On paper, the U.S. has the industrial world’s highest corporate tax rate. In theory, that means its companies hand over more than a third of their profits to Uncle Sam to pay for things like national defense and health care. In reality? They often pay taxes at less than half the 35 percent statutory rate — sometimes in the single digits. Corporations have used many tactics to cut their bills, but none more powerful than booking income in offshore havens and leaving it there. They do so for two reasons. First, the U.S. taxes its companies on their global profits, unlike the rest of the world, which taxes domestic profits only. Second, the U.S. allows companies to defer paying tax on those offshore profits until they're brought home. Those unusual features fuel complicated cross-border transactions that cost the U.S. government tens of billions a year. Now, as talk of tax reform increases, corporate America is all ears.
Both President Donald Trump and congressional Republicans want to cut corporate taxes. In late April 2017, Trump unveiled a tax plan that hews closely to his campaign proposal. It would lower taxes on corporations to 15 percent. House Republicans want to set the rate at 20 percent. To bring home some of the estimated $2.6 trillion in profits stashed overseas, Trump's new plan would also impose a one-time tax on repatriated earnings, without naming the rate. House Republicans want an 8.75 percent rate for overseas cash and 3.5 percent for other property. Both Trump and House Republicans would scrap the taxation of future overseas earnings altogether. These proposals emerged after U.S.-based companies — including Apple, Caterpillar and Google parent Alphabet — came under attack for booking profits in places like Bermuda, the Cayman Islands and Ireland. Governments — especially the European Union — are starting to fight back. In August, the EU ordered Apple Inc. to repay 13 billion euros ($14 billion) plus interest in back taxes, saying Ireland had given the company an illegal tax rate and an unfair advantage. This followed an October 2015 order for Starbucks Corp. and Fiat Chrysler Automobiles to repay as much as 30 million euros in back taxes to the Netherlands and Luxembourg, which the EU said offered illegal state aid.
To avoid the U.S.'s high statutory rate and its taxation of foreign profits once brought onshore, U.S. companies have deployed a tax lawyer’s toolbox to move as much of their income outside the U.S. as possible. Alphabet Inc., for example, has used techniques known as the “Double Irish” and “Dutch Sandwich” to attribute the majority of its profits to a Bermuda mailbox — where it has paid taxes at a rate below 3 percent. Apple set up a subsidiary that exploited gaps in Irish and U.S. laws so that it didn’t have a home anywhere for tax purposes. Caterpillar Inc. saved $2.4 billion from 2000 to 2012 by changing the address of its global parts business to Switzerland from the U.S. In fact, companies have benefited by moving the know-how behind everything from blockbuster antidepressants to search engines to showroom design into the most tax-advantageous places. The U.S. isn’t the only government missing out. Globally, the losses have been estimated to be as much as $240 billion — 10 percent of all corporate income tax receipts.
Companies and their shareholders benefit from profit shifting. Most governments and their citizens don’t. Yet Ireland, with more than 5,000 Apple employees, joined the company in fighting the EU tax ruling. The EU now wants member nations to have a level playing field and avoid a race-to-the-bottom contest. Some tax scholars say that profit-shifting won't end if the U.S. taxes only domestic earnings, or what's known as a territorial system, because incentives to attribute earnings to countries with even lower rates would remain. Although Trump’s proposed tax rates are more generous to businesses than those in the House plan, he says his plan will lure cash back to the U.S. to fuel economic growth and provide revenue to rebuild infrastructure.
The Reference Shelf
- The Organization for Economic Cooperation and Development’s proposals to discourage profit shifting.
- Citizens for Tax Justice conducts regular studies on corporate use of offshore tax havens.
- The Congressional Research Service has an analysis of U.S. companies engaged in profit shifting.
- A Republican proposal to revamp the tax code.
- Bloomberg QuickTakes on tax inversion and House Republican plans for a tax revolution.
- Bloomberg report: “Americans Are Paying Apple Millions to Shelter Overseas Profits.”
Richard Rubin and Jesse Drucker contributed to earlier versions of this article.
First published May 28, 2014
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