Competition takes many forms in capitalism. Financial jiggery-pokery to avoid paying taxes is one aspect of this competition.
Ugland House is an office building in the Cayman Islands, yet it is the registered address for 18,857 companies.Simply by registering subsidiaries in the Cayman Islands, U.S. companies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them. The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing address in the U.S., even while they are officially registered in the Caymans. U.S. tax laws allow profits earned abroad to remain untouched until the money is brought into the country. Profits booked in other countries are instead subject to the local tax rate, even if zero. Accounting, rather than geography, often controls what constitutes “offshore” profits.
The Cayman Islands has a corporate tax rate of zero. Not a cent. The government there raises revenue through taxes on imports (thus a consumption tax for the people who live there as virtually everything must be imported), but, as an added bonus should any corporate executive stop by to visit the company post office box, luxury goods such as diamonds are exempted.
Many of the profits kept ‘offshore’ are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly ‘trapped’ offshore found that more than half of the offshore funds were invested in U.S. banks, bonds, and other assets. The Wall Street Journal revealed that many corporations, including Microsoft Corp. and Google Inc., “keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities.” Under federal tax law, those funds are “offshore” and thus exempt from taxation.
Apple holds more money offshore than any other company — $111.3 billion. It would owe $36.4 billion in U.S. taxes if these profits were they not offshore for tax purposes. Two of Apple’s Irish subsidiaries are structured to be tax residents of neither the U.S. (where they are managed and controlled) nor Ireland (where they are incorporated), ensuring no taxes are paid to any government. Ireland’s ex-prime minister, Brian Cowen, announced that the government would assume all the debts of Ireland’s three biggest banks, he negotiated for what became an €85 billion bailout. In doing so, he demanded, and received, only one concession: There would be no increase in corporate tax rates, which are less than half the level of Ireland’s sales taxes. Taxes on incomes, cars, homes and fuel, however, did rise to pay for the bailout.
Citizens for Tax Justice (CTJ) issued a report at the time, “Apple Holds Billions of Dollars in Foreign Tax Havens,” documenting Apple’s offshore tax avoidance. The report stated that: "An analysis of Apple Inc.’s financial reports makes clear that Apple has paid almost no income taxes to any country on its $102 billion in offshore cash holdings. 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." At a time of worry over budget deficits, Apple was using various schemes to avoid paying as much as $35.3 billion in taxes. From the report: "Applying this same U.S. tax rate to Apple’s $102.3 billion offshore cash hoard as of March 2013 would generate $35.3 billion in U.S. income taxes, without deferral."
Google increased the amount of cash it reported offshore from $7.7 billion in 2009 to $38.9 billion. An analysis found that, as of 2012, the company has 23 tax-haven subsidiaries that it no longer discloses but continues to operate. Microsoft increased the amount of money it held offshore from $6.1 billion to $76.4 billion from 2007 to 2013, on which it would otherwise owe $19.4 billion in U.S. taxes. The company is believed to pay a tax rate of three percent to foreign governments on those profits.
Bank of America reports 264 subsidiaries in offshore tax havens, more than any other company. The bank would otherwise owe $4.3 billion in U.S. taxes on the $17 billion it keeps offshore. Bank of America reported that it paid $3.2 billion to buy back its stock in 2013, money spent to boost its stock price and give extra profits to speculators. (Stock bought for this purpose is paid for at a price higher than the current stock-market value.) That money was available thanks to the billions of dollars it didn’t pay in taxes.
Nike officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. Nike is believed to pay a 2.2 percent tax rate to foreign governments on those offshore profits. Nike proudly announced that, in the past 10 years, it had “returned over $15 billion to shareholders through dividend payments and share repurchases” and assured it would provide more in the future. Nike’s shareholders’ report made no mention of what the company does to extract that money — through brutally exploitative sweatshop labor, paying workers less than a minimum wage set well below subsistence level in places where complaining leads to beatings or firings and striking lands you in prison. And by not paying taxes.
Pharmaceutical manufacturer Pfizer “strips income” out of the United States so they can report it as foreign earnings. Pfizer actually reports a loss on sales in the U.S. while reporting huge profits outside the U.S. – even though they sell more and charge much higher prices here. Explained another way, Martin A. Sullivan of Tax Analysts writes that between 2008-2012, “124 percent of its before-tax profits were foreign, [but] only 57 percent of its sales have been outside the United States.” According to a New York Times report, the result is that, “In its most recent annual report, Pfizer reported $69 billion in foreign profits indefinitely reinvested overseas, and each year’s profits generate more cash.” Pfizer recently was in the news because of its attempt to purchase the rival British pharmaceutical company AstraZeneca. (Pfizer finally dropped the effort.) Pfizer’s “make or buy” decision was based on avoiding taxes. The idea was that Pfizer could become a British company and avoid paying U.S. taxes anymore and possibly avoid ever paying the deferred taxes it owes.
General Electric is often cited as a company that not only doesn’t pay U.S. taxes, it pays a negative tax rate. General Electric is not all bad. For example, they invest heavily in wind energy and are bringing manufacturing back to the U.S. But our tax laws encourage them to do bad things. The Times reported in 2011 that GE not only didn’t pay any taxes for many years, the company “claimed a tax benefit of $3.2 billion.” It reported that GE “mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.” At the end of 2012 GE disclosed it was holding $108 billion outside of the US to avoid paying the taxes it owed on those profits. GE is currently suing the US government for an additional $658 million in federal tax refunds.
Verizon was one of 26 corporations that paid no taxes in the five years between 2008 and 2012. According to a February study by Citizens for Tax Justice (CTJ), The Sorry State of Corporate Taxes, Verizon paid a tax rate of -1.8 percent. Use of this tax deferral for offshoring profits was only a part of Verizon’s overall tax-dodging strategy. According to a fact sheet from Americans for Tax Fairness, “Verizon had $1.9 billion in accumulated offshore profits in 2012, on which it did not pay U.S. taxes.” Verizon CEO Lowell McAdam is a member of the CEO Council of the Fix the Debt campaign, a corporate-funded group seeking to cut corporate taxes and earned benefit programs like Social Security and Medicare. McAdam is also a member of the Business Roundtable, a CEO club that is calling for Congress to cut corporate tax rates and to raise the Social Security retirement age from 67 to 70 – a benefit cut of about 20%. Verizon is also a founding member of the RATE Coalition, a corporate lobby group fighting for a much lower corporate tax rate." Verizon has spent more than $197 million lobbying Congress since 1998. It spent $15.2 million in 2012, with lobbying on tax bills its second-highest priority. Citizens for Tax Justice and Good Jobs First issued a 2011 report, “Unpaid Bills: How Verizon Shortchanges Government Through Tax Dodging and Subsidies,” at a time when Verizon was trying to force its workers to take pay and benefit cuts. According to the report the company aggressively manipulated state tax rules, demanded subsidies, and used other methods to end up with a negative federal income tax rate, and receiving state and local tax subsidies in at least 13 states. From the report: "At the federal level, Verizon should have paid about $11.4 billion at the statutory rate of 35 percent during the three-year period. Instead, it got $951 million in rebates, putting its federal tax subsidies at $12.3 billion. Its effective federal tax rate was -2.9 percent."
Another company hauled before the Senate committee to explain why it isn’t paying taxes was Caterpillar. In March, Caterpillar appeared before the same Permanent Subcommittee on Investigation as Apple’s President Tim Cook had appeared. In 1999 Caterpillar transferred ownership of its international parts-distribution division to a wholly-owned Swiss subsidiary. The company didn’t move any personnel or business activities. Most of Caterpillar’s parts business remained in the U.S. The business transactions concerned parts in warehouses mostly in the U.S., destined for U.S. dealers. Caterpillar transferred ownership of these parts to the Swiss subsidiary but still handled the shipping. But since the ownership was transferred to the Swiss company the profits were considered to be made outside of the U.S. The result was a savings to Caterpillar of $2.4 billion in U.S. taxation. This is, of course, a loss to taxpayers. Senate Republicans congratulated Caterpillar on their tax avoidance schemes. From an LA Times report on the hearing: "Sen. Rand Paul (R-Ky.), who often criticizes the Internal Revenue Service, said Caterpillar should be given an award rather than be put through an "inquisition."
Citigroup had $42.6 billion in foreign profits parked offshore in 2012 on which it paid no U.S. taxes. It reported that it would owe $11.5 billion if it brings these funds back to the U.S. A significant chunk is being held in tax-haven countries.
ExxonMobil had a three-year federal income tax rate of just 15 percent. This gave the company a tax subsidy worth $6.2 billion from 2010-2012. It had $43 billion in offshore profits at the end of 2012, on which it paid no U.S. taxes.
FedEx made $6 billion over the last three years and didn’t pay a dime in federal income taxes, in part because the tax code subsidized its purchase of new planes. This gave FedEx a huge tax subsidy worth $2.1 billion.
Honeywell had profits of $5 billion from 2009 to 2012. Yet it paid only $50 million in federal income taxes for the period. Its tax rate was just 1 percent over the last four years. This gave it a huge tax subsidy worth $1.7 billion.
Merck had profits of $13.6 billion and paid $2.5 billion in federal income taxes from 2009 to 2012. While dodging its fair share of federal income taxes, it pocketed $8.7 billion in taxpayer-funded contracts from Uncle Sam between 2006 and 2012.
A handful of these corporations would likely owe in taxes if they brought those profits home:
Amgen: $7.9 billion
Eli Lilly: $7.3 billion
Oracle: $6.3 billion
Dell: $6.2 billion
In the relentless competition fostered by capitalism, any successful innovation must be matched by competitors. Such an innovation could be a new production technique but also includes measures to lower costs. If production is moved to a location with low wages and little or no safety and environmental regulations, the boost to profits for the company that does this has to be matched by competitors that otherwise would become uncompetitive and/or fall into disfavor with financiers. Financial engineering to avoid paying taxes is another boost to profits, and thus a competitive advantage. Other corporations, under the rigors of competition and the ceaseless necessity of expansion and pressure to increase profits, are compelled to copy these innovations. However much we might wish to morally condemn such behavior, the personality of corporate executives is irrelevant. Expand or die is the remorseless logic of capitalism, and the executive who doesn’t do everything possible to maximize profits will soon be replaced by someone who will.
Of course, the simple answer to this problem is to tell companies to just pay their taxes. Reforms are good, but reforms can and are taken back when the pressure for them relents, and ultimately leaves the system that rewards such behavior untouched.
Adapted from here and here
Ugland House is an office building in the Cayman Islands, yet it is the registered address for 18,857 companies.Simply by registering subsidiaries in the Cayman Islands, U.S. companies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them. The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing address in the U.S., even while they are officially registered in the Caymans. U.S. tax laws allow profits earned abroad to remain untouched until the money is brought into the country. Profits booked in other countries are instead subject to the local tax rate, even if zero. Accounting, rather than geography, often controls what constitutes “offshore” profits.
The Cayman Islands has a corporate tax rate of zero. Not a cent. The government there raises revenue through taxes on imports (thus a consumption tax for the people who live there as virtually everything must be imported), but, as an added bonus should any corporate executive stop by to visit the company post office box, luxury goods such as diamonds are exempted.
Many of the profits kept ‘offshore’ are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly ‘trapped’ offshore found that more than half of the offshore funds were invested in U.S. banks, bonds, and other assets. The Wall Street Journal revealed that many corporations, including Microsoft Corp. and Google Inc., “keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities.” Under federal tax law, those funds are “offshore” and thus exempt from taxation.
Apple holds more money offshore than any other company — $111.3 billion. It would owe $36.4 billion in U.S. taxes if these profits were they not offshore for tax purposes. Two of Apple’s Irish subsidiaries are structured to be tax residents of neither the U.S. (where they are managed and controlled) nor Ireland (where they are incorporated), ensuring no taxes are paid to any government. Ireland’s ex-prime minister, Brian Cowen, announced that the government would assume all the debts of Ireland’s three biggest banks, he negotiated for what became an €85 billion bailout. In doing so, he demanded, and received, only one concession: There would be no increase in corporate tax rates, which are less than half the level of Ireland’s sales taxes. Taxes on incomes, cars, homes and fuel, however, did rise to pay for the bailout.
Citizens for Tax Justice (CTJ) issued a report at the time, “Apple Holds Billions of Dollars in Foreign Tax Havens,” documenting Apple’s offshore tax avoidance. The report stated that: "An analysis of Apple Inc.’s financial reports makes clear that Apple has paid almost no income taxes to any country on its $102 billion in offshore cash holdings. 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." At a time of worry over budget deficits, Apple was using various schemes to avoid paying as much as $35.3 billion in taxes. From the report: "Applying this same U.S. tax rate to Apple’s $102.3 billion offshore cash hoard as of March 2013 would generate $35.3 billion in U.S. income taxes, without deferral."
Google increased the amount of cash it reported offshore from $7.7 billion in 2009 to $38.9 billion. An analysis found that, as of 2012, the company has 23 tax-haven subsidiaries that it no longer discloses but continues to operate. Microsoft increased the amount of money it held offshore from $6.1 billion to $76.4 billion from 2007 to 2013, on which it would otherwise owe $19.4 billion in U.S. taxes. The company is believed to pay a tax rate of three percent to foreign governments on those profits.
Bank of America reports 264 subsidiaries in offshore tax havens, more than any other company. The bank would otherwise owe $4.3 billion in U.S. taxes on the $17 billion it keeps offshore. Bank of America reported that it paid $3.2 billion to buy back its stock in 2013, money spent to boost its stock price and give extra profits to speculators. (Stock bought for this purpose is paid for at a price higher than the current stock-market value.) That money was available thanks to the billions of dollars it didn’t pay in taxes.
Nike officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. Nike is believed to pay a 2.2 percent tax rate to foreign governments on those offshore profits. Nike proudly announced that, in the past 10 years, it had “returned over $15 billion to shareholders through dividend payments and share repurchases” and assured it would provide more in the future. Nike’s shareholders’ report made no mention of what the company does to extract that money — through brutally exploitative sweatshop labor, paying workers less than a minimum wage set well below subsistence level in places where complaining leads to beatings or firings and striking lands you in prison. And by not paying taxes.
Pharmaceutical manufacturer Pfizer “strips income” out of the United States so they can report it as foreign earnings. Pfizer actually reports a loss on sales in the U.S. while reporting huge profits outside the U.S. – even though they sell more and charge much higher prices here. Explained another way, Martin A. Sullivan of Tax Analysts writes that between 2008-2012, “124 percent of its before-tax profits were foreign, [but] only 57 percent of its sales have been outside the United States.” According to a New York Times report, the result is that, “In its most recent annual report, Pfizer reported $69 billion in foreign profits indefinitely reinvested overseas, and each year’s profits generate more cash.” Pfizer recently was in the news because of its attempt to purchase the rival British pharmaceutical company AstraZeneca. (Pfizer finally dropped the effort.) Pfizer’s “make or buy” decision was based on avoiding taxes. The idea was that Pfizer could become a British company and avoid paying U.S. taxes anymore and possibly avoid ever paying the deferred taxes it owes.
General Electric is often cited as a company that not only doesn’t pay U.S. taxes, it pays a negative tax rate. General Electric is not all bad. For example, they invest heavily in wind energy and are bringing manufacturing back to the U.S. But our tax laws encourage them to do bad things. The Times reported in 2011 that GE not only didn’t pay any taxes for many years, the company “claimed a tax benefit of $3.2 billion.” It reported that GE “mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.” At the end of 2012 GE disclosed it was holding $108 billion outside of the US to avoid paying the taxes it owed on those profits. GE is currently suing the US government for an additional $658 million in federal tax refunds.
Verizon was one of 26 corporations that paid no taxes in the five years between 2008 and 2012. According to a February study by Citizens for Tax Justice (CTJ), The Sorry State of Corporate Taxes, Verizon paid a tax rate of -1.8 percent. Use of this tax deferral for offshoring profits was only a part of Verizon’s overall tax-dodging strategy. According to a fact sheet from Americans for Tax Fairness, “Verizon had $1.9 billion in accumulated offshore profits in 2012, on which it did not pay U.S. taxes.” Verizon CEO Lowell McAdam is a member of the CEO Council of the Fix the Debt campaign, a corporate-funded group seeking to cut corporate taxes and earned benefit programs like Social Security and Medicare. McAdam is also a member of the Business Roundtable, a CEO club that is calling for Congress to cut corporate tax rates and to raise the Social Security retirement age from 67 to 70 – a benefit cut of about 20%. Verizon is also a founding member of the RATE Coalition, a corporate lobby group fighting for a much lower corporate tax rate." Verizon has spent more than $197 million lobbying Congress since 1998. It spent $15.2 million in 2012, with lobbying on tax bills its second-highest priority. Citizens for Tax Justice and Good Jobs First issued a 2011 report, “Unpaid Bills: How Verizon Shortchanges Government Through Tax Dodging and Subsidies,” at a time when Verizon was trying to force its workers to take pay and benefit cuts. According to the report the company aggressively manipulated state tax rules, demanded subsidies, and used other methods to end up with a negative federal income tax rate, and receiving state and local tax subsidies in at least 13 states. From the report: "At the federal level, Verizon should have paid about $11.4 billion at the statutory rate of 35 percent during the three-year period. Instead, it got $951 million in rebates, putting its federal tax subsidies at $12.3 billion. Its effective federal tax rate was -2.9 percent."
Another company hauled before the Senate committee to explain why it isn’t paying taxes was Caterpillar. In March, Caterpillar appeared before the same Permanent Subcommittee on Investigation as Apple’s President Tim Cook had appeared. In 1999 Caterpillar transferred ownership of its international parts-distribution division to a wholly-owned Swiss subsidiary. The company didn’t move any personnel or business activities. Most of Caterpillar’s parts business remained in the U.S. The business transactions concerned parts in warehouses mostly in the U.S., destined for U.S. dealers. Caterpillar transferred ownership of these parts to the Swiss subsidiary but still handled the shipping. But since the ownership was transferred to the Swiss company the profits were considered to be made outside of the U.S. The result was a savings to Caterpillar of $2.4 billion in U.S. taxation. This is, of course, a loss to taxpayers. Senate Republicans congratulated Caterpillar on their tax avoidance schemes. From an LA Times report on the hearing: "Sen. Rand Paul (R-Ky.), who often criticizes the Internal Revenue Service, said Caterpillar should be given an award rather than be put through an "inquisition."
Citigroup had $42.6 billion in foreign profits parked offshore in 2012 on which it paid no U.S. taxes. It reported that it would owe $11.5 billion if it brings these funds back to the U.S. A significant chunk is being held in tax-haven countries.
ExxonMobil had a three-year federal income tax rate of just 15 percent. This gave the company a tax subsidy worth $6.2 billion from 2010-2012. It had $43 billion in offshore profits at the end of 2012, on which it paid no U.S. taxes.
FedEx made $6 billion over the last three years and didn’t pay a dime in federal income taxes, in part because the tax code subsidized its purchase of new planes. This gave FedEx a huge tax subsidy worth $2.1 billion.
Honeywell had profits of $5 billion from 2009 to 2012. Yet it paid only $50 million in federal income taxes for the period. Its tax rate was just 1 percent over the last four years. This gave it a huge tax subsidy worth $1.7 billion.
Merck had profits of $13.6 billion and paid $2.5 billion in federal income taxes from 2009 to 2012. While dodging its fair share of federal income taxes, it pocketed $8.7 billion in taxpayer-funded contracts from Uncle Sam between 2006 and 2012.
A handful of these corporations would likely owe in taxes if they brought those profits home:
Amgen: $7.9 billion
Eli Lilly: $7.3 billion
Oracle: $6.3 billion
Dell: $6.2 billion
In the relentless competition fostered by capitalism, any successful innovation must be matched by competitors. Such an innovation could be a new production technique but also includes measures to lower costs. If production is moved to a location with low wages and little or no safety and environmental regulations, the boost to profits for the company that does this has to be matched by competitors that otherwise would become uncompetitive and/or fall into disfavor with financiers. Financial engineering to avoid paying taxes is another boost to profits, and thus a competitive advantage. Other corporations, under the rigors of competition and the ceaseless necessity of expansion and pressure to increase profits, are compelled to copy these innovations. However much we might wish to morally condemn such behavior, the personality of corporate executives is irrelevant. Expand or die is the remorseless logic of capitalism, and the executive who doesn’t do everything possible to maximize profits will soon be replaced by someone who will.
Of course, the simple answer to this problem is to tell companies to just pay their taxes. Reforms are good, but reforms can and are taken back when the pressure for them relents, and ultimately leaves the system that rewards such behavior untouched.
Adapted from here and here
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