[FoRK] US Companies dodging taxes vs. low rates that many corporations actually pay
sdw at lig.net
Mon Oct 11 21:32:27 PDT 2010
Some get away with paying very little, others are paying a reasonable amount even as people howl that rates are too high.
> U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey
> Hurst went home with an amber bottle of Lexapro, the world’s third-best selling antidepressant. The profits from his $99 purchase
> began a 9,400-mile journey that would lead across the Atlantic Ocean and more than halfway back again, to a grassy industrial park
> in Dublin, a glass skyscraper in Amsterdam and a law office in Bermuda surrounded by palm trees.
> While Forest Laboratories Inc., the medicine’s maker, sells Lexapro only in the U.S., the voyage ensures most of its profits
> aren’t taxed there -- and they face little tax anywhere else. Forest cut its U.S. tax bill by more than a third last year with a
> technique known as transfer pricing, a method that carves an estimated $60 billion a year from the U.S. Treasury as it combines
> tax planning and alchemy. (See an interactive graphic on Forest’s tax strategy here.)
> Losing $60 Billion
> That’s only about a fifth of the $60 billion in annual U.S. tax revenue lost to thousands of companies’ income shifting, according
> to a study published in December in the National Tax Journal by Kimberly A. Clausing, an economics professor at Reed College in
> Portland, Oregon.
> $1 Trillion Offshore
> U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year, according to data
> compiled by Bloomberg. That cumulative total, based on filings by 135 companies, increased 70 percent over three years, from $590
> billion in 2006.
> While some of the offshore earnings reflect sales abroad, much of the growth results from expanding use of transfer pricing, said
> Martin Sullivan, a tax economist who formerly worked for the Treasury Department and Arthur Andersen LLP.
> The trek taken by Forest’s profits on Hurst’s $99 purchase involves a corporate structure nicknamed “the Double Irish,” registered
> offices that occupy no real estate and a set of U.S. rules that one tax attorney calls “unenforceable.” It provides a case study
> in how U.S. companies use transfer pricing to avoid paying taxes.
> For U.S. regulators, the key questions in transfer pricing are whether the parent pays too much to its offshore subsidiary or
> whether the subsidiary pays too little to its U.S. parent. Treasury Department regulations require “arm’s length” prices, or the
> amounts that would be paid between unrelated parties.
> Those rules are “based on a fiction,” said Michael C. Durst, special counsel at Steptoe & Johnson LLP, in Washington, who advised
> companies on transfer pricing for 15 years and has emerged as a leading critic of the system.
> Many of the transfer pricing transactions between a U.S. parent and its offshore units would never take place between unrelated
> parties, Durst said. So it’s often impossible to compare the prices paid in those deals to prices in real-world transactions
> between separate companies, he said.
> ‘Unbelievable Scandal’
> “As a result of resting on this basic fallacy, transfer pricing rules have for many years been unenforceable,” said Durst, who
> formerly worked for PricewaterhouseCoopers LLP and the IRS.
> O'Brien: Silicon Valley companies pay taxes below official rate
> By Chris O'Brien
> Mercury News Columnist
> Posted: 09/16/2010 07:06:20 PM PDT
> Updated: 09/17/2010 06:18:32 PM PDT
> More Chris O'Brien
> Whenever advocates for new business tax breaks state their case, you can bet they will complain that the 35 percent corporate
> income tax rate in the U.S. is one of the most burdensome in the world.
> "The United States has the second-highest corporate tax rate in the industrialized world," Sen. Judd Gregg, R-N.H., said in a
> common refrain earlier this year to introduce a bill that would slice the corporate tax rate to 24 percent. "After this law goes
> into effect, which I certainly hope it will, we will be pretty much competitive with everybody who's a major player in the
> corporate world but, certainly, the countries which are our primary competition in Europe and Asia."
> Here's what these folks won't say next: Almost no company pays that 35 percent rate. A report from the Internal Revenue Service
> pegged the effective rate for large U.S. corporations at 27 percent in 2006. And a 2009 World Bank report ranked the U.S.
> effective tax rate in the middle of the countries with the 11 largest economies.
> A note about the "effective tax rate." Companies don't have to disclose how much they actually pay in taxes, but they are required
> by federal securities rules to calculate the effective tax rate in their annual reports. This rate represents a combination of
> state, foreign and federal tax rates they paid minus various deductions, and experts say it is a useful proxy for understanding
> corporate taxes and comparing it to the U.S. rate.
> "It's the
> best you can do," said Alan Auerbach, professor of economics and law at UC Berkeley.
> How do our local companies fare? Here are a few examples:
> # Hewlett-Packard: 18.6 percent in the fiscal year ending October 2009, down from 20.8 percent two years earlier.
> # Intel: 23.4 percent in 2009, down from 23.9 percent in 2007.
> # Apple: 29 percent in 2009, down from 30 percent in 2007.
> # Cisco Systems: 20.3 percent in fiscal year 2009, down from 22.5 percent in 2007.
> # Google: 22.2 percent in 2009, down from 25.9 percent.
> # Oracle: 25.6 percent in the fiscal year ending May 2010, down from 29.5 percent two years ago.
> Though imprecise, these corporate disclosures give us some big clues as to how companies are cutting their effective tax rates.
> The biggest strategy across the board is to keep the bulk of the cash that they earn from foreign operations overseas, where they
> pay lower foreign income taxes and little or no U.S. taxes. Other big deductions come from things like research-and-development
> tax credits and deductions for employees exercising stock options.
> "Statutory tax rates do not provide a complete measure of the burden that a tax system imposes on business income because many
> other aspects of the system, such as exemptions, deferrals, tax credits and other forms of incentives, also determine the amount
> of tax a business ultimately pays on its income," the authors of the GAO report wrote.
> So if the actual rates are this low, why do companies seek a lower statutory rate? Because cutting the statutory rate is likely to
> make the actual rate they pay even lower because of the way deductions and credits work.
> And what's interesting is that in most cases, these companies have more deductions and credits than they can take in a given year.
> This does make me wonder just how much impact something like renewing and expanding the R&D tax credit will have.
> "If you say, 'In addition to all the other deductions you can't use, here are some more,' it's not going to do any good," Auerbach
> Rob Atkinson, president of the Information Technology & Innovation Foundation, is among those who would like to see the R&D tax
> credit expanded. Even if not all big companies can use a bigger credit, he argues that enough would take advantage for it to still
> have a sizable impact.
> "Overall, the evidence on the credit by economists suggests that every dollar spurs from $1.30 to $2 in additional research
> spending," he said.
> Maybe, but I'm still skeptical about the wisdom or need for a big rate cut, or a larger R&D tax credit to address the complaints
> of a heavy tax burden. It's not just that our governments can't afford it, or that it won't have much impact on the economy. I
> just don't see the need to fix a problem that doesn't exist.
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