Respectfully submitted by Lawrence E. Rafferty (rafflaw)- Weekend Contributor
We have read in recent weeks and months about the continued movement of corporate profits by US corporations to their overseas subsidiaries in order to avoid paying taxes here on those profits. Walgreens almost went that route recently but they decided to not do what is called an “inversion” to avoid taxes. At least for now.
You may be wondering what the picture is all about. The building in the attached photo is one of the main buildings on the Microsoft campus in Redmond, Washington. And Microsoft has also been busy working on their taxes.
Microsoft, made news recently, by admitting that they have stashed $92 Billion dollars overseas in an attempt to avoid paying $29 Billions in taxes! While Microsoft has not officially “inverted” its profits, they have done the next best thing.
Many large US corporations have complained that they have to move profits overseas because they cannot be competitive in the world market without a lower tax base. Just how true is that claim?
“At the New York Times’ Dealbook Andrew Ross Sorkin looks at this issue in “Tax Burden in U.S. Not as Heavy as It Looks, Report Says.” Sorkin looks at a paper, “‘Competitiveness’ Has Nothing To Do With it,” by Edward D. Kleinbard. Kleinbard is a professor at the University of Southern California and used to be chief of staff to the Congressional Joint Committee on Taxation. Sorkin quotes Kleinbard:
“Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for these deals,” he [Kleinbard] writes. “Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”
Our tax rates are “the envy of their international peers?” Sorkin explains:
Professor Kleinbard contends that most United States multinational companies don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent, according to the Government Accountability Office, which last measured it in 2010, by deliberately stashing piles of cash abroad.” Crooks and Liars
If the large corporations are really only paying, on the average, 12.6% on their profits, why would they be claiming that can’t be competitive? The only reason I can come up with is good old-fashioned Greed. Of course, it can be argued that these corporations only answer to what their shareholders demand, better performance on their stock earnings. Do you believe that argument?
Just how does a large multinational corporation like Microsoft go about moving their profits overseas?
“Because Microsoft has not declared itself a subsidiary of a foreign company, the firm has not technically engaged in an inversion. However, according to a 2012 U.S. Senate investigation, the company has in recent years used its offshore subsidiaries to substantially reduce its tax bills.
That probe uncovered details of how those subsidiaries are used. In its report, the Senate’s Permanent Subcommittee on Investigations described what it called Microsoft’s “complex web of interrelated foreign entities to facilitate international sales and reduce U.S. and foreign tax.” The panel’s report noted that “despite the [company’s] research largely occurring in the United States and generating U.S. tax credits, profit rights to the intellectual property are largely located in foreign tax havens.” The report discovered that through those tax havens, “Microsoft was able to shift offshore nearly $21 billion (in a 3-year period), or almost half of its U.S. retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the United States, or just over $4 million in U.S. taxes each day.”
U.S. Sen. Carl Levin, D-Mich., said at the time: “Microsoft U.S. avoids U.S. taxes on 47 cents of each dollar of sales revenue it receives from selling its own products right here in this country. The product is developed here. It is sold here, to customers here. And yet Microsoft pays no taxes here on nearly half the income.” ‘ Reader Supported News
Whether you are talking about an inversion which requires the US corporation to claim that its base of operations is actually no longer in the United States, or deferral tactics like the ones used by Microsoft, the bottom line is that many large US multinational corporations have avoided paying billions in taxes. While Microsoft has stashed $92 billion overseas, they are not the worst offender.
“Apple and General Electric, which also employ offshore subsidiaries, are the only U.S.-based companies that have more money offshore than Microsoft, according to data compiled by Citizens for Tax Justice. In all, a May report by CTJ found that “American Fortune 500 corporations are likely saving about $550 billion by holding nearly $2 trillion of ‘permanently reinvested’ profits offshore.” The report also found that “28 these corporations reveal that they have paid an income tax rate of 10 percent or less to the governments of the countries where these profits are officially held, indicating that most of these profits are likely in offshore tax havens.” Reader Supported News
It seems that it is fair game for US corporations to hide from their duty as “citizens” of the United States by using legal tactics that actually harm the Treasury of the United States, while at the same time taking advantage of the infrastructure created by the state and Federal entities. I wonder if non-corporate citizens can use the same inversion tactic to avoid paying income taxes?
Maybe we should all incorporate and sell out to a foreign “corporation” and invert our income to the home country of that foreign “owner’. Sounds crazy, but maybe that is the next step. Maybe we can start a whole new cottage industry of foreign “corporations” designed to house individual Americans income to elude the taxman here in the United States. On second thought, maybe not! However, just how much do these corporate inversions and deferrals cost the rest of us taxpayers?
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Jim22,
The abuses are the lobbying that pushes for the legislation that allows for corporate welfare. A simplified tax code will not mean a thing if it is still written by the lobbyists or their paid agents in Congress.
Both my wife and I loved the religious building shots.
Free, I have meant to compliment you on your website and breathtaking photos. And, I LOVE your philosophy on taxation.
Corporate taxes should be eliminated. I understand they won’t be, however, the government should allow C-Corporations to receive dividends from other corporations without paying any tax on them because those dividends were the result of corporate earnings already being subject to tax to prevent there from being an affirmative disincentive from repatraiting profits to the US. We know corporations have not been doing this and this law is having a TRILLIONS impact on us and there’s nothing you or I can do about it, its ALWAYS legal to avoid taxes on dividends — by not paying dividends.
John Oliver, My wise Uncle Charlie, and immigrant who came here w/ nothing, became an engineer and made a very comfortable living would often say to me, “The harder you work the luckier you get.” I believe you were raised under the same ethic.
Free, I’m glad you’re here. You understand the economics better than myself, and probably most everyone else here. I’m secure enough to admit it. What about lowering our corporate tax rate to help keep companies. I’m not sure I know your thoughts on that.
Its actually NOT legal. Transfer pricing is illegal. I’m not saying it doesn’t happen, but that’s an enforcement issue. Microsoft is a good example of course, but its costs are difficult to allocate since its value added is intellectual property. Burger King is a little different of course, but at the end of the day, alot of it is physical product and that’s a bit more difficult to get away with. Nevertheless, inversion and transfer pricing aren’t the same issue.Inversion relates to how parents and subsidiaries pay dividends from one to the other and how the parent corporation’s county will tax those dividends received and transfer pricing is how the corporate entities deal with each other, to the extent that they don’t deal with each other in an ‘arm’s length’ transaction they can make profits flow from one entity to the other, but there already are laws on that.
I almost feel sad for that percentage of Americans that were raised on the notion life should be fair. It goes against our nature to give up our property when we follow the law in acquiring it.
If you want economic patriotism then pay our military enough to keep them off food stamps. If you want tax revenue then create an environment that keeps business regular rather than one seeking to regulate business.
Once government runs out of “legal” ways to plunder the property of its citizens then they’ll turn the citizens against each other to force compliance; as evidenced by this thread.
Free, You do realize how bean counters can move earnings around, LEGALLY, don’t you?
RealFake Brit – “A lot of these arguments could be made moot if we simplified the tax code. I’m an advocate to creating a tax code that is no longer than 5 pages.”
RFB, It would never work since the IRS would just fill the three pages with the font used for microfiche.
rafflaw -“If the money isn’t taken out of politics, you will still have the same abuses by corporations and the wealthy.”
What abuses? Correct me if I’m wrong but this is what RFB was stating. You assume that business is doing something wrong and they aren’t. Following the tax breaks like you due isn’t a crime. Or, do you not right off personal choices like your house, kids, education, mileage etc….
BK/Tim Horton (Canada) will own BK USA. BK USA will earn money here and pay taxes on those earnings here in the US. They don’t escape US taxation on US earnings by flagging the parent corporation in Canada. People think of multinational corporations as one monolithic entity but in reality they are different corporations that own each other…..
If this BK merger happens, look for Canada to start offering incentives to lure more US companies. Maybe Obama will sign an executive order making it illegal for a corporation to leave. It could be dubbed the Corporation Hostage Order.
Karen,
If you read one of the articles linked in my posting, you can see how these tax dodgers impact small business and individuals. Here is the link: http://www.usnews.com/opinion/economic-intelligence/2014/08/01/corporate-inversion-tax-avoidance-hurts-small-businesses-and-consumers
Free, Of course BK will pay payroll taxes, sales taxes on business conducted in the US. We’re talking about corporate taxes. BK will become a Canadian corporation and taxed by Canada on both the BK and Tim Horton profits. What makes this so tempting is the proximity, they’ll be in Ontario, right across the border in a stable, English speaking[Except for those damn Quebecers], country.
Karen, I dn’t think anyone argues about people being enabled to work/learn to work who are able and on assistance.
The repubs lied that Obama changed that. He did not.
The Obama administration cited the Utah letter when it announced its new policy on July 12. The policy provides exactly the kind of flexibility Utah was seeking.
Under the new policy, states may receive a waiver if they submit plans for a “demonstration project” (not to exceed five years) that provides a “more efficient or effective means to promote employment.” States also must submit an “evaluation plan” that includes a “set of performance measures that states will track to monitor ongoing performance and outcomes.” States also must set up “interim performance targets” and, if states fail to meet those, they will be “required to develop improvement plans.”
“Repeated failure to meet performance benchmarks may lead to the termination of the waiver demonstration pilot,” the rules state.
Is Obama “dropping work requirements,” as Romney’s ad claims? No. He is allowing states to change the work requirements, but he is not dropping them. The changes could be made to a variety of federal requirements, including “definitions of work activities and engagement, specified limitations, verification procedures, and the calculation of participation rates.”http://www.factcheck.org/2012/08/does-obamas-plan-gut-welfare-reform/
Washington (CNN) — Welfare reform, which added a work requirement tied to welfare benefits, is often cited as a major bipartisan political success of President Bill Clinton’s second term.
So the idea of the next Democratic president, Barack Obama, taking the work requirement off the table is political dynamite.
Apparently, the Romney campaign believes it is.
A Romney campaign ad titled “Welfare Reform,” which came out earlier in August, says that’s just what Obama did.
“On July 12, President Obama quietly ended the work requirement, gutting welfare reform. One of the most respected newspapers in the country called it ‘nuts,’ ” the ad says.
“Under Obama’s plan, you wouldn’t have to work and you wouldn’t have to train for a job,” the ad continues. “They just send you your welfare check. And welfare to work goes back to being plain old welfare …”
But the Obama campaign calls Romney’s ad “nuts.”
CNN’s Fact-check agrees.
http://www.cnn.com/2012/08/23/politics/fact-check-welfare/
When warren Buffett moves his corporations off of US soil I think we should worry…. Until then it seems Profits over humanity should be looked at more closely…..
Nick, this is not an issue of rates, its an issue of jurisdiction. The US is one of the few nations which feels its equitable to tax its citizens’ worldwide income. Most other nations actually don’t think that’s fair and basically don’t do it. If Burger King makes money here, they will pay taxes here and the current tax rates aren’t really discouraging them from doing so. But with respect to their foreign earnings it doesn’t matter what the tax rate is, most foreign countries simply don’t tax foreign earnings at all. What they’re avoiding is the TRIPLE taxation regime, they just won’t that particularly when all they have to do is to structure things differently.
I’m a small business owner as well Karen and I have an LLC and an S Corp both of which are ‘pass through’ entities at the business level. 0% on profits, but of course that flows through to your personal return, would you even think about wanting to become a C Corporation?
Well, Nick, there you go with a logical argument, again. It’s much easier to say that business is BAD and to remain unaware of any downstream consequences of our votes.
rafflaw:
My husband is a small business owner. I guarantee you we haven’t the means nor the inclination to buy anyone in Congress. We pay such an obscene amount in taxes I was absolutely certain there must be some mistake when we got married.
A lot of small business owners would benefit from a lower flat tax, and for our politicians to be more responsible with our money.