows companies to accelerate tax write offs for equipment and other infrastructure investment. First enacted to address the recession during the George W. Bush administration, it has been repeatedly re-enacted, expanded during the most recent economic collapse and finally expired at the end of 2013.

Defenders of bonus depreciation argue that this special tax break gives businesses a needed incentive to engage in risky infrastructure investments. But, as we noted previously, the Congressional Research Service published a report last month concluding that bonus depreciation doesn’t appear to have a meaningful impact on corporate investment decisions. In fact, the CRS argued, the only thing bonus depreciation is less good at than encouraging short-term investment is encouraging long-term investment.

Just when it seems the case for bonus depreciation cannot get any weaker, now business leaders have admitted that it has no effect on investment. A new survey from Bloomberg BNA confirms the CRS’s finding that the expiration of bonus depreciation is hardly ruffling a feather among most Fortune 500 corporations. BNA surveyed 100 leaders at large U.S. businesses to find out how, if at all, changes in bonus depreciation and related tax rules are affecting their decisions on capital expenditures, and found that 83 percent of these business leaders believed the expiration of these tax breaks has not affected their capital expenditures in 2014.

Nonetheless, the House of Representatives voted in July to make bonus depreciation permanent (at which point the term “bonus” would apparently no longer describe this break) at a projected cost of $276 billion over a decade.

While CEOs say this break doesn’t spur investment, this doesn’t mean that the business community is indifferent about the fate of bonus depreciation, of course.  Even if businesses aren’t basing their decisions on these tax breaks, they certainly would welcome their extension. As former Treasury Secretary Paul O’Neill put it, “I never made an investment decision based on the tax code...If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.” 

And, Washington being Washington, some lawmakers are quite interested not just in extending bonus depreciation but in broadening its scope. California Rep. Jeff Denham is renewing his call to make bonus depreciation a permanent feature of the tax code—and to extend this tax break to businesses investing in “fruit- and nut-bearing trees and vines,” presumably to benefit almond growers in his district. The bill passed by the U.S. House of Representatives last month would do both of these things.

The Senate has taken a different approach. The Senate Finance Committee approved a bill that would extend bonus depreciation, along with a package of additional tax breaks that mostly benefit businesses, for just two years. While the House has voted to make certain tax breaks (including bonus depreciation and several others) permanent, the Senate seems content to stick with Congress’s traditional, but very problematic, practice of extending such tax breaks (the infamous tax extenders) for a couple of years at a time. The nation would be better served if bonus depreciation, along with the rest of these tax breaks, were allowed to die. 

 


Inversions Aside, Don't Lose Sight of Other Ways Corps. Are Dodging Taxes


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While Congress’s attention has been riveted on the saga of a handful of corporations making high-profile attempts to invert to foreign countries, Microsoft's recent announcement that it's holding a staggering $92.9 billion offshore is a stark reminder of the far more consequential tax avoidance practiced by Fortune 500 companies that remain based in the United States.

Microsoft admits in its annual financial report that it would owe $29.6 billion if it paid taxes on the cash it’s stashing offshore. In the past year, Microsoft moved $16 billion offshore, which is more than the total amount the much-maligned inverter Medtronic currently holds abroad. Only General Electric and Apple disclose having more offshore cash than Microsoft.

Even more important, the company’s annual report essentially admits that the vast majority of its offshore profits are being held (at least on paper) in jurisdictions with tax rates very close to zero. Microsoft estimates that if these profits were brought back to the United States, it would pay an effective tax rate of just under 32 percent. Since the U.S. tax on repatriated profits is 35 percent minus any taxes previously paid to foreign jurisdictions, this suggests that the company has paid an overall tax rate of about 3 percent on these profits to date.  

While the company is required to disclose all its “significant” foreign subsidiaries, none of the 12 subsidiaries the company now discloses are in places with 3 percent tax rates. As the Wall Street Journal reported last year, Microsoft used to disclose “more than 100” subsidiaries. Academic research suggests that in at least some cases, large multinationals that disclose fewer subsidiaries are doing so not because the subsidiaries no longer exist, but because they don’t want to disclose them.

As we have recently noted, companies know they can get away with this because of a loose accounting rule that only requires they disclose “significant” subsidiaries. It’s within the power of Congress and federal regulators to require big multinationals to disclose all of their foreign subsidiaries—including the beach tax haven subsidiaries that tech companies have found so helpful in shifting their U.S. profits abroad.

The wall-to-wall media coverage that has been lavished on corporate tax inversions has shed welcome light on the topic of offshore income shifting, and Walgreen’s recent decision to at least postpone its inversion suggests that this attention has had a positive effect. But for every company currently contemplating an inversion, there are 10 major multinationals that continue shifting their profits offshore the old-fashioned way. Congress shouldn’t lose sight of this broader, worrisome trend.


Woody Guthrie on Corporate Tax Inversions


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Some will rob you with a six-gun,
And some with a fountain pen.
Woody Guthrie, “Pretty Boy Floyd” (1939)

Short of cash, you decide to rob a bank at gunpoint. But on your way out the door, the cops arrest you. You say, “Sorry about all this. I’d sure appreciate it though if you let me keep the money.” Fat chance.

But for big multinational corporations that are caught stealing from the U.S. Treasury, letting them keep the money seems to be exactly what Republicans in Congress favor.

Case in point involves the recent wave of American corporations renouncing their U.S. citizenship, on paper, to avoid billions of dollars in taxes. Almost everybody says they agree that this sleight of hand has to be stopped. But Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, says he’ll support closing this huge new corporate loophole only if the result is “revenue-neutral.” In other words, only if the big corporations get to keep the money.

Hatch is not an outlier. In fact, his screwball position reflects the general view of his party in Congress. Republicans in both the House and Senate are blocking legislative action to stop corporate foreign “inversions” unless the needed reforms are accompanied by a reduction in the statutory corporate tax rate.

“As through this world I’ve wandered,” sang Woody Guthrie, “I’ve seen lots of funny men.” Unfortunately, too many Washington politicians don’t want to make the corporate “funny men” play by the same rules as real people.


How Corps. Are Avoiding Taxes by Using Tax Rule Intended for Small Investors


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In another defection from the corporate income tax base, last Tuesday Windstream Holdings, Inc. announced that it will be spinning off part of its telecommunications assets into a Real Estate Investment Trust (REIT) after it recently received a Private Letter Ruling (PLR) from the IRS approving the transaction. The company, whose 5-year effective federal income tax rate for 2008-2012 was already a paltry 11 percent, will be able to lower its tax rate even more through use of the REIT.

A REIT is to real estate what a mutual fund is to stock and bonds: a way for smaller investors to diversify their holdings by owning a share of a large pool of assets rather than owning individual stocks or properties directly. A REIT, just like a mutual fund, doesn’t pay an entity-level tax. Instead it distributes its income to the REIT shareholders who pay tax on their respective shares.

REIT rules were added to the tax code in 1960 so small investors could invest in pools of real estate (or mortgages on real estate). To qualify as a REIT, the trust must have at least 100 shareholders. Seventy-five percent or more of the REIT’s assets must be related to real estate: real property or mortgages on real property. Traditional REITs hold property such as office buildings, warehouses, and shopping centers. Another requirement for REIT tax status is that at least 75 percent of the REIT’s income must be from real estate (such as rents or interest on mortgages).

Windstream Holdings is a Fortune 500 company that, according to its website, “is a leading provider of advanced network communications, including cloud computing and managed services, to businesses,” and offers “broadband, phone and digital TV services to consumers.”

It shouldn’t qualify as a REIT. As Windstream itself said, the company is putting its copper and fiber networks into the REIT along with “other” real estate. The Internal Revenue Service opened this can of worms with PLRs allowing wireless communications companies, billboard owners, data centers, and prisons to elect REIT status. Casinos, too. Prison operators argued they were receiving rent for holding prisoners.

Is Windstream in the business of providing communications services or owning and managing real estate? Is Corrections Corporation in the business of operating prisons or holding real property? Are casino operators in the business of real estate or emptying your wallet? The answers seems pretty clear to me.

We don't need these companies to spin off their “real estate” assets so small investors can own a piece. These companies are already publicly traded and investors can buy stock or mutual funds that hold the stock.

Many states are losing tax revenue. First, unlike corporate dividends, there’s no corporate income tax paid first. Then, after the REIT pays dividends to its shareholders, they pay tax to their resident state, say, New York, rather than in the state where the properties are located, say, prisons in Mississippi. Companies are also using REIT subsidiaries to dodge state-level income taxes. Mega-retailer Wal-Mart was assessed $33 million in 2005 by North Carolina related to its use of a 99-percent owned “captive” REIT (executives owned the other 1 percent to reach 100 shareholders); its REIT strategy cut its state income taxes by 20 percent during a four-year period.

The initial motivation behind enacting special tax treatment for REITs might have made sense. But give someone a tax break and other folks, for whom it was not intended, will try to figure out how to use it. This is why we continually argue in favor of a simple, broad-based tax system that has few exceptions. Limit the exemptions, credits, and other special rules and you limit the opportunities for taxpayers to game the system. Until we have a tax system that works like that, Congress should close as many of the loopholes as it can. This is one of them.

The Windstream ruling opens the floodgates for REIT spin-offs for all kinds of companies, from Amazon to Zynga, with AT&T, Comcast, and Verizon in between.  Congress should enact rules to prohibit REIT spin-offs from publicly-traded companies and limit the favorable REIT treatment to the types of activities it was originally intended to benefit.


Statement: Despite Walgreens' Decision, Emergency Action Is Still Needed to Stop Corporate Inversions


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Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding emerging reports that Walgreen Co. will announce Wednesday that, although it still plans to buy Switzerland-based Alliance Boots, it will not use legal maneuvers to reincorporate as a Swiss company to avoid U.S. taxes.

“Reports are stating that Walgreen Co. has decided to set aside — for now — plans to avoid U.S. taxes by reincorporating as a foreign company. Only the proverbial fly on the boardroom wall truly knows what led the company to reach this decision. But a single company backing off plans to exploit loopholes in our tax code to dodge U.S. taxes does not fix the fundamental problem.

“Congress and the Obama Administration still need to act quickly because many other American corporations such as Medtronic, AbbVie and Mylan are still pursuing corporate inversions, while other major companies such as Pfizer have indicated that they may pursue inversion in the near future.

“Walgreens is a quintessentially American company and an easy scapegoat. But the company’s initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.

“Congress needs to, at very least, enact the legislation proposed by Sen. Carl Levin and Rep. Sander Levin that would disregard, for tax purposes, attempts by American corporations to claim a foreign status that only exists on paper.

“Refusing to address inversions except as part of comprehensive tax reform would be like refusing to put out a house fire until there is a detailed blueprint for rebuilding the house. Quick action is needed while there is still something to save.”  


Wall Street a Major Player in Current Wave of Corporate Inversions


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taxhaven.pngThe current wave of inversions may be motivated by tax avoidance, but the real driver behind the deals is Wall Street. Advisers of every sort—investment bankers, attorneys, accountants, private equity and hedge fund managers—are pushing companies to do a corporate inversion before Congress shuts down this loophole. It’s the latest mania from the folks who gave us the dot-com bubble and toxic sub-prime mortgages. 

What’s in it for them? Well, the advisers who facilitate the deals are raking in hundreds of millions of dollars in fees. In all, investment bankers have earned about $1 billion over the last three years on inversion transactions. Goldman Sachs, which is part of a shareholder group including private equity and hedge funds that is pressuring Walgreens to invert, has earned an estimated $203 million advising on inversion deals since 2011.

Major shareholders, too, like inversions for the prospect of increased long-term profits from avoiding tax, but that comes with a cost. The inversion transaction is treated as a taxable sale of the stock, resulting in capital gains taxes of 20 percent. Tax applies to executive stock options, too, through a 20 percent excise tax imposed on insiders that was enacted with the other anti-inversion rules in 2004. In most cases, though, the company executives are being reimbursed for the tax hit, so they feel no pain. It’s the small investors and the mutual funds that will be stuck with a tax bill and no cash to pay it.

So the Masters of the Universe make out again, like the bandits they are, while the rest of American taxpayers make up the loss to the U.S. Treasury through higher taxes, reduced public goods and services, or increased government debt.

To stop inversions Congress will have to stand up to both the multinational corporations that are pursuing these deals and the Wall Street firms that are advising them. What are the odds?


New Bill Would Bar Inverted Corporations from Getting Federal Contracts


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It’s bad enough when an American corporation reincorporates as a foreign company to avoid U.S. taxes even as it benefits from research, education, highways, courts and everything else those taxes pay for. But it’s even worse when these companies are allowed to contract with the federal government and profit from business funded by the American taxpayers.

This is the argument behind the No Federal Contracts for Corporate Deserters Act, a bill introduced in the House and Senate on July 29 to bar corporations that invert (reincorporate as foreign companies) from getting federal procurement contracts.

Corporate inversions have been happening for decades, and Congress has enacted laws that are supposed to prevent corporations from dodging taxes by inverting and prevent inverted companies from getting federal contracts. Those rules were never entirely effective, and companies such as Ingersoll-Rand, which reincorporated in Bermuda before those laws were passed, have found numerous ways to get federal contracts through grandfathering and other loopholes and are doing a billion dollars worth of business each year with the federal government.

But the recent wave of announced inversions is a much bigger problem. Corporations have figured out how to circumvent the rules entirely, adding the slightest sheen of legitimacy to the arrangement by obtaining a smaller foreign company and then claiming that the newly merged, restructured company is based in the foreign country.

This is why the medical device maker Medtronic and the pharmaceutical company AbbVie have recently announced plans to acquire Irish companies and reincorporate in Ireland. Similar moves are being considered by Walgreens and (once again) Pfizer.

In May, several lawmakers introduced the Stop Corporate Inversions Act to strengthen the anti-inversion provisions in the tax rules. The No Federal Contracts for Corporate Deserters Act would update the contractor rules the same way. In other words, the two bills are different ways of addressing the current explosion of companies seeking to invert, providing lawmakers separate opportunities to act.

Under the existing rules, a merger with a foreign company can change almost nothing about the American business and yet it can claim to be a new, restructured entity based offshore, with no adverse consequences. The newly merged company can be managed in the U.S. and have significant business in the U.S., and up to 80 percent of its stock can be owned by the shareholders of the original American corporation — and yet it will be considered a brand new company based offshore for tax purposes, not subject to any bar on federal contracting.

Under the two new bills, this would be impossible unless the newly merged company really does become foreign-owned, meaning less than 50 percent of its stock is owned by the shareholders of the American company, and it is actually managed in the foreign country. That would mean an American corporation could no longer simply buy a smaller offshore company and then fill out some paperwork to create the fiction of being foreign.

As more and more corporations announce plans to invert, Congress is under increasing pressure to act to stop them. But key lawmakers, like Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, have laid out conditions that make it extremely difficult to imagine how progress will be made during this Congress.


Yes, the Treasury Department Can Help Achieve Tax Reform, but Congressional Action Would be Far Better


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In a Tax Notes article published Monday, Harvard Law School professor Stephen E. Shay bemoans the recent wave of corporate inversions and suggests that if Congress does not take legislative action, the Obama Administration could take regulatory action to prevent them.

No longer an arcane term, a corporate inversion is when a U.S. company merges with a foreign company and, for tax purposes, subsequently restructures to claim the address of the foreign company as its headquarters even while maintaining operations in the United States. This practice has made headlines lately in part because inversions are another way for companies to avoid U.S. taxes and in part because of the volume of large companies who have announced plans to do so.

Shay, a former tax lawyer for the Obama Administration, made headlines because he said the Treasury Department could stop inversions by using its regulatory powers rather than waiting for Congress to enact changes in the tax laws. Specifically, Shay argued that Treasury could prevent inverted companies from taking interest deductions against their U.S. profits, and could also make it harder for inverted companies to bring their offshore cash back to the United States tax-free.

It probably doesn’t matter much whether Shay is technically correct. His assertion is contrary to Treasury Secretary Jacob Lew’s recent assessment that the Obama Administration simply doesn’t have the authority to prevent inversions through regulatory action. And, of course, in the face of House Speaker John Boehner’s recent effort to bring suit against the Obama administration for allegedly “encroach[ing] on Congress’s power to write the laws,” any effort by the Treasury Department to end inversions by administrative fiat likely would create a firestorm of criticism.

Critically needed revenue is at stake. Executive action on inversions would be welcome but is no substitute for legislative action.

In any case, if neither the Obama administration nor its congressional foes think highly of an administrative approach to ending inversions, Shay’s recommendations are unlikely to see the light of day anytime soon.

To be clear, federal regulations are a vital component to every tax reform effort.  Every day in Washington and the states, tax administrators must find ways to implement tax laws enacted by lawmakers. These laws are often poorly specified or even internally contradictory, and it’s up to the Treasury Department and their state equivalents to write regulations that translate these laws into a properly functioning tax system.

In fact, just in the past week we’ve identified two other areas in which clearer and better-enforced regulations could help to achieve corporate tax reform: requiring more complete disclosure of corporations’ foreign subsidiaries , and requiring companies with offshore profits to admit whether those profits are being held in foreign tax havens. These are important steps, and it’s entirely within the authority of federal regulators to make these changes.

But whenever the proper scope of this federal regulatory power is murky, the best approach is for Congress to clarify the laws rather than having tax administrators attempt to interpret the laws.

Shay’s ideas should be taken seriously. If the current regulations governing corporate inversions are too poorly specified to do the job they are supposed to do, the Treasury Department should rewrite them. But administrative or executive action is not the only answer. Congress could eliminate any uncertainty about whether Shay’s specific recommendations are within Treasury’s powers by taking immediate legislative action. And as we’ve noted, President Obama has laid out a very straightforward set of reforms that could halt inversions. 


Nike's Disappearing Tax-Haven Subsidiaries: Lost at the Beach?


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It’s far more common to see bare feet than sneakers on the streets and beaches of Bermuda, but major athletic footwear manufacturer Nike reports having six subsidiary companies on this island nation with population of about 65,000 people.

That’s six less than the dozen it reported last year, but it’s still a lot. If it sounds a bit fishy, it’s because it is.

As CTJ documented in a June report, the vast majority of Fortune 500 companies (72 percent in 2013) disclose having subsidiaries in tax havens—countries that levy little or no tax on at least some corporate profits.  

Nike is one of the more entertaining examples of this. CTJ noted last year that Nike admitted having a dozen subsidiaries in Bermuda—and had named almost all of them after specific brands of Nike shoes. One plausible explanation for this naming convention is the company has shifted ownership of intangible property (patents, etc.) related to these shoes into the Bermuda subsidiaries. We can’t know this, of course, but the obvious question to ask is this: if you’re a sneaker manufacturer with a dozen subsidiaries located in a tiny country where the most popular footwear is flip-flops, what legitimate economic rationale can there be for this?

CTJ’s analysis of Nike’s Bermuda subsidiaries drew a little attention last year, so we were eager to see whether Nike’s newest annual report would continue disclosing these subsidiaries, especially since some of the biggest offshore tax avoiders have discreetly scaled back their disclosure of tax haven subsidiaries in recent years. Unfortunately, a loose accounting rule allows companies to get away with only disclosing subsidiaries that are “significant.” So it was no big surprise that when Nike released its 2014 financial report late last Friday, fully half of the Bermuda subsidiaries they company reported owning last year had disappeared from their subsidiary list.

So what happened to the missing Nike subsidiaries? It’s possible that they were sold. But it’s also possible that the company simply hopes it can get away with not disclosing this potentially-embarrassing information going forward.

One thing is clear: whatever else may have changed in the past year, Nike definitely still has substantial foreign cash stashed in low-tax havens. We know this because Nike is one of the relatively-few Fortune 500 companies that disclose how much tax it would pay on repatriation of its permanently reinvested earnings (PRE). The company estimates that if it repatriated its offshore cash, it would have a $2.1 billion tax bill on their $6.6 billion in PRE. This is a 32 percent tax rate, the implication of which is that they’ve paid about 3% on their offshore profits so far. And it’s hard to find a foreign tax rate that low outside of, say, Bermuda.

The waters of international corporate tax avoidance are murky. It’s usually impossible for the layperson to have any idea what sort of tax dodges big multinationals engage in, especially since they cannot convene a special congressional investigation. Data on foreign subsidiaries are one of the few easily available indicators of likely tax avoidance. We should have more access to this data, not less.


Stop the Bleeding from Inversions before the Corporate Tax Dies


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If you were listening to last week’s Senate Finance Committee hearing on corporate inversions, you might have thought you’d accidentally stumbled into a HELP (Health, Education, Labor & Pensions) Committee hearing on some strange new epidemic. Finance Chairman Ron Wyden (D-OR) and several witnesses used medical analogies to talk about the wave of corporate mergers that are allowing U.S. companies to invert into foreign-based companies and avoid U.S. taxes.

In his opening remarks Sen. Wyden noted that inversion virus, multiplying every few days, is the latest outbreak of a tax code infected with the chronic diseases of loopholes and inefficiencies.

But witness Allan Sloan, senior editor at Fortune Magazine and author of the recent Fortune cover story on inversions, put it best—comparing the inversions to an emergency-room patient who is bleeding out. First you put on a tourniquet, stabilize the patient, and then deal with the underlying problem.

No doubt about it, the patient—the U.S. corporate tax code—is losing massive amounts of blood through corporate inversions. If we don’t deal with it soon there will be nothing left for Congress to fix when it finally gets around to tax reform. The corporate tax base will have been mostly eviscerated.

President Obama, in a Los Angeles appearance on Thursday and in his Saturday weekly address, also called on Congress to close the loophole now. Jack Lew, Secretary of the Treasury, followed with an op-ed in today’s Washington Post.

The recent wave of inversions is being driven by Wall Street: advisers are telling their corporate clients they’ve got to do this now. The iconic American drugstore Walgreens is considering an inversion in its merger with Alliance Boots, moving the corner of happy and healthy to somewhere in the Swiss Alps. Investment firms, hedge fund managers, and private equity investors are pressuring the company to do the inversion.

We’ve got an emergency here: it’s a Wall Street mania. The Wall Street that gave us massive indigestion with the dot-com bubble and a financial meltdown with toxic sub-prime mortgages that left us with an anemic economy is the same Wall Street that is puncturing what’s left of the U.S. corporate tax base.

Congress needs to stand up to Wall Street and the multinationals and stop the bleeding before it’s too late.


Simply Changing One Rule Could Yield More Transparency Regarding Corporate Profits/Taxes


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While most of us consider ourselves upstanding, taxpaying citizens, imagine if Uncle Sam had a rule that stated individuals must report all their income to the IRS–unless it’s “not practicable” or too difficult to do so. And imagine if the government left it entirely up to taxpayers to decide what “too difficult” means.

Under such loose standards, federal revenue from individual taxes likely would plummet and more taxpayers would take advantage and stash their income in such a way that they could claim it would be impractical to report it to Uncle Sam.  The problem is that this “not practicable” standard is not imaginary. It actually exists and is applied to corporations’ offshore income.

While much media attention recently has focused on the tax loophole that permits inversions, or corporations changing their business address to a foreign postal code to avoid U.S. taxes, an equally toothless regulation from the Financial Accounting Standards Board (FASB) allows hundreds of Fortune 500 corporations and other highly profitable companies to avoid telling Uncle Sam how much money they have parked offshore and whether or how much they have paid in taxes to foreign governments on this cash. It’s an important issue to examine because rules that allow corporations to permanently hoard earnings offshore and technically never bring them to the United States means the U.S. Treasury is missing billions in needed tax revenue.

While loose rules mean we will never know exactly how much money all U.S. companies all holding offshore to avoid U.S. taxes, accounting rules require publicly traded companies to report their offshore earnings to shareholders. Among the Fortune 500, $2 trillion is parked offshore. A CTJ analysis of their financial filings finds that if this money were brought to the United States, these companies would owe $550 billion in taxes.

It’s worth taking a step back to discuss how we got here and what we can do to fix this. Regarding offshore profits, FASB rules state companies must either estimate the tax bill that it would pay on repatriation of their foreign profits, or must state that they are unable to calculate this bill. Not surprising, the vast majority of companies disclosing offshore cash take advantage of this loophole and claim, following the exact wording of the FASB rule, that it is “not practicable” to calculate their tax bill on repatriation. A recent CTJ report found that of the 301 Fortune 500 corporations that disclose holding offshore case, 243 use the “not practicable” loophole.

Tax experts long have suspected that this claim is absurd: multinationals typically employ an army of accountants to help monitor their tax strategies at home and abroad, and they very likely have a good idea of the potential tax hit from repatriating offshore cash. A recent informal disclosure by Medtronic—one of the companies currently attempting an inversion—backs this up. A Medtronic representative recently told the Minneapolis Star Tribune that the company has paid a foreign tax rate of between 5 and 10 percent on its “permanently reinvested” foreign income, which means the company would face a tax rate of 25 to 30 percent on repatriation. This disclosure is notable because it’s completely at odds with what the company has officially told shareholders in its annual reports (including the one released the same week as this informal disclosure): that it is unable to make this calculation.

The simultaneous disclosure and non-disclosure on the part of Medtronic illustrates perfectly what many have long suspected: that many if not all companies that refused to disclose the potential tax bill on repatriation know full well what they would pay, and choose not to disclose this information because FASB rules give them an easy way out.

But there’s an easy fix here. FASB could easily rewrite its regulations in a way that would require Fortune 500 corporations to disclose whether their offshore profits are in tax havens.

Regulations currently require companies to disclose “[t]he amount of the unrecognized deferred tax liability […] if determination of that liability is practicable or a statement that determination is not practicable.”

Removing the “if practicable” clause and simply requiring companies to disclose “the amount of the unrecognized deferred tax liability” would end the spectacle of companies like Medtronic concealing their use of tax havens from Congress and the public.

Improving disclosure of the potential tax bills on the offshore profits of multinationals is not an academic exercise: better information on this important topic would benefit millions of shareholders in these corporations and federal policymakers who are being asked to enact even more tax breaks for the biggest multinationals.

Disclosure of potential tax bills is equally vital for decisions currently being made in the halls of Congress. Corporations continue to lobby for all kinds of exceptions to the tax rules, including a tax holiday that would allow them to bring their offshore profits to the United States tax free. Congressional tax writers would presumably be much less interested in granting a so-called tax holiday for foreign profits if full disclosure revealed that much of these profits were being held in low-tax havens such as Bermuda and the Cayman Islands. 


Hedge Fund Managers in the Hot Seat


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What the heck is a derivative and why do we care?

A derivative is a financial instrument whose value and performance depends on another asset. For example, let’s say a lender owns mortgages worth $100 million. The lender can bundle those together and sell interests in the mortgage pool until all $100 million worth is sold. But if, instead, he sells derivatives contracts whose performance is tied to the performance of the mortgage pool, the lender can sell many times the original face value of the mortgages. As a result, he magnifies the return and also the risk of the pool of mortgages. Anyone remember AIG and the 2008 financial crisis?

The advantages and disadvantages of derivatives are many, but I’d like to focus on just two:

1)      the use of derivatives to game the tax system, and

2)      how derivatives contribute to the financialization of our economy.

On Tuesday the Senate Permanent Subcommittee on Investigations questioned hedge fund managers about their use of a complicated financial derivative known as “basket options” to avoid both taxes and regulatory limits on excessive borrowing. Representatives from Barclays and Deutsche Bank, which developed the strategy that they sold to hedge funds, also testified.

It’s just the latest in a series of investigations about the misuse of derivatives for tax purposes. See, for example, earlier reports about the J.P. Morgan Whale Trades and how offshore entities use derivatives to dodge taxes on U.S. dividends. While there are plenty of reasons why financial managers use derivatives, chief among them is avoiding taxes.

Tax-avoidance derivatives are created to take advantage of loopholes that give some special treatment to particular taxpayers, industries, or types of income. For example, if I own a partnership interest, part of the income I receive may be ordinary income subject to my highest marginal tax rate and some of it may be long-term capital gains that are taxed at a maximum income tax rate of 20 percent. On the other hand, if I own a derivative tied to the performance of a particular partnership and I keep the derivative for at least a year, all of my income may be treated as long-term capital gains. When Congress got wind of this game, they shut it down some years ago.

Unfortunately, Congress just can’t keep up with all of the derivatives that the financial industry invents to game the tax system. That’s the main reason why we need a tax system that taxes all kinds of income at the same rates. Whenever Congress passes a special rule that benefits a certain type of transaction or taxpayer, tax attorneys and accountants quickly come up with ways for their wealthy clients to qualify for the tax break in ways that Congress never intended.

Derivatives also contribute to the financialization of the economy—an increase in the size and importance of the financial sector relative to the overall economy. In 1950, financial services accounted for 2.8 percent of the U.S. gross domestic product. By 1980, that number was up to 4.9 percent and in 2008 in was 8.3 percent.

At some point—and many believe we are there or way past there—continued financialization of the economy has major negative consequences: rising inequality, reduced investment by other sectors, and risk magnification, just to name a few. Derivatives not only add to but compound these negative consequences because there is no limit to the amount of derivatives that can be issued.

Derivatives have another ugly side: many are created in offshore tax haven jurisdictions because they cannot be legally used in the U.S. (or other real countries). The derivatives that contributed to the collapse of Enron at the turn of the millennium and the staggering losses of AIG and other financial institutions in the 2008 financial meltdown were mostly related to transactions in offshore jurisdictions.

Kudos to Sen. Levin and the Permanent Subcommittee on Investigations for putting the spotlight on this important issue. A functioning Congress would take quick action to fix the problem. Sadly, however, too many of our legislators are fervent supporters of evil behavior when it comes to taxes.


Senate Hearing on Inversions Indicates No Bipartisan Progress on Addressing the Crisis


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Today the Senate Finance Committee discussed corporate inversions and other problems with the U.S. corporate tax code but showed no signs of bipartisan agreement on a solution. The hearing was held mainly to address the recent wave of corporations making bids to invert, or restructure (on paper) as foreign corporations to avoid U.S. taxes.

While committee chairman Ron Wyden (D-OR) called for immediate action from Congress to prevent corporations from avoiding taxes by inverting, the committee’s ranking Republican, Orrin Hatch, said his support was conditional on several stipulations that probably cannot be met by any reasonable legislation.

The public focus on corporate inversions began in April as the pharmaceutical giant Pfizer made a bid to merge with a smaller foreign company and then call itself a foreign corporation for tax purposes. The drug store chain Walgreens announced that it was considering doing the same. These were followed by the medical device maker Medtronic and the pharmaceutical companies Mylan and AbbVie.

Senator Wyden had previously said that Congress should enact a sweeping comprehensive tax reform that resolves all the problems with our tax code and that also has provisions addressing such inversions, which would be retroactive to May of 2014 to ensure that companies seeking to invert now are not successful in avoiding U.S. taxes. But as the number of corporations seeking inversions increased in recent weeks, Treasury Secretary Jack Lew called for immediate action. Senator Wyden is now calling for temporary legislation to address inversions until Congress can enact comprehensive tax reform.

Such legislation has been introduced in the Senate by Carl Levin (D-MI) and in the House by his brother Sander Levin, the ranking Democrat on the Ways and Means Committee.

During the hearing, Hatch said he could agree to short-term legislation to address inversions, but only if:
—    it is not “punitive,” which he considers the Levin proposal to be,
—    it is not retroactive,
—    it is “revenue-neutral,”
—    it moves the U.S. tax system closer to, rather than farther from, a “territorial” system, which would exempt the offshore profits of our corporations from U.S. taxes.

The Levin legislation that Hatch finds punitive would change the rules so that the newly restructured corporation that results from one of these mergers would be taxed as a U.S. company if it is majority-owned by the same people who owned the original U.S. corporation, or if it’s managed and controlled in the U.S. and has substantial business here. In other words, an American corporation would not be able to use a merger to undertake a “restructuring” that occurs only on paper and then claim to be a foreign company for tax purposes. This seems entirely reasonable and not punitive at all.

As for Hatch’s opposition to any retroactive change in the tax law, waiting even a couple weeks could result in more corporations that merge and claim to be foreign and able to avoid U.S. taxes forever. And a retroactive provision is not particularly burdensome for these corporations, which are on notice that such a change is likely to apply to any deals made from May on and are able to plan accordingly. In fact, Medtronic and other aspiring inverters are actually writing provisions into their merger agreements that allow them to walk away from the deals if Congress changes the rules to deny the tax benefits of inversion.

Finally, Hatch’s call to move towards a “territorial” system misses the problem completely. Hatch and many of the inverting corporations argue that companies are driven to invert because the U.S. taxes the offshore profits of American corporations when they are officially brought to the U.S. (in addition to taxing their domestic profits). Most other countries have a territorial tax system that only taxes the profits earned in that particular country. Hatch and others argue that inverting companies are trying to free their offshore profits from U.S. taxes.

There are many problems with this argument, and the biggest one is that inverting companies are trying to avoid taxes on the profits they earn here in the U.S., not just profits they earn offshore. Several witnesses at the hearing explained that after inverting, corporations typically engage in earnings stripping, which involves loading the U.S. part of the company up with debt that results in interest payments made to a foreign part of the company and interest deductions that wipe out the U.S. income for tax purposes.

For example, the manufacturer Ingersoll-Rand clearly engaged in earnings stripping after it inverted to become a Bermuda company, swiftly shifting from reporting large annual U.S. profits to reporting U.S. losses or very small profits each year along with dramatically larger offshore profits.

Some members of the Finance Committee complained that U.S. corporate tax rate is too high and that a tax reform that lowers the rate is the only answer. But it has been well-documented that the ultimate goal of much corporate tax maneuvering is to make profits appear to be earned in countries with no corporate tax at all like Bermuda, the Cayman Islands, or the British Virgin Islands. So long as loopholes remain that allow this, no reduction in the U.S. corporate tax rate can address this problem.

Comprehensive tax reform is certainly needed, but that cannot become an excuse for Congress doing nothing in the meantime to stop corporate tax avoidance schemes that will be difficult to reverse once they are in place.


House Poised to Throw $276 Billion "Bonus" at Businesses


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On Friday, the House of Representatives is scheduled to vote on a $276 billion bill that would make permanent “bonus depreciation.” This huge tax break for business investment was first enacted to try to address the recession early in the Bush administration. Since then, it has been repeatedly re-enacted to try to stimulate the economy during the much more severe recession starting at the end of the Bush administration. It finally expired at the end of 2013.

Here are some reasons why Congress should allow bonus depreciation to remain expired rather than making it a permanent part of the tax code.

1. “Bonus depreciation” has not helped the economy in the past and is unlikely to help the economy in the future.

A July 7 report from the non-partisan Congressional Research Service (CRS) reviews research on bonus depreciation and finds that it has little positive impact on the economy as a temporary measure and is likely to have even less impact as a permanent measure. The report cites surveys of firms that “showed that between two-thirds and more than 90 percent of respondents indicated bonus depreciation had no effect on the timing of investment spending.”

Businesses will invest more only if they expect to have more sales. In a recession, when consumer demand falls, companies won’t invest more even with extra tax breaks. In a growing economy, business investment will naturally go up, with or without extra tax breaks. That’s why firms that take advantage of bonus depreciation are getting a break for investments they would have made anyway.

This is one reason why bonus depreciation provides far less stimulative effect for the economy than many other measures. The CRS report cites estimates that each dollar the government gives up for bonus depreciation increases economic output by just 20 cents, whereas each dollar the government spends on unemployment insurance increases economic output by more than a dollar.

2. Enacting the permanent “bonus” depreciation measure is hugely hypocritical when lawmakers refuse to approve much smaller, but more effective measures.

The House is set to approve this bill, which would reduce revenue by $276 billion over a decade to help businesses, after refusing for months to take up a $10 billion extension of emergency unemployment insurance, which would provide a greater impact for each dollar spent.

Many of the lawmakers who champion this bill, including Ways and Means Committee chairman Dave Camp, refuse to support other changes to the tax code unless they are part of a sweeping, comprehensive tax reform. In fact, Camp and others have even used this argument to oppose a bill that would raise $19.5 billion over a decade by preventing the “inversions” that more and more American corporations are seeking so that they can claim to be foreign companies to avoid U.S. taxes. Camp claims that Congress should not close the loopholes these companies use to pretend to be “foreign” unless it is done as part of a comprehensive tax reform. And yet, he supports a permanent change in the depreciation rules that would reduce revenue by $276 billion over a decade.

3. Bonus depreciation provides many business investments with a negative effective tax rate. In other words, these investments are more profitable after taxes than before taxes!

Companies are allowed to deduct from their taxable income the expenses of running their businesses, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time

Of course, firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money, i.e., the fact that a given amount of money is worth more today than the same amount of money will be worth if it is received later. For example, $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is an expansion of the existing tax breaks that allow businesses to deduct their capital expenditures more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

The problem this presents is not confined to abstract ideas about the tax code. For example, because the tax code generally taxes the income (profits) of a business, it allows deductions for expenses like interest payments. This means that businesses can invest in equipment with borrowed money and the combination of accelerated depreciation and deductions for interest payments often results in these investments having a negative effective tax rate. This problem exists to some degree with the depreciation breaks that are already a permanent part of the tax code. Bonus depreciation makes the problem considerably worse.

The CRS report explains that for debt-financed investments, the effective tax “rate on equipment without bonus depreciation is minus 19 percent; with bonus depreciation it is minus 37 percent.”

Taxes are supposed to raise the money we need to pay for public programs. But bonus depreciation turns business taxes upside-down, allowing companies to make more money on their investments after taxes than they’d earn if there were no tax system at all.


New Report: Addressing the Need for More Federal Revenue


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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 


41 Million July 4th Travelers Would Have a Nicer Trip if Corporations Paid Their Fair Share


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AAA estimates that 41 million Americans will travel for the July 4 holiday, including 34.8 million who will travel by car — the highest numbers since before the recession put a damper on holiday travel. Those travelers stuck in traffic bottlenecks may wonder why our government — you know, the one we fought the Revolution to have — can’t provide something as basic as roads and bridges that meet our needs. Infrastructure experts are also wondering that, and in fact, the American Society of Civil Engineers has given the U.S. infrastructure a D+. Now things are about to get worse because, once again, some lawmakers refuse to raise revenue to pay for anything.

Most federal funding for highways comes from the federal Highway Trust Fund, which will face a shortfall starting in August because Congress has not adjusted the 18.4 cent per-gallon gas tax and 24.4 cent per-gallon diesel tax, which are not indexed for inflation, since 1993. The fact that they have not been increased to keep up with the rising costs of construction or adjusted to account for reduced fuel consumption now means that these taxes no longer raise enough money to fund our infrastructure needs.

The straightforward solution would be to raise the fuel taxes, a reform that ITEP has called for before. As usual, many lawmakers oppose this simply because they oppose any and all tax increases even to fund something as basic and popularly supported as highways. Some lawmakers have turned to gimmicks that do not actually raise revenue, which CTJ has criticized.

If lawmakers cannot bring themselves to provide the most obvious solution, an increase in fuel taxes, a second best solution would be to raise revenue by closing corporate tax loopholes. It would be impossible for corporations to profit if the U.S. did not have the roads, bridges and other infrastructure that makes commerce possible, so it’s only reasonable that they pay some taxes to support the federal government and it’s reasonable for Congress to close loopholes allowing corporations to shirk that duty.

Two proposals introduced in Congress recently would raise $19.5 billion for the Highway Trust Fund by closing the loopholes that allow corporations to “invert.” In an inversion, an American corporation reincorporates itself abroad and claims to be a foreign company that is mostly not subject to U.S. taxes even if it is still managed from the U.S. and conducts most of its business in the U.S. There are many more corporate tax loopholes that must be closed, and much more Congress needs to do to provide adequate infrastructure funding. But it certainly makes sense to start by stopping the worst corporate citizens from avoiding taxes. 

The existing tax rules prevent an American corporation from simply reincorporating itself in a tax haven and declaring itself “foreign.” But a loophole allows inversions to take place when an American corporation merges with a smaller foreign corporation, even if the management and most of the business of the newly merged company stays in the U.S. In theory, the profits that any corporation (even a “foreign” corporation) earns in the U.S. are taxable in the U.S., but inversions are often followed by earnings stripping, which makes U.S. profits appear to be earned offshore where they won’t be taxed.

A proposal to close this loophole was first put forward as part of President Obama’s most recent budget plan and was introduced in Congress following the recent news of Walgreens, Pfizer and eventually Medtronic all pursuing inversions over the last several months.

 


Medtronic: Still Offshoring


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Already facing criticism for its plans to become an Irish company to avoid U.S. taxes, Medtronic, the Minnesota-based medical device maker, disclosed this week that it pays very little in taxes in the foreign countries where it claims to have profits.

The company, which made waves recently with its ongoing effort to “invert” its corporate structure so that it becomes (at least on paper) an Irish corporation, doesn’t appear to be facing major obstacles to this effort.

But it’s not taking any chances. Whether the corporate inversion deal ultimately goes through or not, the company continues to aggressively shift profits and cash offshore to avoid U.S. tax. In Medtronic’s just-released annual financial report, the fine print reveals that the company’s total “permanently reinvested” foreign profits—that is, income they have said they have no intention of bringing back to the U.S.—rose from $18.1 to $20.5 billion in the past year. And the total amount of cash and cash equivalents that the company holds abroad rose abruptly from $10.9 to $13.9 billion in just one year.

The tax implications of Medtronic’s offshore cash—to say nothing of the $2 trillion in permanently reinvested earnings held by Fortune 500 companies overall—could be enormous. The company is supposed to pay the 35 percent U.S. tax rate (minus any taxes already paid to foreign nations) on these earnings when they are “repatriated” to the U.S. In its financial statements, the company declined to disclose whether it has paid any tax at all on its permanently reinvested foreign earnings. It hid behind an accounting standards loophole that allows companies to avoid disclosure if calculating the U.S. tax would be “impracticable.” Only 58 of the 301 Fortune 500 companies that have offshore profits estimated the U.S. tax on those earnings in their most recent annual reports.

But in response to a reporter’s inquiry this week, Medtronic admitted that the U.S. tax due on those foreign profits would be 25 to 30 percent.  We’re willing to bet that just like Medtronic the other profit-shifting U.S. multinational companies know exactly how much it will cost to repatriate those earnings, but don’t want to let the public know of their tax-dodging ways.

Medtronic’s 25 to 30 percent estimated U.S. tax liability tells us that a substantial amount of the so-called offshore profits are accumulating tax-free. The company’s 37 subsidiaries located in known tax havens adds to the suspicion: the company has five subsidiaries in the Cayman Islands alone. Unless the company has identified a huge untapped medical-device market in the Caymans, it’s probable that the main reason why Medtronic owns these subsidiaries is to shelter their cash tax-free.

If, as seems likely, Medtronic’s inversion proceeds as planned, its “foreign” earnings in these tax havens may forever escape tax. But the company potentially stands to benefit from shifting profits, on paper, into tax haven countries even if they are not allowed to renounce their Minnesota citizenship.

Some in Congress continue to float the idea of a repatriation “tax holiday” that would allow companies like Medtronic to pay a sharply reduced tax rate on their tax haven profits upon repatriation.

So Medtronic’s ongoing off shoring effort is a profitable tax dodge no matter what happens to their inversion effort. It’s time for Congress to put a stop to it.


FIFA's World Cup of Tax Breaks


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All eyes are on Brazil and the World Cup, but Gov. Tarso Genro of Rio Grande do Sul believes the country’s decision to host the World Cup has been “a huge mistake”.

And many of the country’s residents as well as a host of global anti-poverty advocates agree with him. Brazil has been under increasing scrutiny for tax breaks it awarded to the sporting giant FIFA--tax breaks that many believe the country can ill afford given the high concentration of poverty in some of the country’s districts.

According to InspirAction, Christian Aid’s Spanish affiliate, Brazil will give up $530 million in tax revenue to benefit the World Cup’s corporate sponsors such as McDonalds, Budweiser and Johnson & Johnson. The country is allowing corporations to import an array of products from food, medical supplies and promotional materials tax-free, while also exempting seminars, workshops and other cultural activities from taxes.

InspirAction and other advocates have said the millions saved by FIFA and its sponsors through these breaks should be used to benefit the poor, not corporations and their shareholders. Foregone World Cup tax revenue could help lift 37 million people out of extreme poverty and help improve basic services. Instead, FIFA, a supposed non-profit organization, is reporting historic profits while leaving the host country to foot the bill.

The bidding to receive games such as the World Cup or the Olympics is always intense. During the publicity runs surrounding the bidding, potential host countries and the sponsoring organization tout the economic benefits including increased tourism dollars. Unfortunately, economic benefits that arise from the events often are as short-lived as the event itself. The economic burden, however, can be lasting.

In 2010, South Africa hosted the World Cup. FIFA reported that it received $3.8 billion tax-free in revenue and that year was “the most profitable in FIFA history”. However, South Africa had a $3.1 billion net loss from hosting the games. The same year, the number of tourists in South Africa dropped by half compared to previous years. The displacement of usual tourists is a reoccurring event in World Cup-host countries including Germany, China and Korea. Similarly, the European Tours Operations (EOTA) conducted a study in 2006 of countries that hosted the Olympics, which showed tourism declined the year pre and post-Olympics.

Host countries also have the financial burden of maintaining specially built stadiums. German economist Wolfgang Maennig conducted a study which found that the utilization of accommodation actually fell by 11.1 percent in Berlin and 14.3 percent in Munich during the 2006 World Cup. In Brazil’s case, the country spent $300 million in public funds constructing Arena Amazonia, which Brazilian officials portrayed as an investment into the Manaus’ economy and tourism in spite of the research indicating otherwise.  There has been speculation that the 42,000-capacity Arena Amazonia will be turned into a detention centre after the games as sporting events in the small town rarely attract 1,000  people. Neither a huge stadium nor a detention center is likely to boost tourism figures for Manaus, despite what officials are saying.

Mayor of Porto Alegre, Jose Fortunati, defended the corporate tax breaks and said his city would not have been able to take part in the games without them.  This reasoning still doesn’t sit well with much of the Brazilian public. Former Brazilian footballer, manager and now politician with the Brazilian Socialist Party, Romário de Souza Faria, noted that FIFA is projected to make $1.8 billion in profits, which should generate $450 million in tax for public services, but FIFA won’t pay anything.

Hosting the World Cup and other international sporting events surely is a public relations boon. But underneath the games’ hype, there are serious questions about who really benefits—questions that are worth broad public debate.

Two years from now, Brazil is set to do this all over again when it hosts the summer Olympics and offers the same sort of tax breaks to the Olympic Committee. It seems that now is as good a time as any to address these issues.  


Good and Bad Proposals to Address the Highway Trust Fund Shortfall


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As a result of Congress’s reluctance to raise the gas tax for the past 20 years, the Highway Trust Fund will run out of money in August. That could bring transportation construction and repairs all across the country to a stop and cost 600,000 jobs, according to one estimate. Experts project a nearly $170 billion shortfall over the next decade. Several proposals have been offered to address this, some of them better than others.

Nonsensical “Repatriation Holiday” Proposal

Last week we described a nonsensical proposal from Democratic Senate Majority Leader Harry Reid and Republican Sen. Rand Paul that supposedly would pay for transportation with a “repatriation holiday,” even though this measure would raise almost no revenue even according to their own description of it. The term “repatriation holiday” is essentially a euphemism for temporarily calling off most of the U.S. tax that is normally due on corporations’ offshore profits when they are officially brought to the United States. One of many problems with such proposals is they encourage corporations to shift even more profits offshore.

Increase the Gas Tax… But Give All the Revenue Away with New Tax Cuts?

This week, Democratic Sen. Chris Murphy and Republican Sen. Bob Corker proposed to finally fix the 18.4 cent gas tax and 24.4 cent diesel tax, which are not indexed for inflation and have not been increased since 1993, but unfortunately they also propose to give an equal amount of revenue away with new tax cuts.

Their proposal would raise both taxes by 12 cents over two years and index them to inflation thereafter. ITEP has long called for this type of reform. Of course, attaching tax cuts of equal value to this proposal turns it entirely into a budget gimmick because no revenue would actually be raised overall. The two proponents suggested that the tax-cutting could take the form of making permanent six of the “tax extenders,” the tax cuts that mostly benefit corporations and that Congress extends every couple of years with little debate, without offsetting the costs. 

Close Offshore Corporate Tax Loopholes

If lawmakers cannot bring themselves to fix the gas tax without giving the revenue away with new tax cuts, perhaps they should consider closing corporate tax loopholes. Given that American corporations would be unable to profit without the infrastructure that makes commerce possible, it seems entirely reasonable that they pay their share in taxes to support it, and that Congress close the loopholes corporations use to avoid paying.

Sen. John Walsh of Montana introduced a bill this week to do exactly that with two provisions that close offshore tax loopholes used by American corporations.

The first provision is President Obama’s proposal, which was incorporated into Sen. Carl Levin’s Stop Tax Haven Abuse Act, to bar corporations from taking deductions for their U.S. taxes for interest expenses related to offshore investments until the profits from those offshore investments are subject to U.S. taxes.

American corporations are allowed to defer paying U.S. corporate income tax on their offshore profits until those profits are officially brought to the U.S. (which may never happen). But the current rules allow them to borrow to invest in that offshore business and deduct the interest expenses right away from their U.S. income when they calculate their U.S. taxes. That means that the tax code is essentially subsidizing companies for investing offshore (at least on paper) rather than in the United States. Sen. Walsh (and Obama and Levin) sensibly propose that if the U.S. tax on offshore profits is deferred, then the interest deduction associated with those offshore profits should also be deferred.

The second revenue provision in Sen. Walsh’s bill is the anti-inversion proposal that Sen. Levin and Rep. Sander Levin, the ranking Democrat on the Ways and Means Committee, introduced in May. A corporate inversion happens when a company takes steps to declare itself  “foreign” for tax purposes, even though little or nothing has changed about where its business is really conducted or managed. Given that several corporations have announced plans (or attempts) to do this in recent months, this is a reform Congress should want to enact even in the absence of any immediate revenue need.


Medtronic's History of Shirking Its Tax Responsibilities


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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.

Medical Device Tax

As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.

The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.

After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.

But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.

Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:

…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”

Offshore Tax Havens

Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.

Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.

Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.

Corporate Inversion

This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.

The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.

A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.

This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)   

Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.

In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”


Much of What You've Heard about Corporate "Inversions" Is Wrong


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With yet another big U.S. corporation (this time it’s the medical device maker Medtronic) announcing its intentions to “invert” and officially become a “foreign” company for tax purposes, it’s time to correct a few misunderstandings.

1. What is a corporate inversion?

Incorrect answer: A corporate inversion happens when a company moves its headquarters offshore.

Correct answer: A corporate inversion happens when a company takes steps to declare itself a “foreign” corporation for tax purposes, even though little or nothing has changed about where its business is really conducted or managed.

The law used to be so weak that an American corporation could simply reincorporate in Bermuda and declare itself a foreign company for tax purposes. In 2004, Congress enacted a bipartisan law to prevent inversions, but a gaping loophole allows corporations to skirt this law by acquiring a smaller foreign company. The loophole in the current law allows the company resulting from a U.S.-foreign merger to be considered a “foreign” corporation even if it is 80 percent owned by shareholders of the American corporation, and even if most of the business activity and headquarters of the resulting entity are in the U.S. (A proposal from the Obama administration to change these rules has been introduced in Congress by Carl Levin in the Senate and his brother Sander Levin in the House.)

2. How are the offshore profits of American corporations taxed?

Incorrect answer: When American corporations officially bring their offshore profits to the U.S., they must pay the 35 percent U.S. tax rate, and this is why they want to escape the U.S. tax system.

Correct answer: When American corporations officially bring their offshore profits to the U.S., they must pay the U.S. tax rate of 35 percent only if their profits have been shifted to tax havens.

When American corporations “repatriate” offshore profits (officially bring offshore profits to the U.S.) they are allowed to subtract whatever corporate taxes they paid to foreign governments from their U.S. corporate tax bill. (This break is called the foreign tax credit.) The only American corporations that would pay anything close to the full 35 percent U.S. corporate tax rate on offshore profits are those that claim their profits are in countries where they are not taxed — countries we know as tax havens.

American multinational corporations report to the IRS massive amounts of profits earned in countries that either have an extremely low (or zero) corporate tax rate or otherwise allow them to escape paying much in corporate taxes. It is obvious that these reported tax haven profits are not truly earned in these countries, and in fact that would be impossible. For example, the profits American corporations overall report to earn in Bermuda are 16 times the size of Bermuda’s economy. Obviously, these profits are truly earned in the U.S. or other countries with real consumer markets and real business opportunities, and then manipulated to appear to be earned in countries where they are not taxed.

The corporations that make the most use of these tax haven maneuvers — maneuvers that are probably legal, but which should be barred by Congress — are the corporations that would pay close to the full 35 percent tax rate if they repatriated their offshore profits.

3. What profits are corporations trying to shield from U.S. taxes when they invert?

Incorrect answer: When American corporations invert, they do it to escape the U.S. system of taxing offshore profits, which is something most other countries don’t do. After they become a foreign company, their U.S. profits would still be subject to U.S. taxes.

Correct answer: American corporations invert to avoid paying taxes in any way possible, and often that includes avoiding U.S. taxes on their U.S. profits. It’s true that, in theory, all corporate profits earned in the U.S. (even profits of a foreign-owned corporation) are subject to the U.S. corporate income tax. But corporate inversions are often followed by “earnings stripping” to make any remaining U.S. profits appear to be earned offshore where the U.S. cannot tax them.

Earnings stripping is the practice of multinational corporations reducing or eliminating their U.S. profits for tax purposes by making large interest payments to their foreign affiliates. Corporations load the American part of the company with debt owed to a foreign part of the company. The interest payments on the debt are tax deductible, reducing American taxable profits, which are shifted to the foreign part of the company and are not taxed.

If the American part of the company is the parent corporation shifting its profits to offshore subsidiaries, then the benefit is that U.S. tax will not be due on those profits until they are repatriated, which may never happen. But if the American part of the company can claim to be just a subsidiary of a foreign parent company — which would technically be the case after a corporate inversion — then the benefits of earnings stripping are even greater because the profits that are officially “offshore” are never subject to U.S. taxes.

This is part of what motivated the 2004 reform and a 2007 report from the Treasury Department that found that rules enacted earlier to address earnings stripping did not seem to prevent inverted companies from doing it.


Reid-Paul "Transportation Funding Plan" is No Plan at All


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The nation has a number of pressing problems, and our polarized Congress all too often can’t seem to compromise on policies that would address fundamental issues that most of us care about. In this context, it seems a pending proposal by Democratic Senator Majority Leader Harry Reid and Sen. Rand Paul, a Republican senator and libertarian stalwart, would be a refreshing change from the norm. But not so much.

Unfortunately, Sens. Reid and Paul have proposed to “fund” the Highway Trust Fund with a nonsensical measure that would reward corporate tax avoidance and raise almost no revenue, according to their own description of the plan.

Policymakers know our nation’s roads are chronically underfunded. Since 2008, Congress has covered $53 billion of transportation funding shortfalls by taking needed tax dollars out of general fund revenue, and official forecasts show the need for a huge infusion of new cash to maintain our roads and bridges. There is a straightforward policy solution—increasing the federal gas tax to offset large inflationary declines over the past two decades—that requires a legislative champion.

Instead of taking the obvious step of fixing the federal gas tax, Reid and Paul propose a repatriation tax holiday, which would give multinational corporations an extremely low tax rate on offshore profits they repatriate (profits they officially bring back to the United States). The idea is that corporations would bring to the United States offshore profits they otherwise would leave abroad, and the federal government could tax those profits (albeit at an extremely low rate) and put the revenue toward the transportation fund.

The first problem with such a proposal is many of these offshore profits are clearly earned in the United States and then manipulated through accounting gimmicks so corporations appear to earn the money in countries where it won’t be taxed, as demonstrated by several recent CTJ reports. In fact, profits corporations report earning in zero-tax countries would receive the biggest breaks under a repatriation holiday because the U.S. tax normally due on repatriated profits is reduced by whatever taxes have been paid to foreign governments.

The second problem with a repatriation holiday is that Congress enacted this type of proposal in 2004, and critics have widely panned that measure as providing no increase in employment or investment but only enriching shareholders and executives.

The third problem is that it loses revenue. The non-partisan Joint Committee on Taxation (JCT) has estimated that a repeat of the 2004 measure would reduce revenue by (and increase the budget deficit by) $96 billion over a decade.

According to JCT, one reason for the massive revenue loss is that some of the offshore profits would be repatriated anyway absent any new tax break, and companies would pay the full tax. Another reason is that the measure would encourage corporations to engage in even more accounting games to make their U.S. profits appear to be earned in offshore tax havens, with the expectation that a little lobbying could prod Congress to enact another repatriation holiday in a few years.

Reid and Paul have added a detail that they claim improves their proposal. They argue that companies would rather borrow money than tap profits they claim to hold “offshore.” Reid and Paul therefore propose to also limit the tax-deductibility of corporate borrowing by asserting that any business borrowing that is done for the purpose of avoiding repatriating offshore cash would be non-deductible.

It is unclear how this could possibly be implemented, but even if it works, the New York Times reports that Reid’s staff believes the net effect would raise just $3 billion over a decade. This is laughably insufficient. Replenishing the Highway Trust Fund just to maintain spending until the end of 2015 will cost $18 billion


Tax Foundation's Dubious Attempt to Debunk Widely Known Truths about Corporate Tax Avoidance Is Smoke and Mirrors


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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.


Even the Weak Anti-Abuse Measures Contemplated by OECD Are Too Much for Republican Tax Writers


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Representatives of Organization for Economic Co-operation and Development (OECD) countries are meeting in Washington this week to determine what reforms they should recommend to address offshore corporate tax avoidance. Such recommendations would implement the Action Plan on Base Erosion and Profit Shifting (BEPS), which OECD issued last summer. The plan doesn’t go far enough, but the Obama administration has recently indicated that it is restraining OECD talks from resulting in more fundamental reforms, and the top Republican tax writers in Congress issued a statement on June 2 that seems even more opposed to reform.

As we wrote about the Action Plan last summer,

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of funds they need to make public investments, the plan fails to call for fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes. Both tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

In April, we noted that the Obama administration seems to be blocking any more fundamental (more effective) reform and is clinging to the “arms length” principle that supposedly prevents subsidiaries owned by a single U.S. corporation from over-charging and under-charging each other for transactions in ways that make profits disappear from one country and magically reappear in another. As we explained,

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

This week, just to kill any lingering possibility that the OECD will do some good, Rep. Dave Camp and Senator Orrin Hatch, the Republican chairman of the House Ways and Means Committee and the ranking Republican on the Senate Finance Committee, issued a statement claiming they are “concerned that the BEPS project is now being used as a way for other countries to simply increase taxes on American taxpayers [corporations].”

Of course, major multinational corporations from every country will, in fact, experience a tax increase if the OECD effort is even remotely successful. American corporations are using complex accounting gimmicks to artificially shift profits out of the U.S. and out of other countries into tax havens, countries where they will be taxed very little or not at all. There is no question this is happening. As CTJ recently found, American corporations reported to the IRS in 2010 that their subsidiaries had earned $94 billion in Bermuda, which is obviously impossible because that country had a GDP (output of all goods and services) of just $6 billion that year.

In their statement, Camp and Hatch complain that “When foreign governments – either unilaterally or under the guise of a multilateral framework – abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”

But what exactly have these long-standing principles, like the “arm’s length” standard accomplished? They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the Cayman Islands had profits of $51 billion even though that country had a GDP of just $3 billion. They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the British Virgin Islands had profits of $10 billion even thought that country had a GDP of just $1 billion.

Camp and Hatch have claimed in the past that the solution for our corporate income tax is to essentially adopt a “territorial” tax system that would actually increase the rewards for American corporations that manage to make their U.S. profits appear to be earned in Bermuda, the Cayman Islands, the British Virgin Islands, or any other tax haven. Congress needs to move in the opposite direction, as we have explained in detail. 


The Obama Administration Just Made the Research Credit an Even Bigger Boondoggle


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New IRS regulations issued on June 2 expand the ability of companies to claim the research credit retroactively for prior tax years on amended tax returns. This makes it far more likely that the credit will subsidize activities that businesses would have carried out anyway, even in the absence of any tax incentive.

The research credit is supposedly designed to encourage companies to expand the amount of research they conduct. That means it can be thought of as effective only to the extent that it subsidizes research that businesses would not have carried out anyway even if no tax break was offered to them. Of course, if a company carried out research and did not even become aware that it could claim the credit until three years later, there is no way that research was the result of the credit.

In our December 2013 report, “Reform the Research Tax Credit — Or Let It Die,” Citizens for Tax Justice called upon Congress to bar companies from claiming the credit on amended returns. There are two main versions of the research credit available, the regular research credit and the “alternative simplified credit” (ASC). Companies were already allowed to claim the regular credit on amended returns — which CTJ sought to ban. But IRS regulations had barred companies from claiming the ASC on amended returns — until now.

As the CTJ report explained, at least two senators explicitly called for allowing companies to claim the ACS on amended returns, giving absolutely no policy rationale for such a change. It appears likely that the pressure to make this change came from accounting firms like Alliantgroup who approach businesses and offer to help them claim the research credit for activities they carried out in the past.


House Committee Votes to Increase Deficit by Nearly $300 Billion with "Bonus" Depreciation


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Once again, a Congress that cannot enact a $10 billion extension of emergency unemployment benefits is headed toward increasing the deficit by hundreds of billions of dollars to benefit corporations. 

Republicans on the House Ways and Means Committee voted today to make permanent “bonus” depreciation, the most costly provision within the “tax extenders.” Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service has reviewed quantitative analyses of the tax break and found that, “... accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

This conclusion is not surprising. What businesses need are customers. No business is going to invest to expand operations if there are no customers and thus no way of profiting from that expansion. A tax cut for investment cannot change that logic. The most likely effect of such tax cuts is that they subsidize investment that would have occurred anyway even without a tax break.

Bonus depreciation also departs from general rules on which the tax system is built. Companies are allowed to deduct from their taxable income business expenses so only net profit is taxed. Businesses can also deduct costs of purchases of machinery, software, buildings and so forth.  Since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

In most cases firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money. For example, inflation will erode the value of $100 over time, but $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is a temporary expansion of existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

Of course, this tax break makes even less sense if it is permanent. It was enacted to address a recession early in the Bush administration and then enacted again to address the much more severe recession at the end of the Bush administration. The theory behind it had been that firms would be encouraged to invest and expand right away, counteracting the immediate impacts of the recession, because the break would be available only for a limited time. Making the break permanent obviously destroys even this argument for bonus depreciation. 

A commonsense bill introduced today would prevent American corporations from pretending to be "foreign" companies to avoid taxes even while they maintain most of their ownership, operations and management in the United States.

Sponsored by Sen. Carl Levin and Rep. Sander Levin, the Stop Corporate Inversions Act requires the entity resulting from a U.S.-foreign merger to be treated as a U.S. corporation for tax purposes if it is majority owned by shareholders of the acquiring American company or if it is managed in the U.S. and has substantial business here.

These are common sense rules and many people might be surprised to learn that they are not already part of our tax laws. In fact, the law on the books now (a law enacted in 2004) recognizes the inversion unless the merged company is more than 80 percent owned by the shareholders of the acquiring American corporation and does not have substantial business in the country where it is incorporated.

The current law therefore does prevent corporations from simply signing some papers and declaring itself to be reincorporated in, say, Bermuda. But it doesn’t address the situations in which an American corporation tries to add a dollop of legitimacy to the deal by obtaining a foreign company that is doing actual business in another country.

The management of Pfizer recently attempted to acquire the British drug maker AstraZeneca for this purpose and a group of hedge funds that own stock in the drug store chain Walgreen have been pushing that company to increase its stake in the European company Alliance Boots for the same purpose.

The Stop Corporate Inversions Act is based on a proposal that was included in President Obama’s most recent budget plan, which is projected by the administration and the Joint Committee on Taxation to raise $17 billion over a decade. The only difference between the House and Senate version of the bill is that the House version is permanent while the Senate version is effective for just two years. Apparently the Senate cosponsors include some lawmakers who believe that the issue of inversions can be addressed as part of tax reform at some point over the next two years and a stopgap measure is needed until then.

Either way, Congress needs to act now. House Ways and Means Committee chairman Dave Camp and Senate Finance Committee ranking Republican Orrin Hatch have both suggested that Congress should do nothing at all except as part of a major comprehensive tax reform. Given that the only tax reform plan Camp has been able to produce was a regressive $1.7 trillion tax cut that didn’t even meet his own stated goals of revenue and distributional neutrality, it’s obvious that Congress is a long way off from settling all the issues related to tax reform. In the meantime, how often will we be asked to play along as major American corporations pretend to be “foreign” in order to avoid paying taxes?


Shareholders Urge Google "Don't Be Evil"


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Many companies claim they are forced by shareholders to dodge taxes in order to maximize profits, but what would a company do if its shareholders insist that it actually pay its fair share in taxes?

A group of Google shareholders, headed up by Domini Social Investments, may soon find out. The group has filed a proposal for consideration at the shareholder annual meeting asking the company to adopt a set of principles regarding taxes. The shareholders are recommending that the principles include consideration of any “misalignment between tax strategies and Google’s stated objectives and policies regarding social and environmental sustainability.”

The proposal comes after several widely publicized stories about Google’s aggressive tax planning which moves billions of dollars annually to offshore tax havens. In 2012 alone, Google dodged an estimated $2 billion in income taxes by shifting an estimated $9.5 billion to offshore tax havens.

Last year Google was called before the UK House of Commons Public Accounts Committee to explain its cross-border tax avoidance. The committee chair called the company’s behavior “devious, calculated, and … unethical.” French tax authorities, having raided Google’s offices in Paris in 2012, just delivered the company a $1.4 billion tax bill.

The shareholder group points out that Google’s tax dodging not only gets it in trouble with tax authorities, but damages the company’s brand and reputation that has long been associated with its motto "Don't Be Evil." Its tax avoidance has other social and human rights consequences that the shareholders urge the company to consider.

Over the long term, the best way to ensure that all American corporations like Google pay their fair share would be to end offshore tax loopholes like the active financing exception and the CFC look-thru rules or to simply end deferral of U.S. taxes on foreign profits. Unfortunately, Congress seems to be moving in the opposite direction, with the House Ways and Means Committee voting last week to make the active financing exception and the CFC look-thru rules permanent.

If this new shareholder initiative is any indication, many tax dodging multinational corporations may soon find that the pressure to pay their fair share is not only coming from the public, but increasingly from stakeholders within the company as well.


Why Does Pfizer Want to Renounce Its Citizenship?


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After years of being a bad corporate citizen, Pfizer is now seeking to renounce its U.S. citizenship entirely by reincorporating in Britain as part of its hoped-for purchase of British pharmaceutical company AstraZeneca. While the deal would allow Pfizer to claim on paper that it’s a British company, it would not require the company to move its headquarters abroad.  In fact, the main effect would be to allow Pfizer to reduce its taxes to an even lower level than they already are.

While the audacity of this newest maneuver by Pfizer is striking, it’s not shocking. The company has a history of engaging in offshore income-shifting games. Over the past five years for example, the company has reported that it lost about $14.5 billion in the United States, while at the same time it earned about $75.5 billion abroad. Is the United States just a really bad market for Pfizer? It’s unlikely given that Pfizer also reports that around 40 percent of its revenues are generated in the United States. The more realistic explanation is that Pfizer is aggressively using transfer pricing and other tax schemes to shift its profits into offshore tax havens.

Despite its already low U.S. taxes, Pfizer has been aggressive in pushing Congress to preserve and expand loopholes in the corporate tax code. Over the past five years, Pfizer spent more than $72 million lobbying Congress. It reports that “taxes” are second only to “health” among issues it lobbies on. In addition to its own efforts, Pfizer has helped sponsor four different business groups (Alliance for Competitive Taxation, Campaign for Home Court Advantage, LIFT America and the WIN American Campaign) pushing for lower corporate taxes.

Over the years, Pfizer’s aggressive lobbying efforts have taken billions of dollars out of the U.S. Treasury, at the expense of ordinary taxpayers. Its biggest coup was the passage of a repatriation holiday (PDF) in 2004, for which it was the largest single beneficiary and ultimately saved the company a whopping $10 billion. On the state and local level Pfizer has also done very well for itself, receiving over $200 million in subsidies and tax breaks over the past couple decades.

What makes Pfizer’s tax avoidance efforts particularly galling is how it’s also happy to take full advantage of U.S. taxpayer assistance via government spending. From 2010 to 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefited from taxpayer funded research to develop drugs like Xelijanz, which was first discovered by government scientists at the National Institutes of Health (NIH). Finally, it’s worth remembering that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.

All this begs the questions of why Pfizer thinks it is worthy of profiting from taxpayer-funded research, corporate tax subsidies, and federal health care spending,  but feels no corporate responsibility to pay its fair share of U.S. income taxes.

Congress, should it decide to do so, can easily put a stop to Pfizer’s offshore shenanigans. To prevent Pfizer, as well as companies like Walgreens, from relocating to another country to avoid taxes, Congress could pass a proposal by the Obama administration that would limit the ability of domestic companies to expatriate. It would nix any repatriation if a company continues to be controlled and managed in the United States or if at least 50 percent of the shareholders stay the same after the merger. To address Pfizer’s broader tax dodging, Congress should also require that companies pay the same tax rate on both their offshore and domestic profits, by ending deferral of taxes on foreign profits.

Photo of Pfizer Pill via Waleed Alzuhair Creative Commons Attribution License 2.0


Rep. Dave Camp's Latest Tax Gambit Is "Fiscally Irresponsible and Fundamentally Hypocritical"


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Fresh off a two-week spring recess, House Ways and Means Committee Chairman Dave Camp today shepherded through six bills that would provide corporate tax breaks at a whopping cost of more than $300 billion over the next decade.

The tax breaks are a subset of the temporary business tax breaks or “tax extenders.” Given the nation’s many other pressing priorities, its nothing short of outrageous that the committee, on a party-line vote, approved this package of corporate giveaways.

Rep. Sander Levin, the committee’s ranking Democrat, called this approach “fiscally irresponsible and fundamentally hypocritical” given House leaders’ refusal to extend emergency unemployment assistance or make permanent tax breaks that will help working people with children, including recent EITC and child tax credit expansions.

“To say Republican action today is hypocritical is a serious understatement,” Levin said. He and his Democratic colleagues voted against each of the measures, while Camp’s Republican colleagues voted in favor of each.

The party-line vote was not a certainty given many of the committee’s Democrats are sponsors of the bills. Ultimately, many Ways and Means Democrats said although they support making certain business tax breaks permanent, they oppose doing so in a way that provides hundreds of billions of dollars in deficit-financed tax breaks for businesses while the House refuses to address the needs of the unemployed and working people with children. The unified opposition may mean the full House and Senate may think twice before following Camp’s approach.

Citizens for Tax Justice has explained that the tax breaks made permanent by this legislation demonstrate fealty to corporations over ordinary people and are simply bad policy.

A recent CTJ report describes significant problems in the research credit that should be addressed before it is extended or made permanent. CTJ and other organizations have also called upon Congress to allow the expiration of two breaks that encourage offshore tax avoidance: the so-called “active financing exception” and “look-through rule” for offshore subsidiaries of American corporations.

The Senate Finance Committee has taken a different approach. Instead of choosing certain temporary tax breaks to make permanent, it voted earlier this month to extend the entire package of 50-plus expiring provisions (often called the “tax extenders”) for two years, without offsetting the cost. CTJ has explained that this approach is also deeply problematic.

Some of the tax extenders should be dramatically reformed, and some should be allowed to expire altogether. None should be enacted unless Congress offsets the costs by repealing other tax breaks or loopholes that benefit businesses.

Rep. Dave Camp, the chairman of the House Ways and Means Committee, will take the first step to make permanent certain business tax breaks on Tuesday, when his committee marks up legislation that would increase the deficit by $300 billion over the coming decade.

The provisions are among the “tax extenders,” the package of tax breaks that mostly benefit businesses and that Congress extends every couple of years. We have pointed out that even if Congress simply continues its practice of extending these tax breaks for another two years, it would signal that these corporate tax breaks will likely be with us forever — which the Congressional Budget Office projects would increase the deficit by $700 billion over the coming decade. Camp’s move to make certain of the tax extenders permanent would make that unfortunate outcome even more likely.

These bills should be rejected for several reasons.

1. It is plainly hypocritical for Congress to provide hundreds of billions in deficit-financed tax breaks for corporations while refusing to help the long-term unemployed, ostensibly because of the impact it would have on the federal budget.

2. One of the provisions Camp would make permanent is the research tax credit, which needs major reform before it can come close to carrying out its goal of encouraging businesses to conduct research.

3. Two other provisions Camp would make permanent are tax breaks that facilitate offshore tax avoidance by corporations —the “active finance exception” and “CFC look-through rule.”

Each of these three reasons to reject the legislation is discussed below.

1. Congressional Hypocrites Would Provide Deficit-Financed Tax Breaks for Businesses, Nothing for the Unemployed

It is plainly hypocritical for Congress to provide hundreds of billions of dollars in deficit-financed tax breaks for corporations while refusing to extend Emergency Unemployment Compensation (EUC) to the long-term unemployed, which expired in December, ostensibly because of the impact it would have on the federal budget. Since the 1950s, Congress has always continued such help until the long-term unemployment rate fell lower than it is today. As the Coalition on Human Needs explains

EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.

Now many lawmakers are establishing a new norm: All direct spending must be paid for, even if it’s temporary emergency legislation to help families of unemployed workers, but spending in the form of tax cuts for businesses does not have to be paid for. The bill approved by the Senate before the April recess to extend EUC includes provisions that offset the cost. (House Speaker John Boehner has nonetheless refused to bring the bill to a vote in the House.)

2. Congress Should Not Make Permanent the Research Credit before Reforming It

The most costly of the bills that will be marked up Tuesday would make permanent the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs reform is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs reform is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

3. Congress Would Make Permanent Two Tax Provisions that Facilitate Offshore Tax Avoidance

The general rule is that American corporations are allowed to “defer” (indefinitely delay) paying U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer paying U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

Two of the provisions that would be made permanent on Tuesday poke holes in this general rule.

One of these provisions is the “active financing exception” but ought to be remembered as the “G.E. loophole.” In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to defer paying any U.S. taxes on offshore profits from financing loans.

G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

The other provision is the “look-through rule” for “controlled foreign corporations,” (for the offshore subsidiaries of American corporations). The look-through rule allows a U.S. multinational corporation to defer paying U.S. taxes on passive income, such as royalties, earned by an offshore subsidiary if that income is paid by another related subsidiary and can be traced to the active income of the paying subsidiary.

The closely watched Apple investigation by the Senate Permanent Subcommittee on Investigations a year ago resulted in a report — signed by the subcommittee’s chairman and ranking member, Carl Levin and John McCain — that listed the CFC look-through rule as one of the loopholes used by Apple to shift profits abroad and avoid U.S. taxes.

 

If a group of Walgreens shareholders get their way, the drug retailer will restructure itself to become — on paper — a foreign company for tax purposes. It’s likely that nothing would actually change in terms of Walgreen’s business or management. The scheme is a simply a gimmick to avoid taxes. The bad news is that the laws that are supposed to to prevent this kind of tax avoidance are weak, and Congress, particularly its Grover Norquist-directed contingent, has shown no inclination to address this sort of problem. The good news is that the Obama administration has at least proposed a reform that probably would prevent this sort of corporate tax avoidance.

In some parts of the United States, there is a Walgreens every few miles or even every few
blocks, and it’s difficult to think of a company that seems more American. But tax rules don’t always conform with common sense.

Walgreens recently acquired nearly half of the Swiss-based pharmacy chain Alliance Boots, and could acquire a majority of the company. A group of hedge funds that own almost 5 percent of Walgreens’s stock demand that it use the merger to officially become a “foreign” corporation for tax purposes. This type of maneuver is often referred to as a corporate “inversion.”

When a corporation renounces its Americanism, little or nothing about the way the company does business or is managed changes, and yet the company can claim to be a brand new entity incorporated in another country. For example, a U.S. corporation can merge with a foreign corporation resulting in a new company that is 80 percent owned by shareholders of the original U.S. corporation and still be treated as a foreign corporation for tax purposes. This is true even if the new company is managed and controlled in the United States.

Some anti-tax types argue that the problem facing Walgreens and other American corporations is that the United States taxes both domestic and offshore profits, and that this is unfair. But that’s neither true nor the real motivation behind corporate inversions.

U.S. taxes levied on American corporations' offshore profits are extremely minimal or non-existent in practice. One reason for this is that American corporations get a tax credit equal to any taxes they pay to foreign governments. Another reason is that companies are allowed to “defer” U.S. taxes until they officially bring their offshore profits to the U.S.

The real reason American corporations sometimes invert is that it makes it easier to avoid U.S. taxes on their U.S. profits. Corporate inversions are often followed by “earnings-stripping,” which makes U.S. profits appear, on paper, to be earned offshore. The American part of the company is loaded up with debt that is owed to the foreign part of the company, so that interest payments officially reduce the American profits, which are effectively shifted to the foreign part of the company.

Congress can tighten up rules to prevent all this from happening. As CTJ has explained, under a reform included in President Obama’s most recent budget plan, a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation. That’s far more reasonable than the current rule, which would allow the resulting company to pretend that it’s a “foreign” corporation for tax purposes even if 80 percent of its voting stock is still owned by the shareholders of the original U.S. corporation.

Under another part of the Obama proposal, the resulting company would be taxed as an American corporation (regardless of how much the ownership has or has not changed) if it has substantial business in the U.S. and is managed and controlled in the U.S.

The President’s budget also includes a proposal to make it more difficult for all U.S. corporations (not just those involved in inversions) to engage in earnings stripping.

It’s impossible to know what Walgreens will do. Maybe it will be too ashamed to renounce its ties to the U.S., or fear customer blow back. But Congress should enact common sense reforms to ensure that it and other American corporations don’t avoid U.S. taxes simply by pretending to be foreign companies.

Photo via Kai Morgener Creative Commons Attribution License 2.0

According to the Daily Tax Report (subscription only) a Treasury Department official said publicly on April 8 that the government’s goal in international negotiations over corporate tax dodging is to prevent dramatic change and preserve the “arm’s length” standard that has proven impossible to enforce.

Last summer, the Organization for Economic Co-operation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting” in response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business.

At that time, CTJ criticized the plan as too weak, arguing that:

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The rules that are supposed to address this today (but that fail miserably) require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

It turns out that some of the OECD governments are proposing reforms that challenge the arm’s length concept at least to some degree, but the US government is pushing a line that is more favorable to the multinational corporations.

Robert Stack, the Treasury Department deputy assistant secretary for International Affairs in the Office of Policy, is quoted by the Daily Tax Report as saying that the “main challenge for the U.S. is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable, and reach the right technical tax results.”

Stack also said that the “United States feels very strongly that the 2014 deliverable should be a clear articulation of intangibles under the arm's-length principle—and should reserve on the evaluation of potential special measures to treat BEPS [base erosion and profit-shifting] that depart from the arm's-length principle.”

The international tax system needs reform that is more fundamental than anything that either the OECD or the US is contemplating. Any system that relies on the artificial boundaries between the dozens (or hundreds) of entities in a multinational group and the ways they price transactions between them is unworkable. The US’s “deferral” system and Europe’s “territorial” system, which both require transfer-pricing rules and the hopeless “arm’s length” standard, should be eliminated. CTJ has proposed its own tax reform plan that would provide fundamental solutions. 


"Tax Extenders" Would Mean Even Lower Revenue than the Ryan Plan


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The tax extenders making their way through Congress would cut federal revenue below the level proposed in Rep. Paul Ryan’s budget. This once again demonstrates that anything goes when it comes to providing tax breaks for corporations.

As CTJ explained in its report last week, the Ryan plan includes huge tax cuts for the very rich. But Ryan nonetheless proposes to eliminate unspecified tax breaks to offset the costs and thus collect the same amount of revenue as current law.

The tax extenders, on the other hand, would cut revenue, and increase the deficit, by $700 billion over the coming decade if Congress continues its practice of extending these breaks every couple of years or makes them permanent.

Even organizations not particularly known for progressive positions have pointed out this fact and how it damages the fiscal outlook that lawmakers claim to care about whenever they are discussing domestic spending.

CTJ has explained that the tax breaks that make up the bulk of the “tax extenders” do not provide any economic benefits that would justify the increase in the budget deficit that would result.

We have called the “tax extenders” the biggest budget buster many have never heard of. Fortunately, more and more people are publicly decrying this giveaway to corporations.

Citizens for Tax Justice:
“Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made”

Citizens for Tax Justice op-ed in the Hill:
“Tax Extenders: The Biggest Budget Buster You’ve Never Heard Of”

Americans for Tax Fairness:
“35 National Organizations Say Oppose Offshore Corporate Tax Loopholes in Tax-Extenders Legislation”

The Financial Accountability & Corporate Transparency (FACT) Coalition:
“FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals”

The National Priorities Project:
“Congress May Extend Corporate Tax Breaks But Not Unemployment Benefits”

U.S. PIRG:
Offshore Loophole Got Snuck Back in Tax Extenders Bill Behind Closed Doors

New York Times editorial:
“Hypocritical Tax Cuts”

Washington Post editorial:
“Lawmakers Should Offer Up a Fiscally Responsible ‘Tax Extenders’ Bill”

 


New "Corporate Tax Explorer" Site Details What Fortune 500 Companies Pay in Corporate Taxes


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A new web tool, the Corporate Tax Explorer, from Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP), is a one-stop shop for the state and federal data we analyze on corporate taxes. Just search for a company by name or browse the list of companies to get detailed information on what the company paid in federal, state and foreign corporate income taxes, as well as information about offshore holdings and various tax breaks. This database includes all of the data from our recent corporate studies, The Sorry State of Corporate Taxes and 90 Reasons We Need State Corporate Tax Reform, which analyzed data from 2008-2012.


Enter a Company's Name and Click on Their Page to See What They Pay:

Browse




Data on Top Tax Dodgers


Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made


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*This post was updated on April 2, 2014 to address news that "bonus depreciation," the biggest and most inefficient break among the "tax extenders" will be included in the legislation before the Senate Finance Committee this week.*

Congress appears likely to enact legislation that Capitol Hill insiders call the “tax extenders” because it extends several tax breaks that are technically temporary. These tax breaks, which mostly benefit corporations, are effectively permanent because Congress extends them every couple of years with almost no debate or oversight.

Here are four reasons why that should change this year and Congress should reject the tax extenders unless dramatic modifications are made to the legislation.

1. The tax extenders are deficit-financed tax cuts for corporations, breaking all the “fiscally responsible” rules that Congress applies to benefits for the unemployed, low-wage workers, and children.

In the past several weeks, Congress made clear that it will not enact an extension of emergency unemployment benefits (which have never been allowed to expire while the unemployment rate was as high as today’s level) unless the costs are offset to prevent an increase in the budget deficit.

Congress has also, in the last several years, enacted automatic spending cuts of about $109 billion a year known as “sequestration” in order to address an alleged budget crisis. Even popular public investments like Head Start and medical research were slashed. The chairman of the House and Senate Budget Committees (Republican Paul Ryan and Democrat Patty Murray) struck a deal in December that undoes some of that damage but leaves in place most of the sequestration for 2014 and barely touches it in 2015.

Meanwhile, lawmakers have expressed almost no concern that the “tax extenders” are enacted every two years without any provisions to offset the costs. According to figures from the Congressional Budget Office, if Congress continues to extend these breaks every couple years, they will reduce revenue by at least $700 billion over a decade.

2. “Bonus depreciation,” the most costly of the tax extenders, is supposed to encourage businesses to invest, but there is little evidence that it has this effect.

Bonus depreciation is a significant expansion of existing breaks for business investment. Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide. A tax break subsidizing investment will benefit those businesses that would have invested anyway but is unlikely to result in much new investment.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

We believed bonus depreciation to be truly temporary until recently because there was very little talk in Congress of extending this particular break. The fact that it is included in the legislative package before the Senate Finance Committee is startling.  

A report from the Congressional Research Service reviews efforts to quantify the impact of bonus depreciation and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

3. The second most costly of the tax extenders is the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs to be reformed is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs to be reformed is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly be said to encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

4. Another costly provision among the tax extenders would extend a break called the “active finance exception,” which should be called the “G.E. Loophole.”

In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to “defer” (indefinitely delay) paying any U.S. taxes on offshore profits from financing loans.

The general rule is that American corporations are allowed to “defer” U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

G.E. managed to get Congress to enact an exception, so that it can defer paying U.S. taxes on offshore financial income that it calls “active finance” income — which is ridiculous because these profits are the ultimate example of the sort of passive income that can be easily shifted between countries. G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

Congress should eliminate deferral or further restrict it to prevent corporations from making their U.S. profits appear to be earned in offshore tax havens, but this break actually expands deferral.

Congress Should Reject “Tax Extenders” Legislation that Mostly Benefits Corporations Unless Corporate Tax Loopholes Are Closed to Offset the Costs

The Senate committee with jurisdiction over taxes has announced that it will take up legislation called the “tax extenders” (legislation extending several tax breaks mostly benefiting corporations) that could undo half of the savings achieved through the much-debated “sequestration,” or automatic spending cuts.

This comes just weeks after the Senate failed to provide any extension of emergency unemployment benefits until it was agreed that the costs would be fully offset to avoid any increase in the deficit.

The package of provisions that Capitol Hill insiders call the “tax extenders,” which the Senate Finance Committee will take up the week of March 31, includes tax breaks that are officially temporary (mostly in effect for two years) but are effectively permanent because Congress routinely extends them without any debate or oversight whatsoever.

The last extension of these breaks was tucked into the deal that Congress approved on New Year’s Day of 2013 to address the “fiscal cliff” of expiring tax breaks. Before that it was tucked into the legislation enacted in late 2010 to extend all the Bush-era tax breaks for two years. Before that it was tucked into the legislation that created TARP (the bank bailout), which was signed into law by President George W. Bush in 2008. Congress has never offset the costs of these tax breaks.

While Congress has been generous in providing subsidies to corporations through the tax code, it has taken a very different approach to providing subsidies in the form of direct spending, especially when it would benefit working people. Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration (automatic spending cuts) of about $109 billion each year for a decade.

The resulting cuts in public investments like Head Start and medical research caused widespread public outcry. But even the deal that Rep. Paul Ryan and Senator Patty Murray struck in December to undo some of the damage eliminates less than half of the sequestration for 2014 and a much smaller portion in 2015.

The Ryan-Murray deal undid $63 billion of sequestration over two years. The last time Congress enacted the tax extenders (extending tax breaks for two years) the cost was over $71 billion. Figures from the Congressional Budget Office show that if the tax extenders are never allowed to expire, they will cost at least $450 billion over the next decade (and over $700 billion if the package includes more recent breaks for writing off business equipment).

In this deficit-obsessed environment, it would be logical for Congress to refuse to enact any corporate tax breaks unless they can also offset the costs by ending other corporate tax breaks or tax loopholes. Otherwise, Congress should do something it has never done — vote down the tax extenders.

Tax Extenders Legislation Provides More Harm than Help to the Economy

It would be different if the tax breaks included in this legislation were helpful to the economy. But they are mostly wasteful subsidies for businesses with no obvious benefit to America.

The most costly provision among the “tax extenders” would extend the research credit. As a report from CTJ explains, this break is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would call research (like redesigning packaging for food). It also subsidizes activities that businesses would carry out in the absence of any tax break — including activities that businesses performed years before claiming the credit.

The third most costly provision among the tax extenders would extend the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of the ways it avoids federal taxes.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as CTJ has explained, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even those few provisions that seem like they would help ordinary families are mostly bad policy. For example, the deduction for postsecondary tuition and related fees seems, on its surface, like a nice idea, but CTJ has explained that it’s actually the most regressive of all the tax breaks for postsecondary education. In other words, this break is targeted more to the well-off than any other education tax break, as illustrated in the graph below.

There simply is no provision among the “tax extenders” that justifies Congress enacting this enormous, costly package once again without asking corporations to pay for it.