Company Profits Without Borders Spurs Government Scrutiny: Taxes

Policymakers around the world are stepping up efforts to tighten rules because a growing slice of corporate profits isn’t taxed in any country.

Multinational companies can legally structure transactions so they don’t pay tax anywhere, creating “stateless income” that is coming under attack as countries seek to fill budget gaps. The Obama administration, Organization for Economic Cooperation and Development and tax officials from other countries want to reach a consensus on how to combat the issue, with more than a dozen proposals being weighed, Bloomberg BNA reported.

“Every country is revenue-hungry,” said Edward Kleinbard, a professor at the University of Southern California’s Gould School of Law who has written several papers and testified before Congress on the subject. “Countries see very large gaps in their corporate tax collections.”

The heightened scrutiny offers a chance to take action. The largest U.S.-based companies expanded their untaxed offshore stockpiles by $183 billion last year, or 14 percent, according to data compiled by Bloomberg. In the U.S., Senator Carl Levin held hearings taking companies like Apple (AAPL) Inc., Microsoft (MSFT) Corp. and Hewlett-Packard (HPQ) Co. to task for structures that let them pay little or no tax on billions in profits. Representative Dave Camp is leading a tax rewrite that he says will fix the system.

“Everything is up for grabs right now, including a substantial rewrite of the international tax rules,” Kleinbard said. “When the dust settles, U.S. multinationals will pay a higher effective tax rate tomorrow than they do today.”

“Increasing Recognition”

Stateless income is one driver behind a plan to stop profit shifting unveiled in July by the OECD, which calls on countries to take action in more than a dozen areas over the next two years. Treasury Secretary Jacob Lew hailed the plan. Leaders of the wealthiest economies, the Group of Eight nations, have agreed to tackle tax evasion by multinational companies anew.

There is “increasing recognition” that tax rules in many countries have been designed so companies can avoid tax on an international scale, said Rafaelle Russo, a senior adviser at the OECD Centre for Tax Policy and Administration.

“There has never been so much support for doing work in this area, from senior tax officials to finance ministers,” said Russo. “You see that in the tone of the work.”

The solutions are likely to be difficult and consensus on how to address it may be tough to achieve, former Treasury international tax counsel John Harrington said.

“There’s not a global, universal way of dealing with stateless income,” said Harrington, now a partner with Dentons in Washington. “You have to look at individual situations. In some cases the benefits of going after stateless income may not be worth the cost.”

Apple’s Cook

Levin’s subcommittee spent months of examining the tax frameworks used by Microsoft and Hewlett-Packard.

A case study of Microsoft’s practices released by the subcommittee highlighted subsidiaries in low-tax jurisdictions that handle retail sales around the world. Another issue focused on Hewlett-Packard’s use of loans from foreign subsidiaries to the U.S. parent to essentially repatriate billions in foreign earnings without having to pay U.S. taxes on the money.

In May, the subcommittee held another hearing focused on Apple. The panel said Apple used offshore structures and transactions to shift billions of dollars to Ireland.

Chief Executive Officer Tim Cook defended the practices at the hearing. “We pay all the taxes we owe. Every single dollar,” Cook said. “We don’t depend on tax gimmicks.”

The U.S. isn’t alone. The U.K. Parliament grilled executives from Google Inc. (GOOG), Amazon.com (AMZN) and Starbucks Corp. in hearings, suggesting they shifted income out to tax havens.

Camp Plan

Camp has signaled potential support for a 15 percent tax on intangibles as one way to limit base erosion, one of three options he has suggested in a discussion draft of a new tax system. Camp, who is working on reform legislation that may be unveiled this fall, has emphasized that measures to stop erosion of the tax base need to be part of such a system.

The OECD’s report may form a basis for U.S. legislation and could “lend legitimacy” to the anti-base erosion provisions now being considered in Congress, said Hank Gutman, a principal in KPMG LLP’s Tax Legislative and Regulatory Services group.

The OECD plans to look at rules requiring taxpayers to disclose aggressive tax planning arrangements. The plan calls for scrutiny of facets of the digital economy that may be vulnerable to tax manipulation and a variety of changes to transfer pricing guidelines and a focus on “harmful tax practices.”

OECD’s Russo said the key is the concept of ensuring tax transactions have “coherence, substance, and transparency.”

“There is a recognition that there is a problem and we recognize that it is our duty to solve the problem,” he said.

The plan is a challenge, though momentum is growing to move forward, with countries such as Brazil, Russia, and India now part of the talks, he said.

“It is difficult, but I think there is the political momentum to do it,” he said.

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.