Tax Enforcement & Tax Evasion News

Investors and Corporations Would Profit from a Federal Private School Voucher Tax Credit

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A new report by the Institute on Taxation and Economic Policy (ITEP) and AASA, the School Superintendents Association, details how tax subsidies that funnel money toward private schools are being used as profitable tax shelters by high-income taxpayers. By exploiting interactions between federal and state tax law, high-income taxpayers in nine states are currently able to turn a profit when making so-called “donations” to private school voucher organizations. The report also explains how legislation pending in Congress called the Educational Opportunities Act (EOA) would expand these profitable tax shelters to investors and corporations nationwide.

The core feature of these tax shelters are credits that offer supersized incentives to donate to organizations that distribute private school vouchers. When taxpayers donate to most charities, such as food pantries or veterans’ groups, they typically receive a charitable tax deduction that somewhat reduces the out-of-pocket cost of their donation. Private school proponents have decided that their cause is worthy of a far more generous subsidy, however, and have successfully pushed for the enactment of state tax credits that wipe out up to 100 percent of the cost of donating to private school voucher organizations. When these lucrative state tax credits are combined with federal charitable tax deductions (and sometimes state deductions as well), some high-income taxpayers are finding that the tax cuts they receive are larger than their actual donations (see Figure 1). Tax accountants and private schools have seized on this tax shelter and turned it into a marketing opportunity, advising potential donors that: “You can make money by donating!”

As things stand today, this tax loophole is only available to taxpayers in nine of the seventeen states with private school voucher tax credits. But the Educational Opportunities Act (EOA) introduced by Sen. Marco Rubio (FL) and Rep. Todd Rokita (IN) would open up entirely new profit-making schemes to investors and corporations nationwide.

The EOA would offer a 100 percent tax credit of up to $4,500 for individuals or $100,000 for corporations donating to fund private school vouchers. Under this system, investors choosing to donate stock (or other property) rather than cash to voucher organizations would find that doing so would be more lucrative than if they had simply sold the stock and kept the money for themselves. This is because rather than receiving (taxable) capital gains income from a buyer of the stock, the investor would be paid in (tax-free) federal tax credits.

Another potential tax shelter would be limited to those taxpayers living in states offering their own voucher tax credits. While the EOA prohibits claiming a federal tax deduction and federal tax credit on the same donation, it is silent as to whether taxpayers can claim a state tax credit and federal tax credit on a single donation. If this occurred, taxpayers would enjoy a guaranteed profit every year they donate to private schools when they stacked 100 percent federal credits on top of state credits valued at 50 to 100 percent of the amount donated.

Wealth managers and tax accountants would be foolish not to advise their clients to take advantage of these handouts. Even families with no particular attachment to private schools would find it to be in their own financial best interest to begin donating to those schools. The result could be an explosion in funding for private schools at the expense of the public coffers and everything they fund—including public education.

Read the report: Public Loss, Private Gain: How Voucher Tax Shelters Undermine Public Education

Critical Anti-Tax Evasion Legislation Under Attack

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The Foreign Account Tax Compliance Act – or FATCA – is a financial disclosure and transparency law designed to crack down on international tax evasion by U.S. taxpayers who hold financial assets offshore. This law, passed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, provides the Internal Revenue Service (IRS) with the information necessary to ensure that every U.S. taxpayer is tax compliant.

Despite – or perhaps because of – its important role in combating international income tax evasion, FATCA continues to have outspoken critics. The ongoing effort to repeal FATCA took one step forward this past Wednesday, when the House Oversight Committee’s Subcommittee on Government Operations held a hearing to “Review the Unintended Consequences of the Foreign Account Transparency Act.”

The forum could have been an opportunity to spur reasoned debate to address some of the issues raised by FATCA. Instead, Subcommittee Chair Rep. Mark Meadows (R-NC), who recently introduced a bill to repeal FATCA alongside long-time anti-FATCA champion Sen. Rand Paul (R-KY), used the hearing as an opportunity to cherry-pick extreme examples of FATCA’s (admittedly bumpy) implementation and rail against FATCA’s necessary disclosure of financial information to invalidate the entire law.

Despite what Rep. Meadows and Sen. Paul would like us to believe, FATCA is a critical and effective anti-tax evasion law.  It wasn’t created with the desire to rake through U.S. taxpayers’ financial data. FATCA was passed in the context of overwhelming evidence that certain U.S. taxpayers were taking advantage of the intricacies of the global financial system to hide assets offshore. For example, in 2009, 52,000 American-held accounts totaling over $14.8 billion in previously undisclosed assets were discovered at the Swiss bank UBS. And this is just one example at one bank – it is estimated that the United States loses $40 to $70 billion in revenue annually due to individual income tax evasion.

FATCA helps to close the gap between the revenue the U.S. government should collect and what it actually brings in by aggregating account information from both U.S. accountholders and their foreign financial institutions (FFIs). The IRS can then match what each individual reports against the information supplied by their FFI to identify misreported and unreported income. According to the IRS, sources of income that are not subject to either third-party-reporting or withholding are misreported at a 56% higher rate than sources that are subject to additional reporting and withholding. Matching statements of income provided by taxpayers against third-party sources is a common U.S. practice; it’s how the IRS identifies misreported information from wage (through your W-2) and investment income (through the 1099 series) each year.

When the HIRE act was first proposed, the Joint Committee on Taxation estimated that FATCA would raise approximately $8.7 billion over the next decade. While it’s difficult to measure how much FATCA has raised to date, the IRS recently reported that over 100,000 individuals have voluntarily come back into tax compliance through its voluntary disclosure program, resulting in approximately $10 billion in recouped taxes, interest, and penalties. Many have attributed this influx of voluntary compliance to taxpayers’ realization that FATCA increases their likelihood of detection if they misreport their worldwide income.

FATCA is designed to ensure that every American taxpayer is paying the correct amount of tax. Repealing FATCA would be a serious step in the wrong direction. Without a new law to take its place – which no one advocating for repeal has proposed – repeal would return us to the pre-FATCA status quo of having no meaningful way to crack down on international income tax evasion. This isn’t fair to law-abiding citizens who eventually end up picking up the tab when revenue is hidden overseas.

We should instead focus our energy on thoroughly vetting and advancing reform proposals – such as Sen. Sheldon Whitehouse & Rep. Lloyd Doggett’s “Stop Tax Haven Abuse Act” – that serve to improve and strengthen FATCA, rather than simply striking this important disclosure law from our books.

For more information on FATCA and how the law works to crack down on international tax evasion, ITEP has published a FATCA policy brief Foreign Account Tax Compliance Act (FATCA): A Critical Anti-Tax Evasion Tool and a one page FATCA fact sheet.

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.

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.

States Should Require Combined Reporting of Corporate Income

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An important aspect of a 21st century tax code is ensuring that corporate income taxes are easy for corporations to follow, but not easy for them to avoid. As our newly updated policy brief on Combined Reporting of State Corporate Income Taxes explains, “combined reporting” remains an essential tool for states to achieve these goals. More than half of states with a corporate income tax now implement this common-sense policy to minimize corporate tax avoidance, and at least three more will consider adopting combined reporting this year. Moreover, most states that already require combined reporting can improve it further by taking the policy international through what is known as “worldwide combined reporting.”

Combined reporting works by requiring large companies operating in multiple states to add together all the profits of their various branches and subsidiaries into one single report and then follow existing rules for apportioning those profits to the states in which they operate. Requiring the combined report nullifies certain strategies some businesses use to avoid taxes, such as artificially shifting profits to certain states that tax corporate income at a lower rate or not at all. Because combined reporting renders such strategies pointless, it improves revenue performance of the tax assuring more help to fund services like transportation, education, and public safety, while also simplifying tax compliance for businesses, as they no longer have incentive to engage in behaviors such as creating spin-off companies in new states simply to avoid the taxes they owe.

New Mexico, which has been considering bills to implement combined reporting for more than ten years, will have another chance to take this step to modernize its tax code this year. Pennsylvania’s Gov. Tom Wolf included the policy in his budget proposal earlier this month. And Alabama legislators are making a concerted push to adopt combined reporting as well. As our policy brief explains, these states and others can benefit from combined reporting, and states that have already taken this crucial step can consider additional measures to beef up their defenses against corporate tax avoidance strategies.

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.

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.

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.

Treasury Regs Aim at Ending an Estate Tax Dodge for the Very, Very Wealthy

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Earlier this week the U.S. Treasury Department proposed new regulations designed to prevent wealthy business owners from avoiding estate tax liability by artificially undervaluing their assets.

The tax avoidance strategy the new regs are designed to prevent takes advantage of a provision of the law that has to do with how minority interests in businesses are valued for tax purposes. Minority interests, and interests in companies that are hard to sell, are worth less than other business interests, and are routinely (and sensibly) valued less for this reason.  But this provision can be abused by wealthy people seeking aggressive estate-planning strategies. Someone whose assets, properly valued, would likely put them in the economic stratosphere—the less than one half of one percent of estates that would actually be subject to the federal estate tax—can reduce their estate’s apparent value by seeking out a business investment in which their minority interest would be valued much lower, for tax purposes, than other investment uses of the same amount of money.

Put another way, if you have $20 million in assets, abuse of this provision can allow you to squeeze it into a $10 million package for no purpose other than tax avoidance. The Treasury regs are intended to prevent these transactions only when they are clearly motivated by tax avoidance.

The technique Treasury wants to prevent clearly isn’t something just anyone is going to try. In 2016, estates and cumulative gifts valued at less than $5.45 million ($10.9 million for a married couple) are exempt from all federal taxes. Nor is it a strategy that’s easily available to owners of a small business or family farm for whom this single asset is the lion’s share of their estate. Rather, it’s a tax dodge that’s available to a small number of super-rich Americans who enjoy enough liquidity to contemplate moving tens of millions of dollars in assets around at a moment’s notice.

As things stand, estate tax cuts over the past two decades already mean the tax only applies to the very largest estates. Reversing this trend would require more than regulatory steps. Fortunately, Congress has reform options available in the form of the Responsible Estate Tax Act, which would reduce the estate tax exemption and crack down on other egregious estate tax abuses such as the “GRAT” loophole. But since Congressional action does not appear to be forthcoming, Treasury’s draft regulations are an important step in preserving the estate tax. 

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. 

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.

SEC Allows Big Banks to Fudge the Numbers, Underreport Tax Haven Subsidiaries

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A new review of 27 major American financial firms’ corporate filings finds that some of the nation’s big banks fail to report the vast majority of their tax haven subsidiaries in their annual Securities and Exchange Commission (SEC) corporate filings. This brazen omission gives even more credence to previous studies about how Fortune 500 companies, banks included, are using tax haven subsidiaries to avoid U.S. taxes on a grand scale.

The companies analyzed include banking and financial services giants such as J.P. Morgan Chase, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. All told, the 27 firms collectively reported 401 tax haven subsidiaries to their shareholders and the SEC in 2015. However, when these same companies reported more complete information to the Federal Reserve, they revealed they own more than 2,800 corporate subsidiaries in notorious tax haven countries such as the Cayman Islands, Bermuda, Luxembourg, and the Netherlands. In other words, these major corporations are reporting to the SEC, their shareholders and financial analysts at least 85 percent fewer subsidiaries companies than what’s on their actual books. It’s hard to believe such an omission on this vast scale is accidental. The more likely answer is that these tax haven subsidiaries are shell corporations that are part of a broader strategy to stash earnings abroad to avoid paying U.S. corporate income taxes.

How Do They Get Away With This?

Corporations can avoid disclosing subsidiaries to shareholders due to the SEC’s requirement that companies only have to disclose their “significant” subsidiaries. Even the Federal Reserve doesn’t require all subsidiaries to be reported, but does apply a stricter set of criteria for disclosure. CTJ analysts discovered the gross discrepancy between what these financial firms report to the SEC and what they report to the Federal Reserve by reviewing disclosures released to both entities.

Consumers should be concerned about this partial reporting for a few reasons. First, the SEC-mandated annual financial reports are the main source of information readily available to American shareholders who want to understand the financial health—to say nothing of the ethical standards—of the companies in which they invest. Incomplete disclosure means shareholders are routinely receiving a very incomplete view of the structure of the firms they’ve chosen to invest in. Second, if corporations are using shell companies on a mass scale to avoid paying taxes, it ultimately means ordinary working people are going to have to contribute more or the nation will not have enough resources to fund priorities as varies as education, health and transportation.

This finding is doubly troubling because the financial sector is likely not alone in failing to reveal tax haven subsidiary companies. We were only able to discern this information about the financial sector because such companies have both SEC and Federal Reserve reporting requirements. But most U.S. corporations outside the financial sector aren’t regulated by the Federal Reserve, so it is impossible to know the extent to which corporations in other sectors are concealing their tax haven subsidiaries.

Across the Fortune 500, the scope of this non-disclosure is potentially staggering. CTJ’s 2015 “Offshore Shell Games” report found that Fortune 500 companies disclosed over 7,600 tax haven subsidiaries to the SEC in 2014. If the underreporting seen in the financial sector is representative of what is happening with Fortune 500 companies in general, the actual number of tax haven subsidiaries held by this larger group could be closer to 50,000! However, the only way we will be able to discover whether this is the case is if the SEC broadens its requirements so that companies have to report all their subsidiaries and not just the “significant” ones.

Read the Full 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.

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. 

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.

Tax Cheats Stick Honest Taxpayers with a $406 Billion Annual Tax Bill

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A new report from the Internal Revenue Service (IRS) estimates that the “tax gap,” meaning the amount in taxes that are owed but go unpaid each year, was $406 billion on average between 2008-2010. This is a $406 billion cost that honest taxpayers are forced to make up for due to the illegal actions of individuals and corporations.

While the $406 billion figure is rather staggering, many experts believe that this could be an understatement of the cost of tax evasion. In testimony before the Senate Budget Committee, Bob McIntyre, director of Citizens for Tax Justice, explained that the IRS estimates likely underestimate the amount of income that individuals and corporations are able to evade by hiding their money in tax havens.

It is also important to note that the vast majority of middle income taxpayers are not the ones evading taxes. That’s mainly because they can’t cheat even if they were so inclined. Employers must report wages to the IRS and remit withholding taxes. The majority of the tax gap ($247 billion) is due to underreporting of business income.

The most obvious way to crack down on tax evasion is to beef up enforcement by the IRS. But due to serious budget cuts enacted by Congress, the IRS estimates that its enforcement actions reduced the tax gap by only 11 percent.

Providing the IRS with the resources it needs to do a better job cracking down on tax cheats would seem to be a no brainer, except to the brain dead members of Congress. According to one estimate, increasing funding for IRS enforcement, modernization and management systems can save the government $200 for every dollar invested.

Rather than increasing the funding of the IRS to close the tax gap however, Congress has actually cut the IRS budget by 17 percent since 2010, after accounting for inflation. While cutting the IRS budget may appeal to members of Congress who are in favor of tax cheating, it’s counterproductive in terms of deficit reduction and protecting honest taxpayers.

So if Congress wants to get serious about closing the tax gap, the first thing it should do is reverse these budget cuts and increase the IRS’s funding substantially. In addition, there are numerous legislative actions that Congress could take to crack down on tax evasion. For example, Congress could require more information reporting, increase penalties for tax-evasion facilitators and close the various offshore loopholes that create the opportunity for tax cheating businesses to game the tax system. 

Allowing for rampant tax evasion steals money from honest taxpayers and the public investments that we need. Congress should act immediately to stop this theft of taxpayer money.

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 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”.


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 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

Internet Tax Ban is a Defeat for Good Tax Policy

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Yesterday Congress passed a bill, which President Obama is expected to sign, that will ban states from imposing taxes on Internet access.  The so-called “Internet Tax Freedom Act” (ITFA) was originally enacted in 1998 as a temporary measure meant to assist an “infant industry.”  Now, however, it is being made permanent for exactly the opposite reason: because the Internet is “a resource used daily by Americans of all ages, across our country,” according to Sen. Majority Leader Mitch McConnell.  The bill effectively forces a tax cut onto the states, without any direct cost to the federal government.  It’s Congress’ favorite kind of tax cut: one that it does not need to pay for.

The most tangible effect of ITFA will come in 2020 when the seven states that began applying taxes to Internet access prior to 1998—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin—will lose their “grandfathered” status and be forced to enact special Internet tax exemptions costing a total of $563 million per year.  But Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) explains that the impact on existing state taxes may not stop there.  According to Mazerov, this sweeping new ban could provide Internet access providers with a legal basis for arguing that all of their purchases, from computer servers to fiber-optic cable and even gasoline, must be exempted from tax in order to avoid any “indirect tax” on Internet access.

For years, permanent enactment of the ITFA had been stopped short by members of Congress who insisted that it be packaged with a measure that could actually improve state sales tax systems: the Marketplace Fairness Act (or similar legislation) that would allow states to require online retailers to collect the sales taxes owed by their customers.  Today, enforcement of sales taxes on purchases made over the Internet remains a messy patchwork, with many e-retailers enjoying an inequitable and distortionary price advantage over brick and mortar stores.  In order to secure passage of ITFA, Sen. McConnell pledged to hold a vote on the Marketplace Fairness Act later this year—though if history is any guide, that may not mean much.  The Senate already passed the Act once, in 2013, before watching it languish in the House.

Regardless of what happens to the Marketplace Fairness Act, the permanent extension of ITFA marks a step backward for state tax policy.  ITFA narrows state sales tax bases, makes them less economically neutral, and damages the long-run adequacy and sustainability of state revenues.  Limiting states’ ability to apply their consumption taxes in a broad-based way is antithetical to sound tax policy.

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. 

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.

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.

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.

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.

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.


How the U.S. Became a Top Secrecy Jurisdiction

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Sometimes, ranking near No. 1 is not a badge of pride. The U.S. ranks as the third biggest offender – just after Switzerland and Hong Kong – on the Tax Justice Network’s 2015 Financial Secrecy Index when it comes to facilitating financial secrecy and tax evasion, or, in other words, enabling individuals to hide their assets. 

The largest drivers for the United States’ high ranking are its financial secrecy laws and that it has the largest share of the global market for offshore financial services.

How did the United States become such an important offshore financial center? It began with the passage of the Revenue Act of 1921, which exempted the interest income of non-U.S. residents from tax. The combination of this tax break and weak financial disclosure rules made U.S. banks ideal places for foreign individuals looking to hide their assets.

The United States does not require financial institutions to collect basic ownership information from corporations. This allows entities to create illicit shell corporations, which criminals can use to commit crimes such as money laundering and tax evasion without much fear of being identified. Because incorporation is a function of state governments, many states, including Delaware, Nevada and Wyoming, have facilitated the proliferation of shell corporations as a way to raise revenue by collecting fees for each corporation created.

Some states have taken nominal steps to reverse their secrecy laws in recent years, but no real progress has been made. Federal legislation would help. The Incorporation Transparency and Law Enforcement Assistance Act, for example, would require states to collect the beneficial ownership information for each corporation registered in their state.

The United States’ lack of transparency on information about non-resident investments also aides those seeking to hide assets. Over the years, lawmakers have made several attempts to create a more transparent legal framework, but the only hopeful moment came during the 1990s when the Clinton administration proposed that banks in the United States be required to inform the U.S. Internal Revenue Service (IRS) about all bank interest paid to non-resident individuals. This regulation never went into effect.

The United States should end its protection of potential criminals by allowing more reciprocal exchange information between it and other countries. Steps are already being taken in this direction with the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010. Unfortunately, FATCA relies on an array of bilateral agreements instead of a broader multilateral agreement, making the exchange of information less streamlined. There are also numerous examples where bilateral agreements require U.S. access to information from foreign institutions, but they fail to provide that same information to other countries. Rather than being an impediment to progress, the United States should take a leadership role in combatting tax evasion by fighting for financial transparency around the world.

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.

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.

The IRS: You Don't Have to Like Them, but You Do Have to Fund Them

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Congress is considering further gutting the Internal Revenue Service’s enforcement capacities even as a new report from the Taxpayer Advocate shows that previous rounds of budget cuts have put the IRS dangerously close to being unable to perform basic enforcement and compliance functions.

Lawmakers have cut the IRS’s budget in each of the past five years all while giving the IRS increased oversight responsibility under the Affordable Care Act and Foreign Account Tax Compliance Act (FATCA). Further, the IRS processed 1.5 million more filings this year than last. This is a practice that hurts law-abiding taxpayers and rewards tax evaders.

The IRS budget is down 17 percent from 2010, adjusted for inflation, with another $838 million in cuts scheduled for 2016. These cuts are forcing the IRS to reduce services that help citizens pay their taxes according to the Taxpayer Advocate. During the 2015 tax season, IRS customer service representatives answered 37 percent of phone calls and callers waited an average of 23 minutes to speak with a representative.

Furthermore, the IRS automatically hung-up on 8.8 million callers–a 1500 percent increase since 2014–due to an overwhelmed phone system. The Taxpayer Advocate argues that these dismal levels of customer service will result in fewer people voluntarily paying their taxes.  Currently 98 percent of taxes are paid voluntarily and on time. Any drop in voluntary compliance will lead to greater enforcement costs and less revenue.

Although the IRS is choosing to focus more of its limited resources on making sure citizens pay their taxes, enforcement is still weak and getting worse. The number of employees dedicated to enforcement has dropped by 20 percent since 2010. John Koskinen, the Commissioner of the IRS, stated in January that reduced funding will result in $2 billion of lost revenue this year. This means that the $838 million in ‘savings’ from cutting the IRS budget will really result in $2 billion in losses for the entire federal government. Indeed, losses could be even greater because each additional dollar spent on enforcement yields six dollars of revenue and every dollar spent on “audits, liens and seizing property from tax cheats” yields ten dollars of revenue. In 2011, the commissioner of the IRS even testified to Congress that every dollar spent on enforcement, modernization, and management saves the government $200.

Currently there is a proposal attached to the highway funding bill that requires the IRS to outsource some tax enforcement to private debt collectors. This policy was practiced from 2006 to 2009 and lost money. Critics are also concerned about an increase in scammers who claim to represent the IRS, an alarming trend that has been growing in recent years. Clearly, the government would have to compensate private collectors, but it would be far more cost-effective to fully fund IRS enforcement.

Right now there is no end in sight for the fiscally irresponsible budget cuts to the IRS. Even with the $75 million increase in funding for taxpayer services, Congress is proposing to cut the 2016 budget by more than double the 2015 cuts and spending $2.8 billion less than what President Obama requested. Critics of the IRS argue that reducing the IRS budget will result in more efficient use of funds and more accountability to the American people. The main issue with this argument is that the IRS has already employed many cost saving techniques such as encouraging electronic filing and referring taxpayers to the IRS website rather than speaking with a representative. As noted by the Taxpayer Advocate report, the cuts have already begun to impact taxpayer filing services, fraud prevention, FATCA enforcement, and digital security.

The IRS needs more funds, not fewer, to properly serve taxpayers, maintain high levels of voluntary compliance, and enforce the laws Congress has passed.  

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.

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.


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. 

Rand Paul's Record Shows He's a Champion for Tax Cheats and the Wealthy

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No member of Congress has been more active in the cause of protecting tax cheaters and tax avoidance by our nation’s wealthiest individuals and corporations than Sen.(now presidential candidate) Rand Paul.

While Paul is a standard bearer of anti-tax conservatives through his advocacy of radical policies such as the flat tax, his advocacy of tax avoidance and his lead role in blocking or even trying to repeal basic anti-tax-evasion measures makes him a radical outlier.

Tax Evasion and Avoidance

Most prominently, Sen. Paul, for years, has single-handedly blocked ratification of a critical tax treaty with Switzerland that would allow the United States to go after the thousands of tax cheaters who hide their income in Swiss bank accounts to evade taxes. In addition, Sen. Paul has been a leader in the movement to repeal the Foreign Account Tax Compliance Act (FATCA), vital law enforcement legislation that helps tax authorities collect information on offshore bank accounts. In both cases, the beneficiaries of his policies are tax evaders and the losers are honest taxpayers who are forced to pick up the tab for the billions lost each year to tax evasion.

Another critical component of Sen. Paul’s pro-tax evasion agenda has been his long time assault on the Internal Revenue Service (IRS). Like fellow presidential candidate Sen. Ted Cruz, Sen. Paul has recklessly called for the abolition of the IRS without explaining how the government would function without any sort of revenue collection agency akin to the IRS. While this kind of rhetoric is largely blather, it has real world consequences. Sen. Paul's language has led directly to the deep and devastating cuts to the IRS in recent years that have hamstrung the agency’s ability to go after tax evaders and perform basic functions.

On the issue of corporate tax avoidance, Sen. Paul has been a prominent advocate for the aggressive use of loopholes by our nation’s largest corporations. During the Senate Permanent Subcommittee on Investigation’s infamous hearing on Apple’s avoidance of tens of billions of dollars in taxes using Ireland subsidiaries and accounting gimmicks, Sen. Paul sided with Apple, saying that the Senate should apologize to the company and that discussions of tax reform should not include examining specific tax avoidance practices of companies.

Taking this to the next level, Sen. Paul wants to reward offshore tax avoidance through a repatriation holiday. This would give an enormous tax break to the worst tax avoiders, including Apple and dozens of other companies, by allowing them to pay a 6.5 percent rather than 35 percent tax rate on their offshore profits upon repatriation. While proponents of a repatriation holiday, like Sen. Paul, argue that such a proposal could be used to pay for infrastructure, the nonpartisan Joint Committee on Taxation found that a holiday would lose $95 billion in revenue over ten years.

Tax Cuts for the Rich

Sen. Paul has also proposed changes that would increase taxes on the overwhelming majority of Americans, while at the same time providing massive tax breaks to the very wealthy. For instance, Sen. Paul has proposed the implementation of a flat tax, which would tax income at a single flat rate and entirely exempt capital gains, dividends and interest from taxation. A Citizens for Tax Justice analysis of a similar flat tax proposal found that it would increase taxes on the bottom 95 percent of Americans by almost $3,000 on average and at the same time give the richest 1 percent of Americans an average tax cut of nearly $210,000.

This stark unfairness should be no surprise. In fact, the authors of the "Flat Tax" endorsed by Sen. Paul had this to say about their proposal in their 1983 book: It “will be a tremendous boon to the economic elite,” they admitted. And they also added, “Now for some bad news. . . . It is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.”

Besides advocating for a regressive flat tax, Sen. Paul has indicated that he will soon “propose the largest tax cut in American history.” What’s striking about this is that any tax cut, let alone an extremely large one, is out of touch with the dire fiscal realities our nation is facing. Even the most recent budget proposal by the House Republicans, which includes trillions in draconian and infeasible cuts to critical public programs, assumes that revenue levels need to stay at the already low level of current policy.

While Sen. Paul has a reputation as a maverick on many issues, when it comes to tax issues, he adheres to the worst excesses of the anti-tax, anti-middle-class conservative movement. 

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. 

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.

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.   

Cutting the IRS Budget is a Lose-Lose for American Taxpayers

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The decision to further cut the Internal Revenue Service's (IRS) budget by $346 million next year from its already low 2014 level is almost certainly the most ill-advised cut in the announced omnibus spending bill passed in the House of Representatives Thursday night and now moving forward in the Senate.

IRS budget cuts actually increase the budget deficit because they result in lower revenue collections. In fact, one study found that every dollar spent on the IRS's enforcement, modernization and management system reduces the federal budget deficit by $200 and another report found that every dollar the IRS "spends for audits, liens and seizing property from tax cheats" garners $10 back.

The latest cut to the IRS comes on top of years of devastating budget cuts, with the agency's budget already chopped by 14 percent between 2010 and 2014 (controlling for inflation). As a result, the IRS has cut its staff by 11 percent since 2010. These budget cuts have been enacted even as the IRS has to process more and more taxpayer information each year and to administer the distribution of billions in new tax credits as part of healthcare reform.

Given its increasing responsibilities and decreasing budget, it’s no wonder the National Taxpayer Advocate (NTA), a well-respected non-partisan IRS watchdog, said in its latest annual report that the IRS budget is one of the agency's "most serious problems" and that the "IRS desperately needs more funding." One area where the effects of the budget cuts are especially visible, according to the NTA, is in the customer service division, where only 61 percent of taxpayers seeking to speak with a customer service representative were able to get through.

The tragic thing about these budget cuts is that they have become politically self-reinforcing. For years, anti-tax conservatives have been happy to jump on any IRS misstep to justify punishing the agency with more budget cuts, which then makes the agency less able to function and more prone to precisely these same missteps.

Demonstrating this principle, many conservatives are using a new Treasury inspector general report showing that the IRS improperly paid out billions in child and earned income tax credits as a convenient prop to bash the IRS for "gross mismanagement" and "bureaucratic incompetence." One point that these critics leave out is that this same report concludes that the IRS simply "does not have the resources nor does it have alternative compliance tools needed to adequately address the erroneous EITC payments identified." In fact, Congress has failed to enact several Treasury and IRS proposals or provide funding that would enable the agency to reduce the error rate.

Taking these politically opportunistic attacks to their extreme, a recently released documentary  compared the IRS's recent missteps to fascism and genocide in its advocacy for the IRS's total abolition. The rhetoric of abolishing the IRS used to be the kind of irresponsible speech cordoned off to the political extremes. More recently, the Republican National Committee fundraised on the explicit promise that donating would help the party "Abolish the IRS," though the committee never explained how it would go about paying for government without some equivalent agency to collect taxes. 

Besides the politicians, the only real beneficiaries of IRS cuts are the tax dodgers and cheats that will have even less reason to fear that they will be caught by the woefully inadequate tax enforcement. For example, the IRS commissioner recently noted (Subscription Required) that the agency simply does not have the capacity to take advantage of new international reporting requirements on multinational corporations to help with its corporate tax enforcement efforts. Failure of these enforcement efforts have left honest taxpayers holding the bag for an estimated $385 billion in unpaid taxes each year.

Rather than cutting the IRS’s budget, Congress should substantially increase its budget. A good start would be increasing its FY2015 budget by $1.5 billion, compared to the current proposed level in the budget deal, as President Obama proposed in his most recent budget. Such an increase would be a win-win for taxpayers since it would substantially decrease the deficit and at the same time improve the functioning of the IRS so that it can more fairly and effectively enforce the tax code. 

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.

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.

How Billionaire John Malone Dodged $200 Million in Taxes

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johnmalone.jpgA story that made few waves earlier this week due to the focus on the election reminds me of Leona Helmsley’s infamous “only the little people pay taxes” comment. If you missed it, a Bloomberg report on Monday exposed billionaire John Malone, chairman of Liberty Global, as a world-class tax dodger.

The detailed story is jaw-dropping because Malone’s crafty maneuvers that allowed his company to dodge millions in taxes and allowed him to avoid millions in personal income taxes were all arguably legal.  

Here’s how he did it: Last year Malone’s Liberty Global, the largest international cable company, “moved” from Colorado to London through a merger with Virgin Media. The merger was structured as a corporate inversion, a tax-dodging gambit much in the news lately. Although Liberty gives its London office top billing on its website, the company didn’t actually move its headquarters to London—it’s still run primarily out of the company’s office in Colorado.

As my colleagues and I at Citizens for Tax Justice have noted repeatedly, corporate inversions are often a farce that allow companies to claim they are headquartered elsewhere, while they reap all the benefits of operating in the United States and avoid paying their fair share.

Aside from Liberty Global’s current and future tax savings expected from the paper move, Malone is estimated to have personally escaped $200 million in income taxes in the inversion deal which generally subjects the shareholders to income taxes on their capital gain. He did that by transferring $600 million of his stake in the company to a charitable trust the day before his company announced the inversion deal and by twisting Treasury regulations into a pretzel to avoid tax on the remaining $260 million piece.

The greed that says Malone—whose estimated net worth exceeds $7.5 billion—can’t even pay 20 percent in capital gains tax (compared to a 35 percent rate on wages) on his $860 million dollar gain is truly unimaginable to me. And that we have laws that allow tax avoidance on this scale is deplorable.

If what Helmsley said more than two decades ago is true, that only the little people pay taxes, then perhaps only the “little people” should get the benefits of the public services that taxes pay for: roads, airports, the courts, the Coast Guard (Malone has two yachts), military and police protection—to name just a few. 

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.

New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs

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Looking for a good scare this Halloween? Right-wing film producer John Sullivan will have you hiding under your covers with his portrayal of jack-booted IRS thugs going door to door looking for any Christian, veteran or true freedom-loving American that they can squash.

Pulling no punches, Lori Marcus, a commentator in the recently released documentary "Unfair: Exposing the IRS," says that if the IRS is not stopped then the next boxcar will be coming for you, an allusion to the boxcars used to carry Jews to Nazi concentration camps. Nazi allusions are part and parcel of Sullivan, whose right-wing propagandist films such as"2016: Obama's America" and "Expelled: No Intelligence Allowed," are chock full of factual errors and hyperbole in service of perpetuating a sense of mortal fear of all things Obama or progressive.

With Unfair, Sullivan uses the IRS's recent scandals as a jumping off point to argue that the IRS is an inherently criminal organization at the forefront of turning America into a "fascist state." In reality, the real scandal is how years of woefully underfunding the IRS has seriously hamstrung the agency's ability to perform its even its most basic tax collection duties. The lack of adequate funds for computer infrastructure, staff and training is more the cause of the scandals than any fake conspiracy dreamed up by Sullivan.

Rather than pushing for adequately funding the IRS, the film calls for  abolishing the agency through the enactment of the so-called "Fair Tax," which is a proposal that would essentially replace all federal taxes with a national sales tax. The film fails to mention that a realistic version of the Fair Tax would be extremely regressive, increasing taxes on the bottom 80 percent of taxpayers by an average of $3,200 annually, while cutting taxes for the top 1 percent of taxpayers by an average of $225,000 annually. In addition, the assertion that a Fair Tax system would "Abolish the IRS" is misleading in that it leaves out that fact that the IRS would simply need to be replaced by a complicated system of mini-IRS's at the state level.

In other words, the Fair Tax plan promoted by the movie is really just a bait and switch, promising low taxes and the end of any tax collection issues, but delivering higher taxes for most taxpayers and a whole new set of state tax collection issues.

Unfortunately, the push to abolish the IRS and/or enacting the Fair Tax is not just the province of right-wing filmmakers. The Fair Tax Act, for example, has actually gained some legislative traction, earning as many as 76 sponsors in the House of Representatives and 9 sponsors in the Senate. Even scarier, the Republican National Committee is now parroting the Fair Tax playbook by fundraising on the promise to "Abolish the IRS," though they did not exactly explain how they would go about doing this.

Rather than believing spun up stories about the ghouls and goblins having taken over the IRS this October, Congress should instead take its role seriously by substantially increasing the IRS's budget, so the agency can more effectively collect critically needed revenue and provide better service to U.S. taxpayers. 

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.

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.

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.

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. 

Republican National Committee Wants to Abolish the IRS

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abolishtheirs.jpgWith the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC's new fundraising campaign is not surprising given the IRS's unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC's campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through "abolishment" or even just significant spending cuts is destructive. In fact, recent cuts in the IRS's budget have already hamstrung the organization's ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency's recent controversies in the first place. In addition, cutting the IRS's budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC's messaging saying that "closing the door" at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS's recent unpopularity to push deep cuts to the agency's budget, including a particularly short-sighted cut of a quarter of the IRS's enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency's budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.

How to Combat the Rapid Rise of Tobacco Smuggling

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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.

Tobacco Industry Games Rules to Dodge Billions in Taxes

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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.

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.

On Highway Bill, Congress Moves to the Right of Grover Norquist

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On Thursday, Congress ended a chapter of its latest manufactured crisis by addressing the shortfall in the Highway Trust Fund just hours before the Department of Transportation would have been forced to cut funding for state and local projects by 28 percent, sidelining hundreds of thousands of workers.

Approved Thursday, the measure extends funding through May. The House passed it after Republicans rejected tax compliance provisions in the bill first approved by the Senate — provisions so innocuous that they were even blessed by the anti-tax zealot Grover Norquist.

Norquist, head of Americans for Tax Reform, is famous for his so-called “Taxpayer Protection Pledge,” which by signing politicians promise never to raise income taxes no matter how apocalyptic the consequences. But Norquist apparently recognized that revenue provisions in the Senate’s bill were compliance measures, meaning they would not increase taxes owed by anyone but only ensure people would pay what they owe. Nonetheless, key Republicans in the House of Representatives (who are usually quick to please Norquist) insisted that they were in no mood to “give them [the IRS] more tools to harass taxpayers.” This meant that the Senate was ultimately forced to approve the House version of the bill, which did not include the revenue provisions.

How Another Long Foreseen Problem Became a Washington Nail-Biter

How to cover the costs and how long of an extension to provide were just two of the issues that allowed a totally foreseen and easily fixed problem to become another artificial crisis.

The trust fund that finances transportation projects was set to run out, and the Department of Transportation planned to cut funding to state and local governments for these projects by 28 percent starting Friday. Nothing about this was unforeseen. The trust fund has an estimated shortfall of $170 billion over the coming decade because it relies mainly on the 18.4 cent gas tax and 24.4 cent diesel tax, which have remained the same since 1993.

A September 2013 report from the Institute on Taxation and Economic Policy found that if the nation’s federal gas tax had been maintained at the same inflation-adjusted level since 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Congress ignored this blindingly obvious solution and instead bickered about a short-term measure that would continue funding just for a number of months to provide lawmakers with more time. How could Congress possibly need more time to address a problem everyone has known about for years? That has to do with politics, of course. For example, some lawmakers wanted to provide funding until right after the election, which is when politicians often make politically difficult choices, while some Republicans preferred to extend the trust fund until next year with the expectation that their party would control the Senate and thus the details of a long-term fix.

Taking the latter approach, the House of Representatives had already approved a bill to address the funding gap through May, with an $11 billion cost that would be offset by changes in customs fees and in the timing of pension payments (and thus the tax deductions that are taken for them by employers).

The Senate, on July 30 amended that bill to provide funding only through December and to rely partly on the tax compliance provisions that Senator Wyden, chairman of the Finance Committee, had included in his own bill. In a statement on his bill, Wyden said that his revenue provisions

“… are not tax increases. In fact, the Finance Committee even received a letter from Grover Norquist and the group Americans for Tax Reform saying so. Mr. Norquist is not soft on the question of tax increases, and he has indicated that these provisions are not tax hikes. What these provisions do is crack down on tax cheats and ensure that mortgage lenders provide homeowners with more tax information than they are usually getting today.”

One of the revenue measures would require more reporting related to mortgage interest deductions, another would alter the statute of limitations for overstatements of investment costs, while other provisions would increase certain penalties. Altogether, the provisions would have raised $4.3 billion, which seems like a small sum compared to the drama that has surrounded this debate.

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.

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. 

Foreign Account Tax Compliance Act Goes Into Effect - Bank Secrecy Goes Out the Window

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FATCA, the Foreign Account Tax Compliance Act, finally became effective last week. The Treasury Department had repeatedly delayed implementation of the legislation which was enacted in 2010. Beginning July 1, payments made to foreign banks who don’t comply are subject to a 30 percent withholding tax.

FATCA requires foreign banks and foreign branches of U.S. banks to file information returns with the IRS disclosing the accounts of U.S. citizens and residents. Rather than report to the IRS directly, many countries have signed agreements to have the banks file the information with their home governments which will then share it with the IRS.

Although FATCA has many critics and some lawmakers have voted to repeal it, the global community has lined up to comply with the law. Over 77,000 banks and 80 countries, even China and Russia, have registered and many countries are considering enacting similar laws. Someday soon, having a Swiss bank account will no longer suggest mystery and intrigue—or tax evasion.

The Consequences of Woefully Underfunding the IRS

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Following up on their efforts to enact dramatic cuts to the IRS's funding last year, Republican members of the House Appropriations Subcommittee on Financial Services voted to slash IRS funding by $341 million, pushing the agency's budget to its lowest level in more than five years. What makes these proposed spending cuts so ridiculous is that every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

From fiscal year 2010 to 2014, the IRS has seen its overall funding cut by as much as 14 percent (adjusting for inflation) and its staff cut by 11 percent. Making matters worse, these cuts come even as the IRS takes on increasing numbers of tax returns and the substantial new responsibilities of enforcing the Foreign Account Tax Compliance Act (FATCA) and the tax subsidies in the Affordable Care Act (ACA).

Because the IRS's job is to collect taxes that pay for the rest of the government, it is unique in that cuts to its budget have the effect of substantially increasing the deficit. In fact, the Treasury Inspector General for Tax Administration (TIGTA) found that the 14 percent reduction in enforcement personnel from fiscal year (FY) 2010 to 2012 forced by budget cuts resulted in a loss of $7.6 billion in revenue in FY 2012 alone.

A new must-read report by the Center on Budget and Policy Priorities (CBPP) catalogues the variety of ways that this decrease in funding has hamstrung the agency’s ability to do its basic duties. For example, the CBPP notes that budget constraints have contributed to the delays of critical computer infrastructure created to combat identity theft and the filing of fraudulent tax returns. As it stands now, the new system has still not come into place, meaning that victims of identity theft have to wait longer than six months for a resolution to their case.

While the recent IRS scandal is driving many House Republicans to push deeper cuts to the agency, the scandal is really just further evidence that the IRS needs a larger budget to get its job done right. The latest blowup over the IRS's failure to keep extensive email records, for instance, appears to be driven in part by the fact that the IRS could not afford the $10 million required to increase the capacity of the server where it stores emails. The non-partisan and well-respected National Taxpayer Advocate perfectly explained the fundamental problem with the IRS when she noted in a speech that while "the IRS can improve its policies and procedures," the recent cuts to the agency are "just plain nuts."

The Senate for its part has proposed increasing the agency’s budget by $236 million, which is $950 million lower than the increase the Obama administration requested. While this would be a significant step in the right direction, even the administration's request would not even restore IRS funding to its 2010 level if you take inflation into account. 

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. 

Credit Suisse Gets Off Easy for Aiding Tax Evasion

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On Monday, the Department of Justice announced that Credit Suisse, the second largest bank in Switzerland, has agreed to plead guilty to criminal charges for helping Americans open secret bank accounts and use them to evade U.S. taxes. The bank will pay $1.9 billion to the federal government and $715 million to the state of New York in restitution and fines. 

Surprisingly, the agreement does not require the bank to hand over the names of its U.S. customers. In a statement issued the same day, Senator Carl Levin remarked “it is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts. More than 20,000 Americans were Credit Suisse accountholders in Switzerland, the vast majority of whom never disclosed their accounts as required by U.S. law. This leaves their identities undisclosed, with no accountability for taxes owed.”

This is in stark contrast to the 2008 deferred prosecution agreement with UBS, the largest Swiss bank. The financial giant agreed to pay $780 million in penalties and, unlike Credit Suisse, handed over 4,700 names of American account holders.

The Credit Suisse agreement comes after years of investigations into the bank’s illegal activities aiding tax evasion which were detailed in a February report by the Homeland Security Permanent Subcommittee on Investigations. The report lambasted the American and Swiss governments for dragging their feet in efforts to stop it.

The report noted that Switzerland has bank secrecy laws that prevent banks from disclosing the identities of account holders to U.S. tax enforcement authorities. Switzerland enacted a law specifically allowing UBS to provide that information to the U.S. government, but no such law was enacted this time around for Credit Suisse. Instead, the Department of Justice relied on the convoluted process outlined in a U.S.-Swiss treaty to get the information. That process has given greater power to the Swiss government and Swiss courts that have provided as little cooperation as possible.

Although the agreement imposes big fines, it does not revoke Credit Suisse’s license to continue to operate in the U.S. Apparently some fear the repercussions of taking a harder line against the big banks, apprehensive that stronger actions might precipitate a financial crisis. The possibility that the Department of Justice wanted to avoid this and did not push as hard as it might (for example, by demanding the disclosure of account holders) may mean that some banks really are “too big to jail.”

Switzerland has long been known as a tax haven for individuals from all over the world who want to hide their income from tax authorities with the help of banks like UBS and Credit Suisse. It has also been known as a tax haven for corporations like Alliance Boots that want to artificially shift profits there to avoid paying taxes in the countries where their profits are really earned. One might think it would be easier to solve the problem of individuals using tax havens to evade taxes, since that is illegal, whereas the tax avoidance of big corporations like Alliance Boots is not actually illegal (but should be). But the laws against tax evasion by individuals using Credit Suisse and other banks to hide their income are only as strong as the will of governments to enforce them.

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

Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

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More than a decade ago, a Republican-led Congress held a series of “show trials” designed to paint a picture of the Internal Revenue Service as intrusive, jackbooted thugs. It worked — at least well enough to convince Congress, which has since embarked on a decade-long trend of gradually defunding the IRS’s enforcement capabilities. But a new report from the General Accounting Office  (GAO) is the latest indicator that the pendulum has swung too far toward defanging the IRS’s enforcement capabilities. The GAO report shows that a business form known as “widely held partnerships” is growing dramatically — and that the IRS is able to audit less than 1 percent of the very largest such firms.

Businesses that are partnerships are not subject to the corporate income tax. Instead, the profits are passed along to the partners, who pay personal income taxes on them. Under current rules, this means that when the IRS wants to audit the partnership’s tax filings, it must examine the tax returns of each of the organization’s partners — and levying an adjustment is similarly burdensome for the IRS. The largest such partnerships, including hedge funds and private equity firms, can have hundreds or even thousands of partners. Even an adequately funded IRS might understandably find it difficult to audit even the most blatant partnership tax dodger.

But of course, the IRS is not adequately funded.The agency has lost 10,000 employees since 2010, more than 30 percent of which worked in enforcement areas.

If the prospect of large partnerships being able to bank on the inability of the IRS to audit them sounds like trouble, it is: the revenue stakes are potentially huge. The GAO estimates that the largest partnerships had $69.1 billion in total net income in 2011 alone. Any aggressive tax avoidance practiced by these firms will have a real effect on our nation’s budget deficit.

In a statement on the report, Senator Carl Levin from Michigan said, “Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money. It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free.”

Astonishingly, both President Barack Obama and outgoing House Ways and Means Chair Dave Camp have proposed sensible (partial) solutions to this problem. Both propose to allow the IRS to audit partnerships at the entity level, the same way they audit publicly traded corporations. Sadly, neither has proposed to completely reverse the damaging loss of IRS audit capacity caused by recent budget cuts.

Unfortunately, Camp’s proposal is embedded within a larger tax plan that altogether would result in a massive $1.7 trillion dollar deficit and make the tax code more regressive. Congress should enact the specific reform that would address the problem with partnerships now, on its own.

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. 

New CTJ Reports Explain Obama's Budget Tax Provisions

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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses

Tax Preparers Should Be Regulated

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When individuals fill out their tax returns, billions of dollars -- both for individual taxpayers and for the federal government -- are at stake. This is one reason why more than half of U.S. taxpayers rely on paid tax preparers to help them.

And yet, there are no national standards to ensure tax preparers are well qualified to play this critical role (only four states have taken licensing into their own hands) despite the fact that many preparers are error-prone, or worse. When the Treasury Inspector General for Tax Administration sent auditors into the field to pose as taxpayers seeking preparer services in 2008, 61 percent of the resulting tax returns were found to be flawed. While 65 percent of the mistakes were honest lapses, the other 35 percent were “willful or reckless” misstatements or omissions. The Government Accountability Office reached similar conclusions in a 2006 study, and the National Taxpayer Advocate has been sounding the alarm on this issue for years.

The IRS recently found that the net "tax gap" (the difference between taxes owed and taxes paid after enforcement measures are taken) was $385 billion in 2006, and that $235 billion came from individual income tax underreporting. Tax preparers certainly had a great deal to do with this.

And even relatively small parts of this problem -- like underreporting related to income tax credits, which accounted for $28 billion of the tax gap -- can have huge implications for the individual families affected. For example, the Earned Income Tax Credit (EITC) involves complicated rules and steep penalties for the taxpayer if any misrepresentations are identified, even if the mistakes are inadvertent or caused by preparer error. Roughly half of returns claiming an EITC in 2011 were filed with the help of an unregulated preparer.

While the rate of EITC overpayments has been greatly overstated, the truth is that there are too many overpayments and underpayments of EITC benefits and incompetent or nefarious preparers are partly to blame. Some have been known to offer EITC refunds in the form of deceptive loan products with exorbitant fees.

In reaction to these concerns, the IRS issued regulations in 2011 that would require unenrolled paid preparers to pass a certification exam, pay fees, and take continuing education courses. These regulations are not unprecedented. Some paid preparers who also represent taxpayers before the IRS during appeal proceedings -- like attorneys, certified public accountants, and “enrolled agents” -- are already regulated. And similar requirements currently apply to volunteer tax preparers who work through the Volunteer Income Tax Assistance (VITA) program.

Unfortunately, the 2011 regulations were never implemented because commercial tax preparers attempting to avoid the certification requirements brought suit and won in federal district court. The challengers claimed that the IRS only had statutory authority to regulate preparers that assist taxpayers in their dealings with the IRS after their returns have already been filed (the aforementioned “enrolled” agents), not those who help prepare the return before filing. While it may not seem like a meaningful distinction, federal judges have now ruled against the IRS twice. The latest rebuke came this week from the D.C. Circuit Court of Appeals.

Assuming the Supreme Court does not take up the case (the IRS has not yet announced if it will appeal), the burden will fall on Congress to give the IRS the explicit authority to pursue these important reforms. As the National Community Tax Coalition and the National Consumer Law Center wrote in their amicus brief to the DC Circuit Court, “Without such regulation, consumers are at the mercy of an industry with no minimum training or competency standards for one of the most critical financial transactions that consumers engage in every year.”

IBM's Nonsensical Response to CTJ's Finding that It Paid a 5.8 Percent Effective Federal Tax Rate

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Last week, CTJ published its finding that International Business Machines (IBM) has paid U.S. federal corporate income taxes equal to just 5.8 percent of its $45.3 billion in pretax U.S. profits over the five year period from 2008 through 2012. Today IBM responded by trying to change the subject to what it paid in one single year, and what it may or may not pay in future years.

To understand IBM’s evasive argument, first remember that CTJ’s corporate tax numbers are from the form 10-K, the document corporations file with the Securities and Exchange Commission (SEC) to disclose relevant information to shareholders. We report what are recorded on the 10-K as “current” U.S. income taxes (the federal income taxes paid by the corporation in a given year) and the profits earned by the corporation in the U.S. that year. The current taxes paid over a five-year period divided by the U.S. profits earned over a five-year period is the effective federal corporate tax rate over a five-year period.

Here the description from Politico’s “Morning Tax” of what happened when IBM was asked about CTJ’s analysis:

IBM argues that the CTJ analysis does not take into consideration the fact that the tech company heavily relies on deferrals to lower their year-to-year income tax bill noting that, according to its calculations, the company paid more than $2.5 billion in taxes for its 2012 domestic operations. That comes out to a tax rate of 27 percent, a spokesperson for the company told Morning Tax.

First, IBM focuses only on its U.S. effective tax rate in 2012, which our own figures show was in fact higher than in the previous four years. But IBM’s federal tax rate wasn’t 27 percent; it was only 14 percent. In the previous four years, IBM’s federal tax rate was only 3.5 percent, which is why IBM’s five-year effective rate is 5.8 percent.

Second, IBM seems to think that we should give the company credit for taxes that it did not pay, specifically the “deferred” taxes that it may or may not pay in the future. But quite reasonably, we count such “deferred” taxes only when and if they are actually paid.

“IBM is happy to minimize its federal tax bill, but apparently not so happy for the public to know just how little it pays to support our country,” said CTJ director Bob McIntyre. “If and when IBM starts paying its fair share in taxes, we’ll be pleased to report it. But that hasn’t been the case for at least the past 12 years.” 

US PIRG Report: States Can Crack Down on Corporations that Shift Profits to Tax Havens

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Citizens for Tax Justice has long argued that offshore tax avoidance by corporations will never be fully addressed until Congress reforms our laws to tax the domestic profits and the offshore profits of our corporations at the same time and at the same rate. Only then will corporations have no incentive to make their U.S. profits appear to be generated in tax havens like Bermuda and the Cayman Islands. But a new report from US PIRG explains that state governments can at least protect state corporate income taxes from the worst offshore abuses with reforms newly adopted by Montana and Oregon.

As PIRG explains, these two states

“simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.”

Read the US PIRG report.

Republican Platform Now Endorses Gutting Laws that Stop Offshore Tax Evasion

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(Updated 1/24/2014 to reflect the fact the resolution passed.)

At its yearly winter meeting, the Republican National Committee approved a resolution calling for the repeal of the Foreign Account Tax Compliance Act (FATCA), a major law enacted in 2010 (as part of the HIRE Act) to clamp down on offshore tax evasion.

FATCA was enacted in the wake of revelations that the Swiss bank UBS had helped American citizens evade U.S. income taxes by illegally hiding income in offshore accounts. The most important provisions of FATCA basically require Americans, including those living abroad, to tell the IRS about offshore assets greater than $50,000, and apply a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

Those who are directly affected by FATCA are likely to be few in number and they certainly have the means to fill out the disclosure form required with their federal income tax return under its provisions. The $50,000 threshold excludes housing and other non-financial assets. That means that even a relatively well-off American who works for a few years abroad and even someone who owns a house abroad will not be affected unless they hold over $50,000 in cash or financial assets in the other country.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation. (JCT does have a history of underestimating tax enforcement measures.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, this seems like a modest reform.

In May 2013, Senator Rand Paul introduced legislation to repeal the important parts of FATCA, claiming that this is necessary to protect privacy. But there simply is no right of Americans to hide income from the IRS. As we explained at that time, for a country with a personal income tax (like the U.S.), that kind of information sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

“Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.”

Other opponents of FATCA, like the Wall Street Journal, have claimed that it is causing Americans living abroad to renounce their U.S. citizenship, but as we have pointed out, those renouncing citizenship make up a tiny fraction of one percent of the six million Americans living abroad.

The Bennet-Blunt Corporate Tax Amnesty Must Be Stopped

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On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.

Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common  if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.

Background of Delaney Bill

In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.

Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.

So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.

Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits

The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Not a Way to Create Infrastructure Jobs

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.

Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.

The Dumbest Spending Cut in the New Budget Deal

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The newly passed $1.1 trillion bipartisan budget appropriations bill includes myriad spending cuts, but the $526 million cut to the Internal Revenue Service (IRS) has to be the most foolish. Under the new budget, the IRS's 2014 budget will be $11.3 billion, which is $1.7 billion less than the administration requested and about $2.5 billion higher than the radical 25 percent cut proposed by some House Republicans earlier this year.

As Nina Olsen, the non-partisan United States Taxpayer Advocate, notes in her recent annual report, cutting the IRS budget makes very little sense since every "dollar spent on the IRS generates more than one dollar in return - it reduces the budget deficit." In fact, as we've noted before, every dollar invested in the IRS can generate as much as $200 in deficit reduction.

Unfortunately, lawmakers have not seen it this way in recent years. Since 2010, the IRS has been forced by an 8 percent cut in its budget (adjusting for inflation) to reduce its staff by 11,000 people and its spending on training its employees by 83 percent. These cuts have taken place even though there are now 11 percent more individual and 23 percent more business tax returns for the agency to handle.  As IRS Commissioner John Koskinen testified at his confirmation hearing in December, a recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that at least $8 billion had been lost in compliance revenue due to budget cuts.

The impact on customer service has also been dramatic. In 2013, customer service representatives from the IRS were only able to answer 61 percent of the calls made from taxpayers seeking help, which is a substantial drop from the 87 percent that were answered ten years ago. In other words, some 20 million calls by taxpayers seeking help went unanswered last year, even before this new round of budget cuts.

Ironically, many lawmakers have used the IRS “scandal” (the agency’s targeted scrutiny of organizations seeking tax-exempt status by screening for political words in their names) to argue that it be punished with these and even larger budget cuts. The reality is that the lack of budgetary resources was a major driver of the short-cuts that created the “scandal.” Further budget cuts will only create more problems at the agency.

If Congress is really interested in making the IRS work more effectively and in reducing the deficit, it should substantially increase the IRS's budget. When Congress cuts the IRS's budget, the only people who are really punished are the honest American taxpayers. 

The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

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 of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.

New CTJ Report: Congress Should Offset the Cost of the "Tax Extenders," or Not Enact Them At All

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Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.

The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.

Read the report.

Why Everyone Is Unhappy with Senator Baucus's Proposal for Taxing Multinational Corporations

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Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.  

The Need for Revenue-Raising Corporate Tax Reform

Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.

Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.

There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”

Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.

A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.

CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.

The Need to Stop Corporations from Shifting Jobs and Profits Offshore

While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.

CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly. 

These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).

CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.

The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.

Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.

But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.

Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)

The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate. 

The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.

Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.

Senate Finance Committee Chairman Max Baucus (D-Mont.) today released a draft proposal for changing the way the United States taxes multinational corporations. Robert McIntyre, the director of Citizens for Tax Justice, made the following statement about the draft:

"Senator Baucus promises that his proposals will not increase the paltry federal income taxes that multinational corporations now pay. He also promises that he will later propose changes to the taxes on domestic corporations, which will also be 'revenue-neutral.' And he also says that he 'believes tax reform as a whole should raise significant revenue.'

"That must mean that Baucus plans to propose 'significant' increases in personal income taxes (or some new tax). Will this mean higher taxes on the rich? That seems unlikely, since Baucus is expected to propose a considerably lower top personal income tax rate. So that apparently will leave the middle class and maybe the poor holding the bag.

"That is certainly not what most Americans think tax reform should be about. Lawmakers should instead reform the corporate income tax in a way that raises significant revenue."

Let's Face It: Delaware and Other U.S. States Are Tax Havens

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On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.

“I trained foreign police forces to “follow the money” and track the flow of capital across borders.

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”

The question embarrassed me. There was nothing I could do.

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”

Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”

This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.

The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.

Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.

In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.

New Comprehensive Tax Reform Plan from Citizens for Tax Justice

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Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013

Ireland's Empty Gesture on Curbing Offshore Tax Abuses

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Responding to growing international pressure over his country’s role in facilitating international tax avoidance, Ireland's Minister of Finance, Michael Noonan, proposed a new measure that would end the ability of companies to avoid taxes by incorporating in his country without declaring any country of residence for tax purposes. The move comes after a Senate investigation in the U.S. that revealed Apple’s massive tax avoidance involving subsidiaries in Ireland.

But this move will not make any difference in the ability of Apple and other companies to avoid Irish, and by extension, other countries’ taxes. The law, as proposed, would continue to allow a company incorporated in Ireland to select any country to be its “residence,” the place where it is technically managed. In other words, a subsidiary company incorporated in Ireland can declare a tax haven as its residence and pay zero taxes on its profits and on profits funneled to it from related companies in other countries.

In fact, this approach is already being used by Google, which reportedly routed $12 billion in royalty payments to Bermuda, an infamous tax haven, using the "Double Irish with a Dutch Sandwich" technique. This strategy involves shifting profits (on paper) through subsidiaries that are shell companies in several jurisdictions until they are officially in an Irish shell company that legally “resides” in a country like Bermuda or the Cayman Islands which has no corporate income tax. The U.S. and many other countries have rules that would immediately tax certain payments made directly into a shell company in Bermuda or the Cayman Islands, so this complicated strategy takes advantage of the treaties between Ireland, the Netherlands, and many other countries that waive those taxes.

While it would fail to block this sort of tax avoidance, Ireland’s new proposal has succeeded so far in generating headlines that suggest the country is taking action and doing its part in international efforts to crack down on tax avoidance. Most reporting does, however, note somewhere in the text of the article, if not the headline, the fact that the change would likely have no material effect on tax avoidance (unlike some of the fumbled reporting on the end of the Securities and Exchange Commission investigation into Apple).

The leaders of the U.S. Senate investigation into Apple's tax practices, Senators Carl Levin and John McCain, noted in a statement that in order for Ireland to demonstrate that it’s truly "ready to close the door on these egregious corporate tax abuses," it must ensure that the new rules truly prevent companies from excluding substantial income from the Irish corporate tax by declaring residency in a tax haven. In other words, unless this recent proposal is followed up with changes that would actually impact tax avoidance, then it may be nothing more than a PR move.

Congress can end Apple's and other U.S. companies’ avoidance of U.S. taxes right now, without waiting for Ireland to do the right thing. The best way is to simply repeal the rule that allows American corporations to defer paying (PDF) U.S. taxes on their offshore profits.  American corporations only use gimmicks like the “Double Irish with a Dutch Sandwich” so that they can defer (for years or forever) U.S. taxes on profits they claim are earned offshore. If Congress fails to repeal deferral, it can at least curb the worst abuses of deferral by enacting the Stop Tax Haven Abuse Act which Senator Levin has introduced.

How Congress Can Fix the Problem of Tax-Dodging Corporate Mergers

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On Wednesday, the New York Times examined the practice of some U.S. corporations inverting (reincorporating in another country) by merging with foreign companies, and the extent to which this is done to avoid U.S. taxes. This problem is probably somewhat overblown, but to the extent that it exists, there are straightforward ways Congress can address it.

It used to be that U.S. tax law was so weak in this area that an American corporation could reincorporate in a known tax haven like Bermuda and declare itself a non-U.S. corporation. (Technically a new corporation would be formed in the tax haven country that would then acquire the U.S. corporation.) In theory, any profits it earned in the U.S. at that point should be subject to U.S. taxes, but profits earned by subsidiaries in other countries would then be out of reach of the U.S. corporate tax.

But what sometimes happened in practice was that even the profits earned in the U.S. were made to look (to the IRS) like they were earned in the tax haven country through practices like “earnings stripping,” which involves loading up the American subsidiary company (the real company) with debt owed to the foreign parent (the shell company). That would reduce the American company’s taxable profits and shift them to the tax-haven parent company, which wouldn’t be taxable. A 2007 Treasury study concluded that a section of the code enacted in 1989 to prevent earnings-stripping (section 163(j)) did not seem to prevent inverted companies from doing it.

This problem was to some extent addressed by the “anti-inversion” provisions of the American Jobs Creation Act (AJCA) of 2004, resulting in the current section 7874 of the tax code. The problem highlighted in the Times article is that American corporations today can sometimes get around section 7874 by merging with an existing foreign corporation.

It’s a safe bet that some of these mergers really are motivated partly by a desire to avoid U.S. taxes on profits earned in other countries and also to avoid U.S. taxes on what are really U.S. profits but which are shifted into tax havens through earnings stripping. This may well be the case in the three examples cited of American corporations merging with Irish corporations, as Ireland has a low corporate tax rate and has featured prominently in tax schemes used by Apple and other companies.

In other cases, tax avoidance may not be the only factor in firms deciding to merge — as in the examples cited in the article of an American company merging with a French firm and another merging with a Japanese firm. But even in both of these cases, the new companies are to be incorporated in the Netherlands, which has also featured in tax avoidance schemes used by companies like Google, which suggests that tax avoidance is certainly a sweetener in the deal.

One question not addressed is the extent to which an Obama administration proposal to crack down on earnings stripping by inverted companies would resolve this problem. This proposal would basically apply a stricter version of section 163(j), the provision that is supposed to stop earnings stripping, to inverted companies that manage to avoid being treated as a U.S .corporation under section 7874, the anti-inversion provision enacted in 2004.

Specifically, section 7874 treats an ostensibly foreign corporation as a U.S. corporation for tax purposes if (1) it resulted from an inversion that was accomplished (meaning the U.S. corporation became, at least on paper, obtained by a corporation incorporated abroad) after March 4, 2003, (2) the shareholders of the American corporation own 80 percent or more of the voting stock in the new corporation, and (3) the new corporation does not have substantial business activities in the country in which it is incorporated.

Section 7874 provides much less severe tax consequences for corporations that meet these criteria except that shareholders of the American company now own between 60 percent and 80 percent (rather than 80 percent or more) of the voting stock in the newly formed corporation. Section 7874 does not treat these corporations as U.S. corporations, and that may allow them to save a lot of money by stripping earnings out of their American subsidiary companies. The President’s proposal would apply a stricter version of section 163(j), the provision that is supposed to prevent earnings stripping, to these companies (and to companies that inverted before 2003).

Tax avoidance by the corporations resulting from the mergers discussed in the Times article might be curbed by the Obama proposal. To be affected, the new corporations need to be at least 60 percent owned by the shareholders of the American company and also have no substantial business activities in the country where they are incorporated. For example, the merger between an American company and a French company and the merger between an American company and a Japanese company both resulted in companies incorporated in the Netherlands. They may be over 60 percent owned by the American shareholders and it’s likely that they have no substantial business in the Netherlands, a notorious tax-haven conduit.

But even if the resulting company does not meet these tests, Congress should subject them to the stiffer earnings stripping rule. In other words, the administration’s proposal is arguably too weak. For example, even if one of these mergers results in a company that does have substantial business activities in the country where it is incorporated, why should that company be allowed to strip earnings from its American subsidiary companies?

For that matter, the stricter earnings stripping standard that would be imposed under the President’s proposal is one that reasonably should apply to any foreign-owned company. Among other things, it would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus most certain significant deductions that corporations are allowed to take.

This seems like a reasonable standard to apply regardless of whether or not an inversion has taken place. In other words, Congress should enact an expanded, stronger version of the President’s proposal.

When Congress Turns to Tax Reform, It Should Set These Goals

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Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.

Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.

When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Read CJT’s new report —
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters



Stop Tax Haven Abuse Act Would Curb Some of the Worst Multinational Corporations' Tax Dodges

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Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.

Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.

The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.

Among the key features of the “Stop Tax Haven Abuse Act” are the following:

■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.

■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.

■ Current tax rules allow U.S. corporations to 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. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.

■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.

For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.

An Underfunded IRS Means More Tax Avoiders Get a Pass

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A troubling new report (PDF) released by the Treasury Inspector General for Tax Administration (TIGTA) has revealed that the substantial budget cuts imposed on the IRS meant that it recovered $5 billion less in revenue from enforcement efforts in 2012 compared to 2011. That is, while law abiding citizens and businesses paid the taxes that make up the bulk of our federal revenues, more non-payers, late-payers and under-payers are getting a pass because there aren’t enough IRS staffers to follow up with them.

This drop in revenue should come as no surprise given that the IRS's annual budget was actually cut by some $329 million dollars from Fiscal Year 2010 to 2012. To absorb these cuts, the IRS was forced to get rid of 5,000 front-line enforcement workers – a 14 percent reduction of its enforcement personnel. Not so coincidentally, the TIGTA report notes that this 14 percent reduction in personnel correlates with the 13 percent reduction in revenue from enforcement over the past two years.

As we've noted before, cutting spending on the IRS budget is about the most counterproductive (and we’re being polite – other words are more fitting) ways to reduce the deficit because every one dollar invested in the IRS’s enforcement, modernization and management system saves the federal government as much as $200 in the long run.  So that loss of $5 billion in tax revenue in the TIGTA report amounts to this: every dollar the government cut under the guise of savings actually increases the deficit by $15. How's that for bad math?

Rather than reversing the budget cuts to the IRS in Fiscal Year 2013, Congress allowed the sequester to cut an additional $600 million from the agency’s budget. Looking ahead to Fiscal Year 2014, House Republicans are pushing to carve an additional $3 billion from the IRS, which would represent a cut of almost 25 percent of its entire budget.

Meanwhile, some of those pushing for these cuts view them as somehow a way to fix the IRS after the recent (trumped up) scandal over the process of granting tax exempt status to certain political groups. The reality that these anti-tax conservatives seem to be missing is that that the lack of resources at the agency was one of the main causes of the administrative issues surrounding the scandal, according to the National Taxpayer Advocate (PDF). In other words, cutting the IRS's budget further will almost certainly generate more problems within the agency, not fewer. 

Considering that the $50 billion recovered through enforcement in 2012 is only a fraction of the estimated $450 billion total tax gap, Congress should not only restore the funding lost to years of budget cuts, but significantly increase funding to help us reduce the deficit and pay for critical government investments.   

New CTJ Report Explains How Congressman Delaney Misinforms about His Proposed Repatriation Holiday

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In July, a letter signed by thirty national organizations and a report from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.

A new report from Citizens for Tax Justice addresses each point made by Rep. Delaney's "rebuttal" as well as the myth that a huge amount of money is "locked offshore" and waiting for a tax break to lure it back into the U.S. economy.

Read the report.

Remembering an International Tax Expert and Voice for Tax Justice

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Michael McIntyre, an international tax professor at Wayne State University, former consultant to the United Nations, OECD, and several governments, and the brother of CTJ director Robert McIntyre, passed away on August 14 at the age of 71.

An obituary published in Tax Notes allows Michael McIntyre’s colleagues, among them his brother, to share their thoughts:

“My older brother, Mike, was my mentor and best friend,” said Citizens for Tax Justice Director Robert McIntyre. “He's the reason that I've spent my career in tax policy.”

“Over the past four decades, we collaborated on tax reform proposals that ran the gamut from international, to federal, to state and local, to American Indians. We were soul mates both in tax policy and in life,” Robert McIntyre said. “He made the world a better place, not just for me, the rest of his large extended family, and his many friends, but also for the countless people here in the U.S. and around the world who benefited from the tax policies he promoted.”

Michael McIntyre published a multitude of books and articles on a variety of tax topics. He served as a senior adviser to the Tax Justice Network (TJN) and was the editor of a Web page dedicated to taxation and policy issues for developing countries.

“Mike played a major role in shaping TJN's research and advocacy programs,” said TJN Director John Christensen.

“He has been a trenchant critic of the OECD's dismal lack of progress over umpteen decades, while setting out a cogent case for more radical reform, especially in the direction of combined reporting,” said Christensen. “Mike gave his time and expertise generously, and he'll be remembered fondly for his permanent smile and constant good humor.”

Read the Tax Notes obituary in full.

Surge in Tax-Wary U.S. Expats Renouncing Citizenship? Not Really.

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In its latest attack on the Foreign Account Tax Compliance Act (FATCA), the Wall Street Journal describes in ominous tones the “record” number of individuals who renounced their U.S. citizenship in the last quarter, supposedly driven by FATCA’s reporting requirements, which are designed to prevent tax evasion.

What scary headlines about a “surge” in expatriations leave out, however, is what a miniscule number it really is. Even the six-fold increase this quarter compared to the second quarter of last year meant that only 1,130 people renounced their citizenship in the second quarter of this year. To give some context, this number represents less than 0.02 percent of the estimated six million Americans that live abroad.

Surge in Expatriations to Avoid Taxes!” “US expatriates renounce citizenships at record rate!” Pretty alarming headlines. News coverage of what complying with FATCA actually entails has been misleading and would make you think that the rise in renunciations is driven by the "overly burdensome" rules that are financially crippling US citizens living abroad. The fact is, the primary component of FATCA affecting individuals is the requirement that U.S. citizens with $50,000 or more in foreign financial assets (which does not include housing or other basic non-financial assets) simply have to attach a disclosure statement about their accounts in their yearly tax return.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation (and JCT has a history of  underestimating such tax enforcement measures, too.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, rather than seeking to curtail FATCA, Congress should expand on these efforts through legislation like the Stop Tax Haven Abuse Act in the House or the CUT Unjustified Loopholes Act (PDF) in the Senate.

While the emigration of every single wealthy person abroad is makes big news (see, for example, coverage of Facebook billionaire Eduardo Saverin or singer Tina Turner), the reality is that the number of renunciations is negligible – especially compared to the number of new citizen naturalizations each year. In fact, 503,104 people have been naturalized in the US since the start of Fiscal Year 2013, which means well over 250 people embracing US citizenship for every one person renouncing it over the past several months.

Asking the few and largely wealthy Americans with substantial offshore financial assets to do a little extra paperwork is not unreasonable when we know that cracking down on offshore tax evaders will bring in revenues to invest in things like roads, schools, healthcare and a quality of life that make the US so attractive to aspiring U.S. citizens.

Nike's Tax Haven Subsidiaries Are Named After Its Shoe Brands

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Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0 

CTJ Presents the Nuts & Bolts of Corporate Tax Reform

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On July 19, CTJ’s Steve Wamhoff made a presentation to members of the Alliance for a Just Society on the details of corporate tax reform. Because several of the audience members were small business owners, the presentation partly focused on the offshore tax loopholes that give large multinational corporations an unfair advantage over domestic businesses, which are often smaller businesses.

The presentation makes the following points:

1. The U.S. needs more revenue.

2. New revenue must come from progressive sources.

3. The corporate tax is a progressive revenue source.

4. American corporations are undertaxed.

5. One way to get more corporate tax revenue is to close tax loopholes related to offshore tax havens.

6. We must stop current proposals to expand these loopholes (territorial tax system, repatriation holiday).

Needless to say, corporate lobbyists and many of their friends in Congress and even in the Obama administration disagree with many of these points, so the presentation provides a detailed argument for each.

See the slideshow from the presentation, providing details on each of these points.

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, the Organization for Economic Co-operation and Development (OECD) has released an “Action Plan on Base Erosion and Profit Shifting.” 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 OECD’s action plan does make several suggestions that would make it harder for corporations to pretend their profits are all earned in Bermuda, the Cayman Islands or other tax havens, many of which echo proposals offered by President Obama and Senator Carl Levin. For example, the plan clearly targets rules allowing corporations to immediately take deductions for expenses of doing business offshore, when they will not pay taxes on their offshore profits for years or ever. The plan seems to target rules like the U.S.’s “check-the-box,” which allow corporations to give different governments conflicting information about the nature of offshore entities so that their profits are not taxed by any government anywhere.

But we will never really end the ability of corporations to pretend their profits are all “earned” in offshore tax havens so long as developed countries continue to rely on “territorial” tax systems or a “deferral” tax system like the U.S. has.

In his comment on the OECD action plan, Professor Sol Picciotto, a Senior Adviser to the Tax Justice Network, sums it up well:

“The Action Plan contains some ambitious measures, which would produce some benefits if implemented. But its approach is like trying to plug holes in a sieve. The OECD has chosen a road that is strewn with obstacles, and leads in the wrong direction. The OECD has missed this big opportunity to crack open the door to the big reform that the world’s citizens need...”

Citizen Groups Oppose Rep. Delaney's Tax Amnesty for Offshore Corporate Profits

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In a July 16 letter, 30 national organizations asked members of Congress to reject a proposal by Congressman John Delaney of Maryland because it rewards the most aggressive corporate tax dodgers with tax breaks and even gives them control of a new bank that would be created to fund American infrastructure. The plan is one in a history of Congressional schemes to hand corporations a massive tax break under the pretense that it will help the U.S. economy.

Delaney’s proposal would allow a “repatriation holiday,” meaning American multinational corporations could bring their offshore profits to the U.S. without paying the U.S. taxes that would normally be due, on the condition that they purchase bonds to finance a new bank that would be set up to fund infrastructure projects.

A CTJ report released in June explains that much (and perhaps most) of the profits that American corporations claim to hold “offshore” are actually already invested somehow in the American economy.  So, these profits are not truly “offshore,” and the argument that the U.S. economy is somehow deprived of these dollars doesn’t really hold up. 

As the CTJ report explains, the corporations most likely to benefit from Delaney’s proposed “holiday” are not those with actual business activities offshore, because those companies have their offshore assets tied up in things like factories and equipment. The benefits are much more likely to go to those American corporations that have made their U.S. profits appear to be foreign profits by artificially shifting them to subsidiary companies in offshore tax havens. These subsidiaries are often nothing more than a post office box, and the profits they claim to generate are easy to shift around using accounting gimmicks. 

Incredibly, Rep. Delaney’s proposal would allow those corporations repatriating the most offshore profits — that is, those corporations that are most aggressive and successful at tax dodging — the right to nominate the majority of the members of the board controlling the infrastructure bank.

As the report and letter point out, the last tax amnesty for offshore corporate profits, enacted in 2004, did nothing to create jobs and actually benefitted many corporations that cut their American workforces. The Joint Committee on Taxation found that a repeat of this type of measure would lose revenue partly because it would encourage American companies to shift (on paper, using accounting gimmicks) even more profits into offshore tax havens where they are not subject to U.S. taxes.

In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don't want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.

U.S. and Other G8 Governments Move to Prevent Tax Evasion and Avoidance, But Is It Enough?

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On June 18, the leaders of the G-8 countries meeting in Northern Ireland released a declaration that included cracking down on the use of shell corporations for tax evasion and principles related to this goal, while the White House released a national action plan to implement these principles.

Shell Corporations Facilitate Tax Evasion, Money Laundering and Terrorism

Certain countries and certain U.S. states (Delaware most of all) allow individuals to form shell companies that carry out no real business but only serve to hide money and the owners of money from our government or a foreign government.

This is a problem for tax enforcement and other types of law enforcement, because the motivation for forming a shell company is often to evade income taxes owed to the U.S. government or a foreign government or to launder money generated by criminal activity or even to funnel money to terrorists. 

If you think that sounds far-fetched, think again. Viktor Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists. As Senator Carl Levin (D-MI) explained in a 2009 hearing:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Of course, it’s much more difficult to convince other governments to cooperate with our efforts to stop tax evasion, money laundering and terrorist funding when we allow their citizens to establish shell companies in the U.S. that are used for these very purposes.David Cameron, Prime Minister of the United Kingdom, which is currently the president of the G-8

In 2009, Senators Carl Levin (MI-D), Chuck Grassley (R-IA) and Claire McCaskill (D-MO) introduced a bill that would require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation.

Unfortunately, this legislation, the Incorporation Transparency and Law Enforcement Assistance Act, was stymied by Senator Tom Carper of Delaware, who introduced an alternative bill that would defeat the entire purpose of the reform. (Among other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being.)

The White House action plan released during this week’s G-8 summit proposes to “advocate for comprehensive legislation” which “could” include several possible provisions, one of which would “define beneficial owner as a natural person…” In English, that means that states would have to record the actual human being who ultimately owns the company being formed. 

The bill previously promoted by Senator Levin and his allies in 2009 would accomplish this, and hopefully they will soon reintroduce their proposal with White House backing to implement the action plan. But, the organization Global Financial Integrity points out that the action plan is “essentially the same action plan the White House has had for two years under the Open Government Partnership, and the administration has yet to really ‘advocate for comprehensive legislation’” like Senator Levin’s proposal.

Some organizations addressing exploitation and impoverishment of developing countries, which suffer disproportionately from illegal outflows of capital into offshore tax havens, praised the move by the G-8 and the member countries that have released action plans.

Global Witness noted that part of the G-8’s success today can be attributed to the government of the United Kingdom, which has historically turned a blind eye to tax evasion in its territories but used its current presidency of the G-8 to push for reform. UK Prime Minister David Cameron has said that he would prefer to go even farther than the reforms being discussed today and make the owners of all incorporated entities known to the public, rather than just to law enforcement officials, an idea supported by Global Financial Integrity.

Addressing Tax Avoidance by Companies Like Apple

The declaration issued from the G-8 meeting in Northern Ireland also addressed other tax issues. While mysterious shell corporations are the tool of individuals seeking to illegally hide their income from governments, well-known, publicly traded corporations are involved in offshore tax practices that are probably not illegal, but ought to be. (Think of Apple’s recently uncovered tax avoidance practices using Ireland as a tax haven.)

The G-8’s declaration addresses this type of corporate tax avoidance, for example by stating, “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Unimpressed, Global Financial Integrity says in its statement, “While we’re happy that the G8 acknowledges aggressive tax avoidance and profit shifting is a problem, they failed to agree to curtail it in any meaningful way. This is one area where coordination of changes to legal systems is essential to combat the problem, and public reporting by companies of revenues, profits, losses, taxes paid and number of employees in each country in which they operate is necessary in order to see whether those measures are having the desired effect.”

Ultimately, the White House must promote concrete legislative proposals rather than just vague principles. As we saw with the Incorporation Transparency and Law Enforcement Assistance Act, even a bill cracking down on money laundering and terrorist funding (the sort of bill the public would likely support) can be defeated by vested interests without advocacy from the President.

CTJ Report: Apple Is Not Alone

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Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple Corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But a new report from Citizens for Tax Justice (CTJ) documents seventeen other Fortune 500 corporations which disclose information, in their financial reports, that strongly suggests they, too, have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are doing the same, taking advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.

Read the report, Apple is Not Alone.

Apple is one of eighteen Fortune 500 companies that disclose that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. These 18 corporations have $283 billion in cash and cash equivalents parked offshore.
The report also identifies an additional 235 companies that choose not to disclose the U.S. tax rate they would pay on an almost $1.3 trillion in combined unrepatriated offshore profits.

Taken together, if all of these companies’ offshore holdings were repatriated, it could amount to $491 billion in added corporate tax revenue according to CTJ's calculations.

CTJ concludes that the most sensible way to end offshore tax avoidance of the kind documented in this report would be to end “deferral,” the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States – with, of course, a “foreign tax credit” against any taxes they pay to foreign governments to ensure that these profits are not double-taxed.

Yes, What Apple's Doing in Ireland May Well Be Legal -- and That's the Problem

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 What Rand Paul Fails to Understand about Apple’s Tax Dodging

During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.

As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal. 

Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes

Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.

Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.

An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.

On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.

Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)

Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”

As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.

Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.

This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.

The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.

On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.

The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)

A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.

Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.

The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.

Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”

Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.

It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.

Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.

So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.

Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules

The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.

All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.

Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.

The Bottom Line

So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.

Policy Solutions

Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.

Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.

One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying). 

PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.

New CTJ Report: Apple Holds Billions of Dollars in Foreign Tax Havens

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Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.

That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.

As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

Read the report.

First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

Senator Rand Paul's Fight for Offshore Tax Havens

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Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.

In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:

“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.

“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.

“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.

“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”


The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. More at


New Corporate Tax Lobby: Don't Call It LIFT, Call It LIE

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A group of so far undisclosed corporations are forming a lobbying coalition called Let’s Invest for Tomorrow (LIFT) to press Congress to enact a “territorial” tax system. The coalition should be named Let’s Invest Elsewhere (LIE), because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.

A “territorial” tax system is a euphemism to describe a tax system that exempts offshore corporate profits from the U.S. corporate tax.

U.S. corporations are already allowed to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are brought back to the U.S. This creates an incentive for U.S. corporations to shift operations (and jobs) offshore or just disguise their U.S. profits as offshore profits so that U.S. taxes can be deferred. Completely exempting those offshore profits from U.S. taxes would obviously increase the incentives to shift jobs and profits offshore.

A CTJ report from 2011 explains these problems in detail and concludes that Congress should move in the opposite direction by ending “deferral” rather than adopting a territorial tax system. The stakes are getting higher each year as U.S. corporations hold larger and larger stashes of profits offshore. (A recent CTJ paper finds that 290 of the Fortune 500 have reported their profits held offshore, which collectively reached $1.6 trillion at the end of 2011.)

The Public Opposes Territorial Tax Proposals – But Will Congress Listen?

In a world where politicians actually did what voters wanted, we would not have to worry that this coalition might actually succeed in its goal of bringing about a territorial tax system, which the public would clearly oppose.

For example, a survey taken in January of 2013 asked respondents, “Do you approve or disapprove of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries?” 73 percent of respondents said they “disapprove” and 57 percent said they “strongly disapprove.” The same survey found that 83 percent of respondents approved (including 59 percent who strongly approved) of a proposal to “Increase tax on U.S. corporations’ overseas profits to ensure it is as much as tax on their U.S. profits.”

And yet, it’s unclear that lawmakers are paying attention to the interests or opinions of ordinary Americans.

It is true that Vice President Biden went out of his way at the Democratic National Convention to criticize the territorial system proposed by Mitt Romney. And it’s also true that the “framework” for corporate tax reform released by the White House in February of 2012 refused to endorse a territorial system.

But the framework only rejected a “pure territorial system.” CTJ pointed out that the time that probably no country has a “pure territorial system,” so this does not provide much assurance or guidance.

Meanwhile, it has long been rumored that many of the Democratic members of the Senate Finance Committee (the Senate’s tax-writing committee) favor a territorial system.

Republican lawmakers, for their part, have long fully endorsed a territorial system. House Ways and Means Committee Chairman Dave Camp made public his proposals for a territorial system in October 2011. That very day, CTJ released a letter signed by several national labor unions, small business associations and good government groups opposing Camp’s move, but the response from lawmakers was relatively muted.

Perhaps more disturbing, at his recent confirmation hearings, the new Treasury Secretary, Jack Lew, appeared open to the idea of a territorial system.

Similar Corporate Lobbying Coalition Failed to Get a Temporary Exemption for Offshore Profits (Repatriation Holiday)

Some readers will remember that during 2011 and 2012 a group of corporations calling itself WIN America pushed for an tax amnesty for offshore profits (which they preferred to call a “repatriation holiday.”) The coalition was made up of companies who believed that Congress might not be naïve enough to give them the much bigger prize, a territorial system. As explained in a CTJ fact sheet, a repatriation holiday would temporarily exempt offshore profits from U.S. taxes, while a territorial system would permanently exempt those offshore profits from U.S. taxes, and would therefore cause even greater problems.

WIN America did give up and disband. But that could be largely because influential lawmakers like Ways and Means Chairman Dave Camp are indicating that the bigger prize, a territorial system, is within reach.

Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On

It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.

The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.

The reality is very different and much more complicated. While the U.S. has a relatively high statutory tax rate for corporations, the U.S. corporate tax has so many loopholes that most major multinational corporations seem to be paying a lower effective tax rate in the U.S. than they pay in the other countries where they have operations. CTJ’s major 2011 report on corporate taxes studied most of the profitable Fortune 500 companies and found (on pages 10-11) that among those with significant offshore profits (making up a tenth or more of their overall profits) two-thirds actually paid a lower effective tax rate in the U.S. than in the other countries where they operated.

On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.

This is confirmed by a recent report from the Congressional Research Service finding that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five very small tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries. In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.

These statistics are outrageous and demonstrate that U.S. corporations are engaging in various accounting tricks in order to make it appear (for tax purposes) that their profits are generated in countries where they won’t be taxed. The LIFT coalition will count on the fact that this is simply too difficult for ordinary people to understand – which makes educating the public about this more important than ever.

Why We Hope Obama's Nominee for Treasury Secretary Is a Quick Learner

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If confirmed, Jack Lew, the President’s nominee for Treasury Secretary, will oversee IRS enforcement of tax laws and will oversee the development and analysis of tax proposals, among other things. It would therefore be reassuring if Lew did not seem unaware of what is going on in tax havens, and unaware of the problems with proposals to exempt corporations’ offshore profits from U.S. taxes.

Much has been made of the fact that Lew, who worked at Citigroup before serving as chief of staff to the President, had an investment in a fund registered in the Cayman Islands, a notorious offshore tax haven.

Lew told the Senate Finance Committee on Wednesday that the fund was set up by Citigroup, that he didn’t know where it was based, and that he lost money on it in any event.

Lew “Unaware of Ugland House” in the Cayman Islands

What’s actually alarming about Lew’s comments before the committee is that he didn’t even seem to understand the crisis in our tax system that the Cayman Islands and other tax havens are taking advantage of.

For example, Republicans on the committee told of how the fund in question was registered in Ugland House, a small five-story building in the Cayman Islands where over 18,000 companies are officially headquartered. Obviously, most of these “companies” consist of little more than a post office box. Profits are shifted from real business activities in countries like the U.S. into these “companies” in Ugland House. The profits can then be designated as Cayman Island profits, because the Cayman Islands has no corporate income tax.

Those of us who follow tax issues know that Ugland House has been discussed for years at Congressional hearings — although Wednesday’s hearing may be the first time that it was brought up by Republicans.

The Washington Post describes the back-and-forth during the hearing on this topic:

Lew argued that “the tax code should be constructed to encourage investment in the United States.”

“Ugland House ought to be shut down?” Grassley asked.

“Senator, I am actually not familiar with Ugland House,” the witness pleaded. “I understand there are a lot of things that happen there.”

Lew Unaware that Offshore Tax Avoidance, Not Just Tax Evasion, Is a Problem

Equally troublesome is Lew’s defense. “I reported all income that I earned. I paid all taxes due.”

This completely misses the point and misses the point of the debate over tax reform. No one has suggested that Lew committed tax evasion — the criminal act of hiding income from the IRS. The Cayman Islands and other tax havens are certainly used for tax evasion, but that’s not the issue here.

The much larger problem is that our tax system allows massive tax avoidance — practices that reduce taxes that are mostly legal, but in many cases should not be legal — and that tax havens like the Cayman Islands are exploiting this weakness.

Lew probably did pay all the taxes that were due under the tax laws as they’re currently written. The same is true of General Electric, Boeing, Pepco, Verizon, Wells Fargo and the dozens of corporations that paid nothing over several years because the tax laws allowed it. The scandal is not that laws were broken, but that the laws actually allowed this.

Is Lew Unaware that the Administration Has Rejected a “Territorial” Tax System — Or Does He Know Something We Don’t?

One Senator at the hearing asked Lew about the possibility of the U.S. shifting to a “territorial” tax system — which is a euphemism for a tax system that exempts the offshore profits of corporations.

Lew said “there is room to work together.” He said [subscription required] “We actually have a debate between whether we go one way or the other [towards a territorial system or a worldwide system], and we have a hybrid system now. It’s a question of where we set the dial.”

This is alarming for those who thought that the administration had already wisely rejected moving to a territorial system. As CTJ has explained in a report and fact sheet, U.S. companies now can “defer” (delay indefinitely) paying U.S. taxes on their offshore profits, which creates an incentive to use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in a tax haven like the Cayman Islands. Under a territorial system, they would never have to pay U.S. taxes on offshore profits, which would logically increase the incentive to engage in such tax dodges.

A year ago, the Obama administration stated that it opposes a “pure territorial system.” CTJ pointed out at the time that a little more clarity is needed because probably no country has a “pure” territorial system, and the “impure” ones are facilitating widely reported tax avoidance in Europe and across the world.

That clarification seemed to arrive when Vice President Joe Biden went out of his way to criticize the idea of a territorial tax system at the 2012 Democratic convention, referring to a study concluding that it could cost the U.S. hundreds of thousands of jobs.

We hope that this is simply another case of Lew being uninformed, and not an indication that the administration may shift towards favoring a territorial system.

New Google Documents Show Another Year of Offshore Tax Dodging

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In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.

To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented.  And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.

So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.


A two-page report from Citizens for Tax Justice explains new evidence of offshore tax avoidance by corporations unearthed by the non-partisan Congress Research Service (CRS).

In a nutshell, CRS finds that U.S. corporations report a huge share of their profits as officially earned in small, low-tax countries where they have very little investment and workforce while reporting a much smaller percentage of their profits in larger, industrial countries where they actually have massive investments and workforces.

This essentially confirms that corporations are artificially inflating the share of their profits that they claim to earn tax havens where they don’t really do much real business. Remember that offshore tax avoidance by corporations often takes the form of convoluted transactions that allow U.S. corporations to claim that most of the profits from their business are earned in offshore subsidiaries in a tax haven like Bermuda, and that the offshore subsidiary my be nothing more than a post office box.

And Bermuda is a great example. CRS finds that the amount of profits that U.S. corporations report to earn in Bermuda is 1,000 percent of Bermuda’s GDP! That’s ten times Bermuda’s gross national product — ten times the tiny country’s actual economic output. This is obviously impossible and confirms that much of the profits that U.S. corporations claim are earned there represent no actual economic activity but rather represent profits shifted from the U.S. or from other countries to take advantage of that fact that Bermuda has no corporate income tax.

Sadly, most of the tax dodges practiced by U.S. corporations to shift their profits to tax havens are actually legal. CTJ’s report explains what type of tax reform is needed to address this.

Small Business Owners Push Back Against Anti-Tax Agenda

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For years, groups like the US Chamber of Commerce and the National Federation of Independent Business (NFIB) succeeded in portraying the consensus position of the “small business community” as staunchly favoring lower tax rates on top income earners and corporations. The tax debate surrounding the so-called “fiscal cliff” has exposed the myth that these groups actually represent small businesses and shows that many of these large national groups have very different interests at stake.

The biggest pushback in recent days against the anti-tax agenda represented by the Chamber and NFIB has come from groups of small business owners who are fed up with having the position of “small business owners” misrepresented. In recent days, thousands of business owners and executives have signed on to a letter calling for the expiration of the Bush tax cuts for those making over $250,000 and arguing that only a small fraction of the wealthiest small business owners would even be affected by allowing this to occur. In addition, many small business leaders have signed on to a letter calling for corporations to contribute more to reduce the deficit as part of the fiscal cliff deal. The letter also calls for an end to the offshore tax loopholes that give larger multinational corporations a tax advantage over small businesses.

The reason so many small business owners are raising their voices is because they believe that raising revenue is critical to stopping spending cuts in education, health care, and infrastructure that are crucial to building a strong economy. Backing this up, a poll of small business owners by the Small Business Majority found that, by a 2 to 1 margin, small business owners believed that spending cuts would do more harm to the economy than higher taxes on the wealthy. As Brian McGregor, owner of the Silver Dollar Saloon in Montana and a supporter of allowing the tax cuts for the wealthiest to expire, put it, “What my business needs is customers – not more tax cuts for the rich.”

The growing opposition of small business owners has not done much to change the position of NFIB and the Chamber, which continue to push for more tax cuts for the wealthy and corporations. This is not all that surprising, since both groups have historically been more interested in promoting the Republican Party than the real preferences of the small business community. In fact, during 2012 the Chamber spent over $32 million (98% of its total spending on electioneering communications) supporting Republican candidates, while the NFIB spent $4 million (100% of its total spending on electioneering communications) supporting Republican candidates. This is especially striking considering that less than half of small business owners identify as Republican.

The intransigence of the NFIB and Chamber has become even more clear as other big business backed groups like the Business Roundtable and Fix the Debt have begun calling for a fiscal cliff deal that includes revenue increases. To be fair, however, many critics suspect that the Business Roundtable and Fix the Debt groups messaging may have more to do with cutting a backroom deal to lower corporate taxes, than in protecting small businesses. In fact, one recent study using data from Citizens for Tax Justice found that the companies backing the Fix the Debt campaign could directly benefit to the tune of $134 billion if such a deal included a move to a territorial tax system, while at the same time further disadvantaging small businesses that do not have offshore earnings.

The more small business owners speak out for themselves, rather than allowing corporate-backed national organizations to speak for them, the more lawmakers will realize that small businesses demand robust government investments and are hurt when multinational corporations are allowed to escape paying their fair share in taxes.

New Report Shows Why Corporate Lobbyists' Proposals Should Not Be Part of Budget Deal

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New CTJ Report: Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore

More Evidence that the Corporate Lobbyists’ Version of Tax “Reform” Should NOT Be a Part of Any Budget Deal 

A new report from Citizens for Tax Justice explains that among the Fortune 500 corporations, 290 have revealed that they, collectively, held nearly $1.6 trillion in profits outside the United States at the end of 2011. This is one indication of how much they might benefit from a so-called “territorial” tax system, which would permanently exempt these offshore profits from U.S. taxes.

Just 20 of the corporations — including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs — held $794 billion offshore, half of the total. The data are compiled from figures buried deep in the footnotes of the “10-K” financial reports filed by the companies annually with the Securities and Exchange Commission. 

Read the report.

The appendix of the report includes the full list of 290 corporations and the size of their offshore profits in each of the last three years, as well as the state in which their headquarters is located.

Corporate lobbyists and their allies in Congress are pushing for two changes that would benefit their investors but leave America worse off. Neither one of these should be included in any deal coming out of the so-called “fiscal cliff” negotiations.

Congress Should Reject a Revenue-Neutral Corporate Tax Overhaul

The first goal of the corporate lobbyists is an overhaul of the corporate tax that does not raise any revenue. Some corporations have stated that they would support closing corporate tax loopholes, but only if all the revenue savings is used to reduce the corporate tax rate. This would be a terrible waste of revenue at a time when lawmakers are considering cutting public investments that middle-income people rely on in order to reduce the deficit.

In May of 2011, a letter circulated by Citizens for Tax Justice was signed by 250 organizations, including organizations from every state, calling on Congress to close corporate tax loopholes and use the revenue saved for public investments and deficit reduction rather than lowering the corporate tax rate.

CTJ also has published a fact sheet and a detailed report explaining why corporate tax reform should be revenue-positive rather than revenue-neutral.

Unfortunately, the Obama administration endorsed a revenue-neutral corporate tax overhaul in the vague “framework” it released in February of this year. As lawmakers face real choices about whether to cut programs like Medicare, Medicaid, and education, we believe many will realize that demanding corporations contribute more to the society that makes their profits possible is more sensible.

Congress Should Reject a Territorial Tax System

The second goal of the corporate lobbyists is a transition to a “territorial” tax system, which would call off U.S. taxes on the offshore profits of U.S. corporations. As the new CTJ report explains, many of those profits are truly U.S. profits that have been made to look like “foreign” profits generated in tax havens through convoluted accounting schemes.

Citizens for Tax Justice has published a fact sheet and a detailed report explaining why Congress should reject a territorial tax system.

Thankfully, the administration has not endorsed a territorial tax system and Vice President Biden even criticized it during his speech at the Democratic National Convention. We hope that the President and his allies in Congress hold firm to this position. 

CEOs and Fix-the-Debt Gang Lobby for Terribletorial Corporate Tax System

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While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.

Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.

Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.

Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K.  Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K.  Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.

The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?

The International Relations Issue the Candidates Probably Won't Debate: Territorial Taxes

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As President Obama and Governor Romney discuss foreign policy in their final debate, there’s a major issue that they will, unfortunately, probably ignore: the tangle of international tax rules that allow offshore tax dodging.

The U.S. tax system is already in a mess when it comes to the rules we use to determine how profits of multinational companies are taxed. President Obama has proposed some steps to rein in the worst abuses, but most of these are relatively timid or vague. Meanwhile, Romney proposes that the U.S. follow the example of other countries that have a “territorial” system, which has facilitated high-profile tax avoidance schemes by major multinational corporations. On this issue, the U.S. needs to show leadership that has been lacking so far.

Here are the basics: The U.S. could either have a “worldwide” tax system, in which we tax the offshore profits of our corporations (but provide a credit for foreign taxes paid, to prevent double-taxation) or the U.S. could have a “territorial” tax system, which exempts the offshore profits of our corporations from U.S. taxes. What we have now is a hybrid of the two systems. The U.S. does tax the offshore profits of U.S. corporations and provides a credit for foreign taxes paid, but also allows the corporations to “defer” (delay indefinitely) those U.S. taxes, until the profits are brought to the U.S.

Under the current rules, U.S. corporations have a reason to prefer offshore profits over U.S. profits, because they benefit from the rule allowing them to “defer” U.S. taxes on offshore profits indefinitely. So they may shift operations (and jobs) to a country with lower taxes, or engage in convoluted transactions that make their U.S. profits appear to be earned by subsidiaries in countries with no (or almost no) corporate tax (i.e., offshore tax havens).

The offshore subsidiary may be nothing more than a post office box in the Cayman Islands. CTJ recently explained that Nike, Microsoft, Apple and several other companies essentially admit in their public documents that they engage in these tricks.

If allowing corporations to “defer” U.S. taxes on offshore profits causes them to prefer offshore profits over U.S. profits, then eliminating U.S. taxes on offshore profits would logically increase that preference, and increase these abuses. And that’s exactly what a territorial system, which Romney supports, would do.

CTJ has explained in a fact sheet and a more detailed report that we should move in the opposite direction by simply repealing “deferral” so that we have a true “worldwide” tax system. A CTJ report on options to raise revenue explains that repealing deferral would raise $583 billion over a decade.

President Obama has proposed far more limited steps. His most recent budget blueprint proposes to raise $148 billion over ten years with a package of provisions to crack down on the worst abuses of deferral. (The official revenue estimators for Congress projected that the provisions would raise a little more, $168 billion over a decade.)

These proposals would do some good. For example, one would end the practice of companies taking immediate deductions against their U.S. taxes for interest expenses associated with their offshore operations while they defer (not pay) the U.S. taxes on the resulting offshore profits indefinitely. Another would help ensure that the foreign tax credit, which is supposed to prevent double-taxation of foreign profits, does not exceed the amount necessary to achieve that goal. Still another would reduce abuses involving intangible property like patents and trademarks, which are particularly easy to shift to tax haven-based subsidiaries that are really no more than a post office box.

But none of these reforms proposed as part the President’s budget really addresses the underlying problem with a deferral system or a territorial system: The IRS cannot figure out which portion of a multinational corporation’s profits are truly generated in the U.S. and which portion is truly generated overseas. If a U.S. corporation tells the IRS that a transaction with an offshore subsidiary wiped out its profits, the IRS cannot challenge the company unless it can prove that the transaction was unreasonable. And that’s difficult to do, especially when the transaction involves some product or service that is not comparable to anything else in the market (like a new invention, pharmaceutical, or software program).

President Obama has also proposed, as part of his “framework” for corporate tax reform, a minimum tax on offshore corporate profits. Because he has not yet specified any rate for this minimum tax, it’s impossible to say whether it would be effective. If the rate is set extremely low, then it would change very little. In theory, if the rate was set high enough, it would almost have the same effect as ending deferral — but no one in the administration is talking about anything that dramatic. (Read CTJ’s response to the President’s “framework” for corporate tax reform.)

There are some members of Congress looking very seriously at offshore tax dodging by corporations (like Senator Carl Levin). But serious leadership is unlikely to come from the presidential candidates anytime soon.

Photo of Barack Obama, Mitt Romney, and Cayman Islands Flag via Austen Hufford, Justin Sloan, and J. Stephen Con Creative Commons Attribution License 2.0 

Nike, Microsoft and Apple Admit to Offshore Tax Shenanigans; Other Companies Plead the Fifth

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While the presidential candidates debate whether the tax code rewards companies that move operations overseas, a new CTJ report shows that ten companies, including Apple and Microsoft, indicate in their own financial statements that most of their foreign earnings have never been taxed – anywhere. The statements the companies file with the SEC reveal that if they brought their foreign profits back to the U.S., they would pay the full 35 percent U.S. tax rate, which is how we can surmise that no foreign taxes were paid that would offset any of the 35 percent U.S. tax rate.

The most likely explanation of this is that these profits, instead of being earned by real, economically productive operations in developed countries, are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands. This same type of offshore profit shifting was the focus of a recent Senate hearing where Microsoft and Hewlett-Packard found themselves in the hot seat.

In the tax footnote to their financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested,” that is, parked offshore. Calling it "indefinitely reinvested" allows them to embellish their bottom lines, on paper anyway, because they don't have to account for the cost of U.S. taxes they'd pay on that offshore income. But, they must disclose the total amount of their unrepatriated profits, and also estimate the U.S. tax that would be due if those earnings were repatriated.

A new CTJ analysis of the Fortune 500 found that, although 285 companies reported unrepatriated foreign earnings, only 47 companies disclosed in their financial statements an estimate of the U.S. income tax liability they would face upon repatriation, although that disclosure is required by accounting standards. The remaining companies hid behind a common dodge that estimating the U.S. tax would be “not practicable.” Legions of lawyers and accountants help these companies avoid taxes but can’t calculate the costs to the U.S. treasury?

Which Fortune 500 Companies are Shifting Profits to Offshore Tax Havens? ranks the 47 companies that do disclose this figure by the tax rate they’d pay if they repatriated their foreign earnings. Seven of the top ten are members, either directly or through a trade association, of the WIN America campaign that is lobbying for a repatriation tax holiday (aka corporate tax amnesty) that would let them bring the foreign earnings home at a super-low rate.

It’s not as though the rest of the Fortune 500 is innocent. CTJ’s report notably says nothing about the 238 Fortune 500 companies that have admitted having offshore hoards but refuse to calculate how much tax they’d pay. These companies include suspected tax dodgers like Google and HP, each of which has subsidiaries in known tax haven countries. In all likelihood, many of these other companies have been as successful in avoiding tax as the ten companies ranked highest in CTJ’s report.  

The new CTJ report is another reminder of what U.S.-based multinationals will do to avoid paying tax and why changing the U.S. international tax system to a territorial system is such a bad idea. Moving to a territorial tax system, which is supported by Gov. Romney and Congressman Ryan, would give companies a permanent tax holiday and encourage even more aggressive offshore profit shifting. President Obama has proposed corporate tax reform that would include a “minimum tax” on foreign earnings, although the rate has not been specified. And Congress, it seems, will be taking up overhaul of the corporate tax code next year, so watch this space for the facts about corporate America’s campaign to make dodging taxes even easier.


About that Cayman Islands Trust....

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In last night’s presidential debate, Governor Romney pointed out that President Obama’s pension holds investments in Chinese companies and even in a Cayman Islands trust. Unlike Romney’s self-directed Individual Retirement Account, the President’s pension is in a system over which the President has absolutely no control; it’s an account with the Illinois General Assembly Defined Benefit Pension Plan. To somehow compare that with the vast wealth that Romney has personally placed offshore is ludicrous.

While Romney was at the helm of Bain Capital, the private equity firm began forming all of its new funds in the Cayman Islands through labyrinthine structures that allow investors to legally avoid – and illegally evade – tax. In addition, Gov. Romney has a Bermuda corporation which has never been explained and, of course, there is that famous Swiss bank account. Over 250 of the 379 pages of Romney’s 2011 tax return are devoted to disclosing transactions with offshore corporations and partnerships.

If Romney was trying to make the point that most investors have some holdings in companies outside of the U.S., we buy that. But if Romney’s point was that facilitating tax avoidance and evasion through complicated offshore structures is both normal and acceptable or in any way ordinary, we could not disagree more.

Microsoft and HP in the Hot Seat as Senate Investigates Offshore Profit Shifting

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A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.

On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.

The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.

Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income.  Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.

In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.

The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).

Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.

It's outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.

Swiss Bank Tipster Gets Record $104 Million Reward from IRS

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Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.

Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that -- obviously -- boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.

The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.

While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.

Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

Are Bain's Tax Practices Actually Illegal?

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More and more people are asking if Bain Capital’s tax avoidance strategies are more than merely aggressive. On August 23, released a staggering 950 pages of documents related to Bain, the private equity firm that Mitt Romney founded, that confirm a lot of what we had previously surmised, including the fact that the Bain private equity funds set up “blocker” corporations to help tax-exempt investors avoid the unrelated business income tax and help foreign investors avoid tax in the U.S. and in their home countries.

CTJ senior counsel Rebecca Wilkins summarized it for Huffington Post: “The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax. Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions.”

The management fee conversions, detailed in several of the fund documents, do what they sound like they do: they convert some of the private equity firms’ annual management fees from clients, which would be taxed as ordinary income, into increased shares of partnership profits known as “carried interest”.  Carried interest is how these firms have structured their performance-based compensation from managing their clients’ investments, and carried interest is taxed at the special low rate at which capital gains are taxed. The management fee conversion is an effort to get yet another form of client compensation taxed at the capital gains rate, which is less than half the rate at which it would be taxed if it were ordinary income. These conversions save private equity firms’ partners millions of dollars in income taxes (the Bain partners alone have saved an estimated $220 million).

Colorado Law Professor Vic Fleischer, an expert on the taxation of private equity, quickly branded the management fee conversions as improper. “Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.”

It looks as though the New York Attorney General agrees. In July, weeks before the Gawker document dump, AG Eric Schneiderman served subpoenas on more than a dozen private equity firms, including Bain Capital.  The AG’s office is seeking documents related to whether the firms improperly converted management fees into additional carried interest, and running the investigation through its Taxpayer Protection Bureau

As controversial as private equity firm tax practices have become (thanks to Mitt Romney’s candidacy), we are likely to be hearing more about this investigation soon. Stay tuned.


Mitt Romney: I "Learned Leadership" From Tax Dodging Marriott CEO

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Presidential candidate Mitt Romney has been doing a lot of media interviews lately, and when the editors at Politico wrote up their sit-down with the GOP nominee, they characterized Romney’s answers to their questions as “the clearest window yet into how the lessons he gained in the corporate world would be applied to the presidency.

So what did he say? Romney told Politico “I learned leadership by watching people,” and named J.W. “Bill” Marriott, a fellow Mormon and the CEO of the hotel chain of the same name, as one of the people from whom he’s learned a lot about leadership. He put Marriott right up there with his mentor, Bill Bain.

While we can’t speak to Bill Marriott’s management style, we can tell you that during his 40-year tenure as CEO of Marriott International, the company engaged in aggressive tax avoiding – so aggressive that it later got them into trouble with the IRS.

The company used a tax shelter known as “Son of BOSS,” generating capital losses that a federal court deemed “fictitious,” “artificial” and a “scheme.” The government criminally prosecuted the promoters of this particular tax shelter and people are now serving federal prison sentences for it. In fact Romney himself, as a member of Marriott’s audit board, most likely signed off on this tax evasion strategy. The company has used other aggressive tax planning vehicles, too, even claiming a questionable tax credit for synthetic fuels.

Marriott also shows an ever-increasing ability to shift and shelter its profits offshore. While 3,122 of its 3,718 hotel properties are in the United States, the company pays more income tax in foreign jurisdictions than in the US, even though the majority of its profits must surely be generated here.

Marriott has over a hundred subsidiaries in known tax haven countries. For example, while it has only one hotel in the Cayman Islands, Marriott has 15 subsidiary companies there.  And in Luxembourg, where it has nine subsidiaries but zero hotels, Marriott uses one of its subsidiaries to collect royalties on its various brand names which the US cannot tax.

Does Romney admire and endorse these kinds of shenanigans? Hard to say for sure. But given his widely recognized use of some pretty aggressive (though legal, far as we know) strategies to avoid paying his personal taxes, we now have a glimpse into the values that inform his views on corporate tax policy.  We are beginning to sense a pattern in this presidential candidate, and it looks a little like disdain for our nation’s tax laws.


Today, the Senate Finance Committee approved a package of provisions often called the "tax extenders" because they extend several tax cuts, mostly benefiting businesses. A new report from Citizens for Tax Justice identifies two of the "tax extenders" as particular problems, despite having arcane names that are unknown outside of the corporate tax world: the “active financing exception” and the “CFC look-thru rules.”

Read the report: Don't Renew the Offshore Tax Loopholes: Congress Should Kill the “Extenders” that Let G.E., Apple, and Google Send Their Profits Offshore

These two temporary rules in the tax code — which allow U.S. multinational corporations to park their earnings offshore and avoid paying tax on them — expired at the end of 2011. If Congress refuses to extend these expired provisions, many U.S. companies will have much less incentive to send their profits (and possibly jobs) offshore.

►  The active financing exception and the CFC look-thru rules make it easy for U.S. multinational companies to move income to offshore tax havens and avoid paying U.S. tax.

►  Income shifting by multinational corporations using offshore tax havens, including transactions facilitated by these two rules, cost the U.S. Treasury an estimated $90 billion per year in lost tax revenue.

Read the report for more details.

At a hearing before the House Ways and Mean Committee today, witnesses from Corning, Inc. and 3M called for a “territorial” tax system, which would exempt offshore corporate profits from U.S. taxes, and which is part of Mitt Romney’s tax plan. Both companies said that their ability to compete internationally is harmed by the current system, in which U.S. corporations pay U.S. taxes on foreign profits when they bring them back to the U.S. (U.S. taxes minus a credit for whatever they already paid in foreign taxes).

As we explain in another post, our 2011 corporate tax study found that both of these companies actually pay higher effective tax rates in the other countries where they do business than they pay in the U.S., raising the question of how our tax system could be making them less able to compete.

Our 2011 study examined most of the Fortune 500 corporations that had been profitable for three years straight and found that two thirds of those corporations with significant foreign profits paid higher taxes to the foreign governments than they paid to the U.S. on their domestic profits.

Despite the U.S. having a relatively high statutory corporate tax rate, the effective U.S. corporate tax rate (the percentage of profits that U.S. corporations actually pay in income taxes) is clearly lower than that of most other countries (not counting tax havens, where companies don’t do any real business).

A refreshing dose of honesty was provided by the witness from Ford Motor Company, who said Ford’s offshore operations are, in fact, in “high-tax” countries and that Ford has no position on whether or not we should adopt a territorial system.

As we explain in a fact sheet and in a more detailed report, adopting a territorial system would mainly increase the incentives to shift operations (and jobs) to a handful of countries that really do have low corporate tax rates, or to simply disguise their U.S. profits as “foreign” profits generated in countries with low (or no) corporate taxes.

As we also explain in our report, the expansion of U.S. corporations’ operations in foreign countries may not be in the interest of U.S. workers.

In some situations those offshore operations may be substitutes for U.S. operations, meaning U.S. jobs are shipped offshore. In other situations those offshore operations may compliment U.S. operations, meaning U.S. jobs are created, particularly in corporate headquarters and research facilities, to support the offshore operations. Data from recent years shows that the former effect is more pronounced than the latter.

But either way, America does not need a tax system that favors offshore operations over U.S. operations — which is exactly what a territorial system would do. 

We’re not alone in this view. Last year, several small business associations, labor unions, and good government groups joined a letter opposing a territorial system. And today, the New York Times editorialized that the “corporate tax system needs reform, to raise more revenue, more fairly. The territorial tax system does not meet those criteria.”

Corning Pays Zero Federal Taxes, Tells Congress That's Too Much

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Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.”  With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.

Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.

It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.

But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.

Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:

“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”

In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid  -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.

During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”

But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.

Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.


The IRS 35,000: How the Richest Americans Pay the Lowest Taxes

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A new study from the Internal Revenue Service confirms your worst fears about the tax code: it’s riddled with loopholes and Congress isn’t doing anything about it.  Year after year since 1977, the IRS has dutifully issued its “data on individual income tax returns reporting income of $200,000 or more, including the number of such returns reporting no income tax liability and the importance of various tax provisions in making these returns nontaxable” because Congress mandates it. And year after year, it shows that some of the very richest Americans are finding entirely legal ways to avoid federal income taxes altogether.

The new (and most recent) IRS data show that in 2009, more than 35,000 Americans* with incomes over $200,000 paid not a dime in federal income tax. For this group—less than one percent of all the Americans with incomes over $200,000, according to the study— itemized deductions and tax-exempt bond interest are among the main tax breaks that make this tax-avoiding feat possible. 

And, as if to illustrate how loopholes never die, these two tax breaks are among the oldest on the books; the exemption of bond interest dates to the century old statute establishing the income tax itself!

Sensible tax reforms could close (or at least shrink) these holes in the tax code.  The president, for example, has proposed a limit on the value of itemized deductions for the wealthiest Americans, and to extend the “Build America Bonds” program which keeps revenues flowing to cities but phases out the tax shelter the current system provides for the bond holders.

Of course, these wealthy taxpayers avoiding all their federal income tax responsibilities don’t even include the ones paying zero or low federal taxes because of the low rates at which investment income is taxed.

There is no excuse for hundred-year-old loopholes in a tax code: it’s time for Washington to clean up the tax code and take a brave stand against unwarranted exemptions that drain revenues and reward the rich.

* Others have focused on a smaller number of taxpayers, 21,000, who have an adjusted gross income (AGI) of over $200,000. But simple AGI excludes many types of income, such as tax exempt bond interest which is key to the low tax liabilities.

Tax Treason and a Facebook Billionaire

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Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

Close the Newt Gingrich/John Edwards Loophole!

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Republican leaders in the Senate claim that they agree with the Democrats’ goal of extending a temporary reduction in interest rates on student loans, but oppose the Democrats’ proposal to offset the costs. But this proposal, which would close the “Newt Gingrich/John Edwards Loophole” used by owners of “S corporations” to avoid payroll taxes, is a reason to support the Senate Democrats’ bill, which was filibustered by Senate Republicans on Tuesday.

CTJ’s recent report on revenue-raising options explains the loophole (on pages 17-18) and explains a proposal from Congressman Pete Stark to close it. The Senate Democrats’ proposal to close the loophole is a little weaker (as explained below) but still certainly deserves support.

Income from work, including wages and salaries, is subject to federal payroll taxes (Social Security taxes and Medicare taxes). Some wealthy individuals, including (at one time) former presidential candidates John Edwards and Newt Gingrich, have used a loophole to make their earned income appear to be unearned income, in order to avoid payroll taxes. (This is particularly true of the Medicare tax because there is no cap on the amount of earnings subject to the Medicare tax.)

The scheme involves a type of business called an “S corporation,” which is distinguished from other corporations in that its profits are not subject to the corporate income tax but are simply included in the taxable income of the owners and therefore subject to the personal income tax. These profits should also be subject to payroll taxes when they are income from work, but an odd feature of S corporations allows some “active income” (income a business owner receives as a result of being involved in the operations of the business) to be characterized as income that is not earned and thus not subject to payroll taxes.

This is an invitation for abuse, and John Edwards accepted the invitation when he was a trial lawyer. He claimed that his name was an asset and that this asset (rather than his labor) was generating the income for his firm (which was an S corporation). Newt Gingrich’s recently released tax returns demonstrated that he, too, took advantage of this loophole.

To be sure, the Senate Democrats’ proposal doesn’t go as far as it should. It would apply the Medicare tax to this income only when the S corporation is “a professional service business in which more than 75% of its gross revenues come from the service of 3 or fewer shareholders.” The proposal is more restrictive than Congressman Stark’s bill in that it would apply to S corporation owners only if their adjusted gross income exceeds $250,000. It’s hard to see why anyone at any income level should be allowed to get away with this.

Nonetheless, the Senate Democrats’ proposal certainly sounds like it would, if in effect, have prevented John Edwards and Newt Gingrich from using this loophole to avoid payroll taxes. And that’s a reason to support the legislation, which may come up for a vote again according to Democratic leaders.

Photo of Newt Gingrich and John Edwards via Gage Skidmore and SS Kennel Creative Commons Attribution License 2.0

Senator Rand Paul: Champion of Secret Swiss Bank Accounts

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Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

No Amnesty for Corporate Tax Dodgers!

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Representing a remarkable defeat for corporate tax dodgers, a spokesman for the so-called "Win America Campaign" confirmed this week that it has “temporarily suspended” its lobbying for a tax repatriation amnesty. The coalition of mostly high-tech companies pushed for months for a tax amnesty for repatriated offshore corporate profits. The campaign once seemed unstoppable because so many huge corporations, and veteran lobbyists with ties to lawmakers, were behind it. 

What supporters call a tax "repatriation holiday," or more accurately, a tax amnesty, allows US corporations a window during which they can bring back (repatriate) foreign profits to the US at a hugely discounted tax rate. The holiday’s proponents argue this would encourage multi-national corporations to bring offshore profits back to the US.

CTJ has often pointed out that the only real solution is to end the tax break that encourages U.S. corporations to shift their profits offshore in the first place — the rule allowing corporations to defer (delay indefinitely) U.S. taxes on foreign profits. Deferral encourages corporations to shift their profits to offshore tax havens, and a repatriation amnesty would only encourage more of the same abuse.

The Win America Campaign and its long list of deep pocketed corporate backers (including Apple and Cisco) spared no expense in pushing the repatriation amnesty, spending some $760,000 over the last year. This sum allowed the coalition to hire a breathtaking 160 lobbyists (including at least 60 former staffers for current members of Congress) to promote their favored policy in Washington.

So what prevented Win America from winning its tax amnesty? It was the steady march of objective economic studies put out by groups from across the political spectrum demonstrating how the holiday would send more jobs and profits offshore and result in huge revenue losses.

One of the toughest blows the repatriation amnesty took came from the well-respected Congressional Research Service’s (CRS) report showing what happened last time: the benefits from the repatriation holiday in 2004 went primarily to dividend payments for corporate shareholders rather than to job creation as promised. In fact, the CRS found that many of the biggest corporate beneficiaries of the 2004 holiday had since actually reduced their US workforce.

On top of this, the bipartisan and official scorekeeper in Congress, the Joint Committee on Taxation (JCT), found that a new repatriation holiday would cost $80 billion, which is a lot of money for a policy that would not create any jobs. Advocates for the tax holiday responded with studies of their own claiming the measure would actually raise revenue, but Citizens for Tax Justice (CTJ) immediately debunked the bogus assumptions underlying these reports. 

On top of the solid research there was the incredible and rare consensus among policy think tanks across the political spectrum to oppose the measure. The groups opposing a repatriation holiday included CTJ, Tax Policy Center, Tax Foundation, the Center on Budget and Policy Priorities and Heritage Foundation, to name a few.

The suspension of lobbying for the repatriation amnesty is a victory for ordinary taxpayers. And while the Win America Campaign isn’t dead – one lobbyist promised that "if there was an opportunity to move it, the band would get back together and it would rev up again" – its setback validates our work here at CTJ on corporate tax avoidance in all its forms. 

Obama Administration Scores a Victory for Honest Taxpayers Everywhere

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On Tuesday, advocates for transparency scored a victory while tax evaders suffered a loss. The Treasury Department issued final regulations requiring banks to report to the IRS any interest payments made to foreign account holders in the same way they must report interest payments made to U.S. resident account holders. You’d think this sort of regulatory issue would be a pretty dull affair, but sparks flew over the last several months as opponents of the new rule accused Citizens for Tax Justice and the Obama administration of supporting dictators, kidnappers and terrorists.

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so before now it never bothered to require banks to report those interest payments made to foreigners. But the IRS proposed to change that rule in order to reduce tax evasion by Americans, both directly (by helping to identify Americans who evade U.S. taxes by posing as foreign account holders) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

CTJ and the Financial Accountability and Corporate Transparency (FACT) Coalition continually expressed support for the regulations as they worked their way through the process, and CTJ’s Rebecca Wilkins testified before the Internal Revenue Service and the House Financial Services Committee in support of the rule. Sen. Carl Levin, a long-time crusader against tax haven abuse and chair of the Senate Permanent Subcommittee on Investigations also submitted comments. Levin’s committee has done ground-breaking investigative work on offshore tax evasion issues and chief counsel Elise Bean also testified in support of the proposed regulations.

At the House Financial Services Committee hearing in October, Republican Chairman Spencer Bachus read a letter from the Florida House delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

Wilkins explained that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement. Even more important, Wilkins explained, is that the rule in effect until now actually helped criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.

The hearings made clear that supporters of the regulations were greatly outnumbered by the tax cheaters’ lobby, the politicians, and the bankers who benefit from facilitating tax evasion. We’re really glad that the IRS didn’t rewrite the regulations to please them.

Today we’re celebrating this rare win in our long fight for good tax policy and robust enforcement. But the real winners today are honest taxpaying citizens all over the world.

New CTJ Report: Tax Tips with Mitt

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Millions of Americans will spend part of this upcoming weekend trying to navigate tax preparation software or filling out the actual paper forms to file their income tax returns before the Tuesday deadline. For those wishing they could pay less tax, outlined below are some tax planning ideas taken from a review of presidential candidate Mitt Romney’s tax returns.

Read the report.

New Rule: If Taxpayers Pay Your Salary, Come Clean on Your Finances

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Presidential candidate Mitt Romney took some heat this winter for delaying release of his tax returns and then, in January, released only one year’s worth (and an estimate for 2011). Now the calls for more disclosure are heating up again since the Washington Post reported that Romney is using an obscure ethics rule loophole to limit the disclosure of his Bain Capital holdings. An earlier Los Angeles Times article reported that Romney’s financial disclosure did not list many of the funds and partnerships that showed up in his 2010 tax returns, eleven of which are based in low-tax foreign countries such as Bermuda, the Cayman Islands and Luxembourg.

While it’s Romney’s offshore holdings that are making news, the fact is any government official using offshore tax havens right now is allowed to keep that a secret.

But that’s about to change. On March 29, Senators Dick Durbin (D-IL) and Al Franken (D-MN) introduced a bill that would require members of Congress, candidates for federal office, and high-ranking federal government officials to identify which of their assets are located in tax havens when they file their required financial disclosures. The Financial Disclosure to Reduce Tax Haven Abuse Act of 2012 (S. 2253) would amend the Ethics in Government Act of 1978.

Although there’s nothing illegal about having an offshore account, estimates are that abuses facilitated by these accounts cost the U.S. Treasury over $100 Billion per year in lost tax revenue. And while the Durbin-Franken bill won’t make it illegal, it would have the effect of limiting that sort of tax dodging among public officials – or weed out candidates unwilling to tolerate a little sunshine.

In his floor statement introducing the bill, Sen. Durbin stated “it might seem ridiculous that we don’t already know whether candidates and Members of Congress are using offshore tax havens.” Sen. Franken, in the press release, said “Americans deserve transparency from public officials.” We could not agree more.

Photo of Mitt Romney via Gage Skidmore Creative Commons Attribution License 2.0


New from CTJ: How Corporate Tax Dodgers are Buying Tax Loopholes

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Large majorities of Americans, including small business owners, want profitable corporations to pay their fair share in taxes, but none of the major proposals in Washington would make that happen.  They will close some loopholes while creating others and, meantime, leave the amount of revenues U.S. companies contribute just about where it is now – at an historic low.

Why the disconnect between public opinion and political action? Could it be because 98 percent of the sitting members of Congress have accepted campaign donations from the country’s most aggressive, successful tax avoiding corporations?

Citizens for Tax Justice and U.S. PIRG’s new report Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.

Loopholes for Sale details how thirty major, profitable corporations (a.k.a. the Dirty Thirty) with a collective federal income tax bill of negative $10.6 billion have made Congressional campaign contributions totaling $41 million over four election cycles. This includes PAC contributions to 524 current members of Congress.

These 30 tax dodging companies specifically targeted the leadership of both political parties, and members of the tax writing committees in the House and Senate. Top recipients of their largesse since the 2006 campaign have been:

1- House Minority Whip Steny Hoyer (D-MD) - $379,850.00
2- Speaker of the House John Boehner (R-OH) - $336,5000.00
3- House Majority Leader Eric Cantor (R-VA) – $320,900.00
4- Senator Roy Blunt (R-MO)Former House Minority Whip 2003-08) – $220,500.00
5- Senate Minority Leader Mitch McConnell (R-KY) - $177,001.00

These companies – including GE, Boeing, Honeywell and FedEx—also gave disproportionately to members of the tax writing committees, including $3.1 million to current members of the House Ways and Means Committee and $1.9 million to members of the Senate Finance Committee.

The “pervasiveness of that money across party lines speaks volumes about why major proposals to close corporate loopholes have not even come up for a vote,” says US PIRG’s Dan Smith.

So if the public is so clearly supportive of closing corporate tax loopholes and making corporations pay more than they currently are, why aren’t our elected officials moving forward on corporate tax reform? This report, along with our earlier Representation with Taxation on corporate lobbying expenditures, exposes how part of the answer may be found by taking a hard look at the way some of America’s largest companies translate wealth into influence.

iTax Dodger

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apple store.png

On Monday, Apple™ announced that it will distribute tens of billions of its cash holdings as dividends to shareholders, ending speculation over how the company will use the large pile of cash it has been sitting on. CFO Peter Oppenheimer went out of his way to point out that the dividends would be paid entirely from Apple’s U.S. cash, which means the $54 billion Apple has stashed in foreign countries will stay there. Oppenheimer explained that “repatriating cash from overseas would result in significant tax consequences under U.S. law.”

He’s not kidding! CTJ has estimated that Apple has paid a tax rate of just over three percent on this stash of “foreign” earnings, a clear indicator that much of this cash is likely parked in offshore tax havens and has never been taxed by any government. If Apple brought this cash back to the U.S., they’d likely pay something close to the 35 percent corporate tax rate that the law prescribes. The resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits – over the last 11 years.

Apple is part of the Win America Coalition that’s been lobbying hard for a repatriation holiday (a.k.a. tax amnesty) which would allow them to bring back those unrepatriated profits at a super-low tax rate. But that would only encourage U.S. multinational corporations to shift even more profits offshore in anticipation of the next holiday.

Apple’s CFO was astonishingly blunt: “we do not want to incur the tax cost.”  Rather than shirking its basic obligation to help pay for the public goods that contribute to its extraordinary success, Apple’s executives might want to “think different” about its tax dodging ways before its devoted consumers start thinking differently about their favorite high-tech brand.

Photo of Apple Logo via Marko Pako Creative Commons Attribution License 2.0

Press Release: General Electric's Ten Year Tax Rate Only Two Percent

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For Immediate Release: February 27, 2012 (rev. 4/12)

Contact: Anne Singer, 202-299-1066, ext. 27

General Electric Paid Only Two Percent Federal Income Tax Rate Over the Past Decade, Citizens for Tax Justice Analysis Finds; Actual Payments Were Probably Lower

Washington, DC – General Electric’s (GE) annual SEC 10-K filing for 2011 (filed February 24, 2012) reveals that the company paid at most two percent of its $80.2 billion in U.S. pretax profits in federal income taxes over the last 10 years.

Following revelations in March 2011 that GE paid no federal income taxes in 2010 and in fact enjoyed $3.3 billion in net tax benefits, GE told AFP (3/29/2011), “GE did not pay US federal taxes last year because we did not owe any.” But don’t worry, GE told Dow Jones Newswires (3/28/2011), “our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.”

As it turns out, however, in 2011 GE’s effective federal income tax rate was only 11.3 percent, less than a third the official 35 percent corporate tax rate.

“I don’t think most Americans would consider 11.3 percent, not to mention GE’s long-term effective rate of 1.8 percent, to be ‘normal,’ ” said Bob McIntyre, director of Citizens for Tax Justice.  “But for GE, taxes are something to be avoided rather than paid.”

Citizens for Tax Justice’s summary of GE’s federal income taxes over the past decade shows that:

O From 2006 to 2011, GE’s net federal income taxes were negative $3.1 billion, despite $38.2 billion in pretax U.S. profits over the six years.

O Over the past decade, GE’s effective federal income tax rate on its $81.2 billion in pretax U.S. profits has been at most 1.8 percent.

McIntyre noted that GE has yet to pay even that paltry 1.8 percent. In fact, at the end of 2011, GE reports that it has claimed $3.9 billion in cumulative income tax reductions on its tax returns over the years that it has not reported in its shareholder reports — because it expects the IRS will not approve these “uncertain” tax breaks, and GE will have to give the money back.

GE is one of 280 profitable Fortune 500 companies profiled in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.”  The report shows GE is one of 30 major U.S. corporations that paid zero – or less – in federal income taxes in the last three years.  The full report, a joint project of Citizens for Tax Justice and the Institute on Taxation and Economic Policy, is at Page 24 of the report explains “uncertain” tax breaks.


Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (


Note: GE’s profits and taxes for 2009 and 2010 have been slightly revised from an earlier version of this release. The earlier version inadvertently used GE’s restated 2009 and 2010 figures from GE’s 2011 annual report. Those restated figures excluded the half of NBC that GE sold to Comcast in 2011, and did not reflect GE’s actual results for those two years.

Facebook's First Public Filing Reveals Its Plan to be a Champion Tax Dodger

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(See CTJ director's full explanation of Facebook's use of the stock option deduction here.)

Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.

The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing?  If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.

In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.

The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.

See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0

The Huge Corporate Tax Issue that Obama's Jobs Council Can't Agree On

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A new report from President Obama’s jobs council reflects a major dispute between corporate and labor leaders over tax reform. According to Reuters, the report “notes disagreement among council members over whether to shift to a ‘territorial’ system that exempts most or all foreign income from corporate taxes when it is repatriated.”

The report is from the President’s Council on Jobs and Competitiveness, which includes labor and business leaders and is chaired by Jeffrey Immelt, CEO of the notorious tax dodger, General Electric.

A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from our corporate income tax. The bottom line is that our current system already provides a tax break that encourages U.S. corporations to shift investments offshore, and a “territorial” system would expand that tax break.

The existing tax break is the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (until they are “repatriated”). Often these profits remain offshore for years and the U.S. corporation may have no plans to repatriate them ever.

This “deferral” of U.S. taxes on offshore profits provides an incentive for U.S. corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.

These incentives for corporations to shift jobs and profits offshore would only increase if their offshore profits were entirely exempt from U.S. taxes, as would be the case under a territorial tax system.

Labor leaders know this, and labor unions have joined other organizations in opposing a territorial system. In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, the big unions joined a letter to the committee members urging them to reject any proposal for a territorial tax system.

Corporate leaders, on the other hand, have been calling for a territorial system because of the benefits it would provide for corporations trying to lower their tax bills. The likely “disagreement” cited in the White House report probably was between the labor leaders and corporate leaders on the President’s jobs council.

As we explain in this fact sheet, the real answer is not to adopt a territorial tax system but to end “deferral.” Here’s a report making the same case in much more detail.

Ending Tax Breaks for Companies Moving Jobs Offshore

President Obama hosted an “Insourcing American Jobs Forum” last week with business leaders who are bringing jobs back to the United States. During the event, the President announced he’d soon “put forward new tax proposals that reward companies that choose to bring jobs home and invest in America.  And we’re going to eliminate tax breaks for companies that are moving jobs overseas.”

As already explained, the most straightforward way to do this would be to end deferral.

Another possibility is that the President could push some of the modest, but still helpful, proposals made early in his administration to limit the worst abuses of deferral. (Here’s a CTJ report explaining these proposals.) Unfortunately, the President immediately started backing away from these and dropped the most significant of these reforms (a change to the arcane-sounding “check-the-box” rules) by the time he made his second budget proposal.

Real tax reform depends on the administration being far more willing to stand up to the corporate CEOs — including those who sit on his jobs council.

Photo of Council on Jobs and Competitiveness via The White House Creative Commons Attribution License 2.0

Tax Cheaters Cost Law Abiding Taxpayers $385 Billion in a Single Year

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A new report from the IRS estimates that individuals and businesses failed to pay $385 billion of the taxes they owed in a single year — a figure that many experts believe is an understatement. This comes just months after Congress cut funding for IRS enforcement activities that could recoup those dollars.

The IRS report estimates that taxpayers paid $450 billion less than was owed in 2006 and that the IRS eventually recovered $65 billion of that, leaving a net "tax gap" of $385 billion — which is roughly 14.5 percent of all taxes due.

As CTJ director Bob McIntyre explained in his testimony before the Senate Budget Committee a few years ago, he and other tax experts have long thought that the tax gap is actually larger than what the IRS estimates, particularly the portion that results from income hidden in offshore tax havens.

The IRS is less able to counter this type of tax evasion than it was in the past. Congress drastically slashed the IRS budget in the 1990s with the rationale that the agency was a bother to taxpayers. But another report released today by the National Taxpayer Advocate (a Bush appointee) concludes that the paltry budget for the IRS is itself the source of irritation for taxpayers who are affected by the various short-cuts the IRS must take in administering the tax system with fewer staff.

The more fundamental problem with the tax gap is that it means the vast majority of Americans, who pay the taxes they owe, are effectively subsidizing those who do not.

Most middle-income working people don't have many opportunities to evade taxes because their employers report their wages to the IRS and withhold a portion of them for taxes. On the other hand, corporations and business owners are responsible for a majority of the tax gap.

For example, underreporting of business income, corporate income, and compensation by self-employed individuals together make up a majority of the tax gap, according to the IRS report.

Congress's cuts to IRS funding are bizarre because this is one type of government spending that pays for itself several times over. In some cases a dollar of additional IRS funding can generate $200 of revenue. In other words, lawmakers have forced cuts to the IRS budget knowing full well that this is one type of spending cut that actually increases the budget deficit.

In addition to restoring IRS funding, there are other measures that Congress can take to increase income reporting and crack down on institutions that facilitate offshore tax evasion, as McIntyre called for in his testimony. Most of those proposals have still not been enacted, partly because they're opposed by the Tax Cheaters Lobby.

Photo of Tax Preparation via Money Blog Creative Commons Attribution License 2.0

On Thursday, a subcommittee hearing on a proposed IRS rule veered towards the absurd when Citizens for Tax Justice and the Obama administration were accused of supporting dictators, kidnappers and terrorists.

CTJ’s Rebecca Wilkins testified before a House Financial Services subcommittee in favor of a proposed rule that would require U.S. banks to report to the IRS any interest payments made to foreign account holders in the same way they report interest payments made to U.S. resident account holders.

Read Rebecca Wilkins’s Written Testimony

Watch Rebecca Wilkins’s Testimony

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so it never bothered to require banks to report those made to foreigners. But the IRS has proposed to change that rule in order to reduce tax evasion by Americans directly (to help identify Americans who evade U.S. taxes by posing as foreigners) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

Wilkins faced off against three witnesses opposed to the proposed rule and a panel of lawmakers controlled by bank supporters. Chairman Spencer Bachus read a letter from the Florida delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

In other words, Bachus and the Florida delegation believe we should help all foreign individuals break their home countries’ tax laws because some of those countries have corrupt governments.

Never mind that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement, as Wilkins calmly explained. Even more important, Wilkins explained, is that the rule in effect now actually helps criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.!

“America should not be a tax haven,” Wilkins told the panel.

Towards the end of her opening statement, Wilkins addressed her opponents directly:

"Chairman Bachus said, ‘Do we want to have blood on our hands, as a result of these rules?’ I want to tell you, the U.S. already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands."

Perhaps the most remarkable comment came at the end of the hearing from Bill Posey of Florida, who said to Wilkins, “Your advocacy for the government of Venezuela and, um, ultimately someday maybe Iran, North Korea and Cuba and the like, startles me, quite frankly. Most of us here try to put America first.” Posey then went on, not about putting Americans first, but about the plight of the people living under these dictatorships who hide their money in American banks. 

Wilkins had already explained that the IRS would not be required to provide foreign governments with the information it collects, but would be able to respond to a limited request under a tax information exchange agreement. Perhaps if Wilkins had been allowed to respond to Posey’s comments, she might have addressed some of his confusion, starting with his apparent belief that the United States has tax information exchange agreements with North Korea, Iran and Cuba.


Labor unions, small business associations and good government groups have lined up to oppose proposals to exempt corporations' offshore profits from U.S. taxes on a permanent basis (by enacting a "territorial" tax system) or temporary basis (by enacting a "repatriation" amnesty). These organizations also oppose any overhaul of the corporate income tax that fails to raise significant revenue.

The organizations spell out their positions on corporate tax reform in a letter sent to members of the Joint Select Committee on Deficit Reduction (commonly called the "Super Committee") today.

Read the letter.

These positions put the organizations at odds with House Ways and Means Chairman Dave Camp, who today proposed a corporate tax overhaul that includes a territorial system and that would be "revenue-neutral."

The letter asks the Super Committee to do four things:

1. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes permanently (by enacting a “territorial” tax system).

2. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes temporarily (by enacting a “repatriation” amnesty).

3. Require any overhaul of the corporate income tax to raise significant revenue.

4. Require that the revenue-positive result be estimated using traditional revenue scoring procedures as opposed to controversial alternative procedures (often called “dynamic” scoring).

To learn more, see CTJ's fact sheet about raising revenue through corporate tax reform and CTJ's fact sheet about territorial/repatriation proposals.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

New CTJ Fact Sheet Explains Why Congress Should Reject “Territorial” System

House Ways and Means Chairman Dave Camp is planning to release a “working draft” of a plan to adopt a “territorial” tax system, which is another way of saying a permanent tax exemption for corporations’ offshore profits.

On Tuesday, BNA’s Daily Tax Report (subscription required) informed us that

Lobbyists representing U.S. multinationals said they have not heard anything specific related to the timing of the proposal but they have heard that it will not be formal legislation, just a working draft. The idea behind this is that it would allow business interests to weigh in on a proposal before lawmakers turned it into actual legislation, multiple lobbyists said.

That’s about the closest thing we ever see to an admission that corporate lobbyists will decide what the Republican-controlled House tax-writing committee should enact.

Those lobbyists will be in an awfully good mood from the start because the “territorial” tax system that Chairman Camp is offering them will increase opportunities for their companies to lower their taxes by shifting jobs and profits offshore. To understand why, see CTJ’s new fact sheet on the international corporate tax rules.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

Rare Consensus among Organizations Opposing Massive Campaign to Enact Repatriation Amnesty

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CTJ, Heritage Foundation, Tax Foundation and Others AGREE that the 60 Former Hill Staffers Lobbying for Repatriation Amnesty Are Wrong

Bloomberg reports that the corporate coalition promoting a tax amnesty for offshore profits that U.S. corporations repatriate to the U.S. has hired 160 lobbyists, including an astounding 60 people who formerly served as staff to current members of Congress.

This breathtaking chart illustrates how everyone from President Obama’s former communications director to the Democratic Finance Committee chairman’s former chief of staff is now being paid by corporations to promote the repatriation amnesty.

Even more remarkable is that the organizations that study tax policy and agree on nothing have come to a consensus that this proposal should be rejected. Groups like Citizens for Tax Justice and the Center on Budget and Policy Priorities have been joined by the anti-tax Tax Foundation and the extremely conservative Heritage Foundation in opposing the proposal.

Naturally, the consensus ends there. For example, CTJ explains that the way to really fix our international tax rules is to remove the tax break that causes U.S. corporations to shift profits and operations overseas in the first place (“deferral”) while the Tax Foundation argues instead for permanently exempting offshore corporate profits from U.S. taxes. “However,” the Tax Foundation explains, “experience shows that the [repatriation] holiday has been ineffective policy.”  

The Heritage Foundation is similarly unimpressed with the proposal, saying:

“The issue here is not whether tax cuts are good or bad per se, but whether this particular tax cut would increase domestic employment and domestic jobs. Again, the answer is that it would not. . . Are these repatriating companies capital-constrained today? No, they are not. These large multinational companies have enormous sums of accumulated earnings parked in the financial markets already.”

Other organizations that have published analyses extremely critical of the proposal include the Economic Policy Institute, the Tax Policy Center, the Center on Budget and Policy Priorities, and the Center for Economic and Policy Research.

The proposed repatriation amnesty, which proponents call a “repatriation holiday,” would temporarily remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.

Here’s what we have said about this debate:

Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network

“The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits ‘permanently reinvested’ (i.e., parked) overseas as they did at the end of 2005.”

Call on Congress to Oppose the Amnesty for Corporate Tax Dodgers

1. Another repatriation amnesty will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.

2. Another repatriation amnesty will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.

3. The proposal is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.

4. Congress enacted a repatriation amnesty in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.

Here’s more from CTJ on the right way to fix our international tax rules:
Congress Should End “Deferral” Rather than Adopt a “Territorial” Tax System


The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report

Verizon Pushes for $1 Billion in Concessions from Workers, While Receiving Nearly $1 Billion in Subsidies from Uncle Sam

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On Sunday, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions. What makes these demands particularly galling is that Verizon is both highly profitable and already a model of poor corporate citizenship.

Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.

If Verizon thinks its employees should pay $1 billion more for their benefits, we think Verizon should pay A LOT more for the benefits it receives from the federal government.

In fact, if Verizon paid its corporate income tax at the official rate of 35 percent, it would have owed more than $11 billion (rather than negative $1 billion). This alone is enough to  avoid the recent cuts in the debt deal to student loan programs..

For its part, Verizon has disputed the claim that it does not pay enough in taxes. Their math however is misleading because it includes taxes that they will owe in the future, not those they actually pay in a given year.

Verizon’s tax dodging is now so infamous that it has become one of the primary targets of US Uncut, a grassroots organization dedicated to getting corporations to pay their fair share.

The Communication Workers of America (CWA), who is leading the strike along with the International Brotherhood of Electrical Workers (IBEW), also notes that while calling for a benefit cut from workers, the top 5 executives at Verizon received more than a quarter of a billion dollars in compensation over the last 4 years.

Given their record on taxes and compensation, it’s hard to believe Verizon will come around to being a good corporate citizen anytime soon, yet unions and the public alike need to keep up the pressure by asking Verizon: Can you hear us now?

A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.

The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.

Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.

A coalition of companies that would benefit is promoting the bill.

Neither of the tax breaks offered under the bill would create jobs.

The R&E Credit Rewards Companies for Research They Would Do Anyway

The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.

The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”

The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.

A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.

The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.

The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs

Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).

For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.

Photo via Wellstone.Action Creative Commons Attribution License 2.0


Anonymous Owners of U.S. Shell Companies Now Funding Politics

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Levin-Grassley Incorporation Transparency Bill Would Help Identify Mysterious $1 Million Contribution to Romney Campaign

Today, NBC News reports that a Delaware company made a $1 million contribution to a PAC supporting Mitt Romney about six weeks after it was formed, and then dissolved two months later. This ripped-from-the-headlines story of a corporation that was created for the sole purpose of laundering massive political contributions highlights the need for a bill that was just introduced this week in the U.S. Senate.

The company, called W Spann LLC, filed a certificate of formation on March 15 with no information about the owners or the business purpose of the entity. On April 28, the LLC made a $1 million contribution to a political action committee supporting Mitt Romney.

The company then dissolved on July 11, leaving no trail of the real people behind the political mega-donation. Lawrence Noble, former general counsel of the Federal Election Commission, called it a "roadmap for how people can hide their identities" and disguise their political contributions.

This technique would be blocked if Congress enacts a bipartisan bill introduced this week to require states to collect information about who really controls corporations and limited liability companies (LLCs) that are formed in their jurisdictions. Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483) on August 2.

The bill's provisions are vital to law enforcement who are trying to investigate crimes ranging from arms dealing to money laundering and tax evasion. But it will also help combat another problem - the clandestine funding of politics.

Last year, a Senator from a certain state known for its loose incorporation laws blocked this bill from moving forward. (See Criminals, Inc.: Delaware's Fight to Keep Opaque Incorporation Rules is Helping Tax Cheats and Terrorists, June 25, 2010.)

The reasons for supporting this law continue to multiply. Lawmakers on both sides of the aisle should be lining up to cosponsor the Incorporation Transparency Act.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

New CTJ Report: The Stop Tax Haven Abuse Act

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On July 27, Congressman Lloyd Doggett (D-TX) introduced the Stop Tax Haven Abuse Act (H.R. 2669) in the House of Representatives with 53 cosponsors. The Senate version was introduced July 12 by Sen. Carl Levin.

The U.S. Treasury loses an estimated $100 Billion in tax revenues annually due to tax havens. Many believe the actual revenue loss could be much higher.

A key provision would tax corporations where they are located and do business instead of where they are incorporated, say, a post office box in the Cayman Islands. Another important provision would require companies that file with the SEC to report certain financial information on a country-by-country basis so that investors and tax authorities could see where operations are located and where profits are ending up.

Most of the Stop Act provisions are aimed at the foreign financial institutions and foreign jurisdictions that facilitate offshore tax evasion and avoidance. The bill also targets some other types of tax dodging, as well as the bankers, lawyers, and accountants who facilitate these abuses by their clients.

A new report by CTJ explains the bill's provisions.


Tax Dodgers in the Cross Hairs

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Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.


In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department's Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a "loan" to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0

Senator Levin Introduces Bill to Crack Down on Tax Havens

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On Tuesday, Senator Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act (S. 1346) to help stem the tide of the estimated $100 billion annual tax revenue loss connected to the use of offshore tax havens. In his press conference and floor statement Sen. Levin stated that offshore tax abuses undermine public confidence in the tax system, increase the tax burden on middle America, create and unfair disadvantage for small business, and encourage the movement of jobs offshore.

The bill would give the IRS new enforcement tools to detect and prosecute these abuses. The bill is being championed by a wide spectrum of supporters including small business and the Financial Accountabiltiy and Corporate Transparency (FACT) Coalition.

Caterpillar Inc. Accused of Dodging $2 Billion in U.S. Taxes

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Company Accused of Dodging $2 Billion in US Taxes After Calling for Exemption for Tax Haven Profits and Attacking Illinois Tax Hike

A former global tax strategy manager of Caterpillar is suing the company for demoting him after he complained that it was using “tax and financial statement fraud” to avoid $2 billion in U.S. taxes.

Daniel J. Schlicksup’s specific claim is that the company improperly attributed at least $5.6 billion of profits from the sale of spare parts from a plant in Illinois to another unit in Geneva. He alleges that after telling his superiors that he believed the tax avoidance was illegal, they retaliated by transferring him to the company’s information technology division, which is entirely out of his area of expertise.

For their part, Caterpillar representatives have said that the company complies with all laws and regulations, but have not as of yet addressed the specific charges in the lawsuit.

Based on the details released so far, it is unclear how this case against Caterpillar will ultimately pan out. The problem, according to Harvard Professor Stephen Shay, is that a company does not need “much substance” to be considered legal in these circumstances under U.S. law. In other words, even if Caterpillar is using a Swiss subsidiary primarily to avoid billions in taxes, it’s possible that the maneuver could actually be legal depending on the specific details of the subsidiary’s operation.

Caterpillar has long been an especially outspoken critic of corporate income taxes. In May, the company’s CEO called for the US to adopt a territorial tax system, which would be a boon to multinational corporations and a disaster for everyone else.

On the state level, Caterpillar was the first company to protest the recent corporate tax increases in Illinois, where the company is headquartered. They led the opposition to the state increase, despite the fact that their total (all states including Illinois) state and local tax liability represented only a tiny fraction of their costs; a mere 0.7 percent of their global earnings in 2010. In addition, if the accusations prove to have any truth, Caterpillar may have been fraudulently avoiding Illinois taxes as well.

Photo via Cyrillicus Creative Commons Attribution License 2.0

Jeffrey Immelt, CEO of the company famous for making profits of $26 billion from 2006 through 2010 and receiving tax benefits from the IRS of $4.1 billion over that period, has endorsed the recently proposed amnesty for corporate tax dodgers, called a "repatriation holiday" by its proponents.

Immelt was selected by President Barack Obama in February of 2009 to chair his Council on Jobs and Competitiveness, which is to advise the White House on economic policy. He has been CEO of General Electric since 2000.

In March, the New York Times reported GE's federal corporate income tax bill of negative $4.1 billion over the five-year period in which it earned $26 billion in profits, which is an effective tax rate of negative 15.8 percent. A recent report from CTJ focuses on the three-year period 2008-2010 and finds that GE earned $7.7 billion in profits during this period and had a federal corporate income tax bill of negative $4.7 billion over this period.

Following the New York Times revelations, progressive activists spearheaded a call for Immelt's resignation from the President's Council on Jobs and Competitiveness.

His call for an amnesty for offshore tax dodgers will surely give more ammunition to those demanding that he step down from the Council.

What Does an Infrastructure Bank Have to Do with an Amnesty for Corporate Tax Dodgers? Nothing.

A repatriation holiday is essentially a break from U.S. corporate income taxes on offshore profits that U.S. corporations bring back (repatriate) from foreign countries, particularly from tax havens.

The non-partisan Joint Committee on Taxation (JCT), the official revenue-estimator for Congress, has concluded that a repeat of the repatriation holiday that was enacted in 2004 would reduce revenue by $79 billion over ten years.

Yet Immelt, confusingly, says that a repatriation holiday could be used to fund an infrastructure bank. How can a measure that reduces revenue be used to fund anything?

It's true that JCT finds that the holiday would raise some revenue initially because corporations would repatriate more profits to the U.S. than they normally would, and they would be taxed, albeit at a very low rate, on those profits. (The 2004 measure taxed repatriated offshore profits of U.S. corporations at a super-low rate of 5.25 percent.)

But in subsequent years the measure would cause much larger reductions in revenue, partly because corporations would be encouraged to shift even more profits and investments offshore.

Anything that costs $79 billion and encourages companies to shift even more profits and investments out of the U.S. has nothing to do with the goals of an infrastructure bank and should not be attached to any bill creating an infrastructure bank.

The infrastructure bank is supposed to create jobs, but the non-partisan Congressional Research Service (CRS) found that the repatriation holiday enacted in 2004 failed to create jobs and that the benefits went instead to corporate shareholders.

Read about how you can call your Senators and Representatives toll-free and urge them to oppose the amnesty for corporate tax dodgers. 

Photo via Steve Wilhelm Creative Commons Attribution License 2.0

How to Increase Tax Evasion and the Deficit in 1 Easy Step

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Despite the fact that the move would actually increase the deficit by an estimated $3.4 billion, House Republicans voted to slash the IRS’s budget by $600 million.

Unlike most types of public spending, increased funding of the IRS actually reduces the deficit. In some cases a dollar of additional IRS funding can generate $10 of revenue. Because of this, the non-partisan National Taxpayer Advocate noted in her recent report to Congress that the IRS should be viewed as not part of the deficit problem, but rather “as part of the solution.”

Taking this perspective, the Obama Administration proposed earlier this year to increase the IRS’s budget from $12.1 billion to $13.3 billion, in a move that was expected to actually reduce the deficit.

A $1.1 billion increase in funding would help the IRS reduce the “tax gap,” the difference between the amount of taxes owed and the amount of taxes actually paid on time. The tax gap is estimated to be between $400 to $500 billion each year.

One recent article points out that “the biggest losers” in the failure to stop tax evasion “are America's wage earners and salaried workers, who pay an estimated 99 percent of their taxes on time because their taxes are automatically withheld from their pay and reported by a third party, their employers.” These working people — the vast majority of Americans — must pay even more in taxes when others evade theirs.

Other than tax evaders, it’s unclear who the decrease in funding is supposed to benefit. It’s certainly not law-abiding businesses or individuals, who according to a report by the law and lobbying firm K&L Gates would actually face higher compliance costs if the cut in funding is enacted.

CTJ’s director, Bob McIntyre, addressed IRS enforcement a few years ago before the Senate Budget Committee. Just returning the IRS to the staffing levels of a decade ago, he said, would require a 50 percent increase in the IRS enforcement budget. Taking this a step further, McIntyre noted that, given the increase in tax sheltering in recent years, it may be necessary to double the resources for tax enforcement in order to keep up with tax evasion.

If lawmakers are serious about reducing the deficit, then reforming and dramatically increasing (rather than decreasing) funding for the IRS is one place to start.

Photo via alykat Creative Commons Attribution License 2.0

Call Lawmakers to Oppose the Amnesty for Corporate Tax Dodgers

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Call both your Senators and your member of the House of Representatives at the toll-free number below and tell them:

“Oppose the amnesty for corporate tax dodgers, which corporate leaders call a ‘repatriation holiday.’ This giveaway to corporations should not be part of the deal on raising the debt ceiling or any other legislation.”

Call this number to be connected to your members of Congress.


Here’s why this is important.

A “repatriation holiday,” which has been proposed by some Republicans and Democrats in Congress, would remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.

If you want to give your lawmakers’ staffs more information, you can also tell them that:

1. Another repatriation holiday will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.

2. Another repatriation holiday will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.

3. The repatriation holiday is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.

4. Congress enacted a repatriation holiday in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.

For more information, see the recent post from Citizens for Tax Justice on one senator’s repeated flip-flops related to the repatriation holiday.

Thanks to AFSCME for providing the toll-free number to enable constituents to get in touch with their members of Congress regarding this critical issue.