Wednesday, May 27, 2015

A Trillion Dollars Here, A Trillion Dollars There

No, this isn’t a blog about the money we lost pursuing the failed wars in Iraq and Afghanistan. This one is about the $2.1 trillion dollars of untaxed foreign earnings of U.S. companies that simply got away. The tax avoidance (vs. “evasion,” which is illegal) schemes are perfectly legal, and senior management of the relevant corporations have an obligation to their shareholders that supersedes any “tax loyalty” to any country to maximize profits and minimize taxes. They’re doing what is prudent and valuable, even if it hurts the country they live in. They may employ “inversions” (buying a smaller company in another, tax-friendly country, and moving the new entity’s headquarters to that overseas venue) or, most likely, a set of structures to move what would otherwise be U.S. taxable income overseas.
The keys involve multiple, interlocking companies located in tax-treaty friendly nations around the world, blend them with recognizing income in countries with embarrassingly low tax rates (sometimes, when the company is big enough, actually negotiated with that country), making sure that the profits never show up in any U.S. taxable entity. Those with an axe to grind will tell you that the United States has the highest corporate tax rate on earth. But given all the loopholes and “facilitating legislation,” the paper tax rate vs. the actual effective rate bear little or no relationship to each other.
“The 35 percent statutory U.S. corporate tax rate is the highest in the world. But according to a paper published [in 2013] by University of Southern California law professor Edward Kleinbard, many companies don't pay anywhere near that much due to the plethora of loopholes in the tax code… According to data from the General Accountability Office cited by Kleinbard, corporations on average paid 12.6 percent as of 2010… Other tax experts have made the same point as Kleinbard. A report by the advocacy group Citizens for Tax Justice noted that 111 of the 288 companies it examined paid zero or less in federal taxes in at least one year from 2008 and 2012.”, August 19, 2014.
Apple is a classic case in point. With component manufacturing centered heavily overseas, with underlying patents and other proprietary intellectual property parked in tax-avoiding foreign affiliates, Apple has created a complex flow of corporate structures with one solid goal in mind: avoid taxes no matter where the income in generated. Even for U.S. sales, there is a huge deduction that Apple U.S. has to pay… er… through a series of structures… to… er… Apple overseas… with… er no employees or tax situs… to… er… a company in Ireland where income is recognized at what many believe is a negotiated 2% tax rate. That deduction? A royalty from Apple U.S. to the Irish company for the right to use the patents, etc. parked “over there.” Hence, the real money, the aggregation of patent royalties, is shifted from the U.S. to Ireland... and so is the tax liability.
But when shareholders in the U.S. began to demand dividends from the U.S., Apple realized that if it shifted the nine figures of revenues from Ireland to the U.S. to fund those dividends, it would have a huge tax bill. Solution? Borrow the funds you need to pay the dividends in the U.S. from U.S. lenders and deduct the interest from the otherwise minor tax bill you are paying in the United States! Leave those accumulated profits in Ireland! Use them only for overseas operations, and minimize the U.S. operations (keeping those jobs overseas!) accordingly. For America, this strategy is a win-win for Apple and a big, job and tax-revenue loss for the U.S.
We make it so easy for American companies to avoid taxes, and a GOP-dominated Congress is exceptionally unlikely to do anything that would make their campaign-supporting corporate interests pay what they really should. Even where such taxes are recognized as being payable someday, when revenues are repatriated to the U.S., that “someday” is anything but clear. “The problem is, accounting rules don’t require a company to record a deferred income tax liability on these profits, as long as it says it intends to reinvest earnings in the foreign jurisdiction where they were generated. So the money piles up, contributing mightily to reported corporate profits.
“Untaxed foreign earnings disclosed by companies in the Standard & Poor’s 500-stock index last year climbed to more than $2.1 trillion, according to Jack Ciesielski, president of R.G. Associates and editor of The Analyst’s Accounting Observer… Last year, Mr. Ciesielski said, 322 of these companies generated $182.4 billion offshore, an estimated 19 percent of their total net income.
“Companies provide few details on their reinvestment intentions, making it seem as if they are reaping the benefits of the rule without really following it. And the piles have grown so large — about $90 billion at Microsoft, for example — that claims of plans to reinvest this money overseas simply aren’t credible.
“‘If they don’t have concrete plans for the money, which they haven’t really shown us that they have, the deferred tax liability should be right there on the balance sheet — full stop,’ said Lee Sheppard, a contributing editor to Tax Notes, the definitive publication on national and global tax issues. ‘But companies don’t want to book the deferred tax liabilities because that would affect their share prices.’” New York Times, May 23rd. In the end, our infrastructure will remain unrepaired and below what we need to function efficiently, our once-excellent educational system will continue to unravel for lack of funding and much-needed, job-stimulating government research is simply going away.
I’m Peter Dekom, and our tolerance for special treatment for the richest segments of society, our willingness to guarantee their special status well apart to the burdens imposes on the rest of us, will prove to be the most expensive and ignorant decisions we have ever made.

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