Export this: Time for corporations to stop off-shoring profits and dodging taxes
By Samantha Curran
CFI Communications Associate
When it comes to paying taxes, U.S.-based multinational corporations have been playing by a different set of rules than small, domestic businesses and individuals.
For years, some of the biggest and most successful multinational corporations such as Apple and Walmart have been reporting their U.S. profits as profits earned offshore in tax haven countries with no or minimal tax rates to avoid paying U.S. taxes on their income. While this accounting maneuver saves these companies billions of dollars, it comes at a cost to other U.S. citizens. Corporate tax avoidance is not inevitable, however. Congress has the ability to level the playing field by getting rid of incentives to shift profits offshore, increasing transparency for financial reports and closing the loopholes in the current tax code.
The U.S. tax code states that companies can defer paying U.S. taxes on profits that were made outside of the U.S. until they repatriate the money, or in other words, bring the money back into the U.S. This has led to at least 367 companies of the Fortune 500 to operate one or more subsidiaries in tax havens to avoid paying an estimated $100 billion in U.S. federal taxes every year according to a report called “Offshore Shell Games.” With a few accounting maneuvers, companies can disguise their U.S. profits as profits made abroad from one or more of their subsidiaries located in tax havens. By “transferring” their profits to tax havens like the Netherlands, Ireland and Bermuda, the corporation avoids having to pay the corporate U.S. tax of 35 percent and instead pays on average a tax rate of 6.2 percent to other countries.
Generating billions of dollars in savings for these multinational corporations by recording profits offshore comes at a cost to other tax paying Americans. The absence of their federal tax dollars results in other taxpayers having to balance out the difference, cuts in government programs and even increased federal debt.
It is important to remember that the majority of these companies’ business transactions take place within the U.S., and the companies benefit from the use of public goods and services. For example, they use U.S. roads to transfer products, and they benefit from strong private property rights that are enforced through the U.S. court system. The courts system also settles disputes between companies, and the regulatory bodies that are set up to oversee the financial system ensures investors keep investing. The U.S. military safeguards shipping and American interests around the world. Companies benefit from clean water and air protections, from the regulatory structures that ensure their raw materials are safe, from the infrastructure that maintains an electrical grid, water systems and communications.
The list is endless.
As Americans, we all help pitch in in order to receive these goods and services that we all benefit from and use every day. However, when these companies avoid paying their share of taxes, they are leaving it up to small businesses and individuals to fit the bill.
The inequity that comes from corporate tax avoidance is not inevitable. As suggested in “Offshore Shell Games,” policymakers can and should reform the tax code to stop incentivizing offshore recording of profits, increase transparency and close the current loopholes.
This can be accomplished by no longer allowing companies to defer paying U.S. taxes on foreign profits and instead, require companies to pay taxes on their foreign income at the same rate and time they pay their U.S. taxes.
The Financial Accounting Standards Board should require that companies fully disclose country-by-country information on their profits, income taxes paid, number of employees and assets in their annual 10-K filings to the agency, which would increase transparency and make it more difficult to disguise information in their books. Lastly, methods to close the current loopholes include treating companies that are managed and that conduct the majority of their business within the United States as U.S. companies, requiring consistent claims on what the company considers a subsidiary and a partner and stopping companies from being able to shift intellectual property (patents, trademarks, licenses) to tax havens. By following these methods, it is possible to instate overall fairness into the tax system and prevent corporations from avoiding paying U.S. taxes.
Corporate tax avoidance is grossly unfair, but, easily preventable. The current tax code incentivizes multinational corporations to classify their domestic income as foreign income to reduce the rate at which they pay taxes. There is no such thing as a free lunch however. By shipping profits offshore, corporations are dodging an estimated $100 billion in federal taxes annually, forcing other taxpayers to make up the difference. Small businesses and individuals should not have to carry the load for these corporate freeloaders.
Congress should act to reform the tax code to stop incentivizing this practice, make companies disclose full and honest financial reports, and close loopholes altogether in order to make big corporations pay their fair share.
