By GREGORY N. HEIRES
Fortune 500 companies are increasingly using offshore tax havens, depriving the U.S. government of an estimated $90 billion in federal income taxes each year.
This corporate shell game puts a greater tax burden on ordinary Americans.
And in an era of stagnating wages and great inequality, the corporate tax dodging raises concerns about tax fairness and excessive corporate power, which are emerging as critical issues in the presidential race.
“Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt” says an October report by the U.S. Public Interest Research Group Education Fund and Citizens Tax Justice.
“When corporations dodge their taxes, the public ends up paying,” said U.S. PIRG Program Associate Michelle Surka. “The American multinationals that take advantage of tax havens use our roads, benefit from our education system and large consumer market, and enjoy the security we have here, but are ultimately taking a free ride at the expense of other taxpayers.”
All told, 72 percent of Fortune 500 companies used tax havens in 2014. U.S. multinational companies doubled the amount of cash they booked offshore for tax purposes from 2008 to 2014.
The Russell 1000 list of U.S. companies reported parking nearly $2.3 trillion overseas in 2014, about twice the amount in 2008, according to a study by the research firm Audit Analytics. This practice of using tax havens has allowed U.S. companies to increase their annual tax avoidance from $60 billion in 2007 to $90 billion in 2011, according to tax expert Kimberly Clausing of Reed College.
By and large, the cash booked overseas isn’t used for investing, according to the U.S. PIRG and Citizens for Tax Justice report, “Offshore Shell Games 2015.” Rather, it’s simply an accounting maneuver that allows companies to avoid their tax obligations. Corporations are able to disguise their profits by booking them to subsidiaries in tax havens.
Corporations Hold $2.1 trillion in Profits Overseas
Together, the 286 of the Fortune 500 companies that report offshore profits hold $2.1 trillion overseas. Thirty companies account for 65 percent of the profits held offshore. The top five companies are Apple, General Electric, Microsoft, Pfizer and International Business Machines.
Only 57 of the Fortune 500 companies have disclosed how much taxes they would have to pay if they did not book their profits offshore. A loophole in the tax code allows a company to avoid the disclosure requirement if it reports that it is “not practicable” to calculate the tax rate.
The U.S. corporate tax rate is 35 percent. But, on average, the 57 companies that disclose what they would owe on their offshore deposits apparently pay a tax rate of only 6 percent to foreign governments. Assuming the non-disclosing companies enjoy the same rate of tax savings, the total loss to the U.S. Treasury is $620 billion.
In 2010, U.S. multinationals reported to the IRS that they earned $505 billion in 12 of the most well known tax havens. That amounted to more than half of the profits that the companies reported earning abroad that year.
Profits Exceed Yearly Gross Domestic Product of Tax Havens
In the five tax havens–including Bermuda and the Cayman Islands–where the companies booked their profits, the total earnings were more than the value of those countries’ gross domestic product. “This illustrates how little relationship there is between where American multinationals actually do business and where they report they make their profits for tax purposes,” the U.S. PIRG and Citizens for Tax Justice study says.
In recent years, some companies have reported fewer subsidiaries in tax havens even while increasing the cash they hold abroad. They could be doing this to avoid media attention on their offshore tax dodging or the scrutiny of the IRS. On the other hand, the companies could simply be consolidating their offshore profit deposits.
Measures that the U.S.PIRG and Citizens for Tax Justice recommend for curbing the use of tax havens include:
• ending tax incentives to shift profits and jobs offshore. No longer permitting companies to indefinitely defer paying taxes on profits they attribute to foreign subsidiaries would raise nearly $900 billion over ten years.
• rejecting the creation of new loopholes
• closing the most egregious offshore loopholes. For instance, stopping companies from deducting interest expenses paid to their overseas subsidiaries would save $58.6 billion over 10 years.
• increasing transparency.
“All too often, corporations’ offshore cash isn’t offshore at all—it’s right here in the United States,” said Robert McIntyre, director of Citizens for Tax Justice.
“Corporations are using skilled tax attorneys to make it appear on paper that their U.S. profits, and their U.S.-based cash, are being earned, and kept, in foreign tax havens. The tax code makes this scam possible. Incredibly, Congress is considering pouring salt on the wound by giving companies a special low tax rate to ‘repatriate’ profits that, in many cases, are likely already here.”
