The $90 Billion Parked Offshore

As the U.S. Congress and the White House hunt for revenue to avoid going over a “fiscal cliff” on January 1^st, tax experts and some lawmakers point to an untapped source of revenue that’s moored just off U.S. shores — $90 billion in corporate taxes lost every year due to loopholes and profits shifted to tax havens like the Bahamas and the Cayman Islands. Now, a corporate tax overhaul is on the negotiating table, but companies are pushing to make that money harder, not easier, to tax.

“The fact that we are cutting all these programs that benefit the public while corporations are getting all the benefits of this country and not paying for it, is just an absolute travesty,” said Dan Smith, tax and budget advocate for the U.S. Public Interest Research Group.

During the most recent round of negotiations, President Obama for the first time put changes to the corporate tax rules on the table for negotiation. Details of his proposal have not been released, but would amount to an overhaul of the corporate tax code next year. Also on the table is a plan to cap itemized deductions and the child tax credit. Deductions for charitable giving could be among the casualties, putting non-profits on tenterhooks going into the holiday season.

Meanwhile, a study released by the U.S. Public Interest Research Group this week shows that the U.S. tax base is missing out on some $90 billion per year in tax revenue from companies that stash their profits offshore and shift money from country to country in perfectly legal, if labyrinthine, schemes.

To make up the difference, Congress is considering abandoning the tax credit some 35 million families receive for child care, worth $52 billion in 2011. Also on the table is some $108 billion in mortgage interest deductions, affecting about the same number of homeowners.

Under current law, taxes are deferred on money that companies stash offshore. Eventually, they’re supposed to pay taxes when the money is brought back into the U.S. Smith says there’s a growing movement, pushed by CEOs and corporate lobbyists, to switch to a “territorial” tax system, which would allow companies to pay taxes only in the country where their funds are located.

“It’s very unfair to the American taxpayer, it robs the U.S. Treasury of needed revenues, it’s unfair to any competitors who don’t use these offshore gimmicks and these corporate loopholes to shift revenue overseas to avoid paying taxes,” said Senator  Carl Levin, the Michigan Democrat.

Levin is pressing for a deal that would include tighter restraint on U.S. business profits overseas. In a conference call Friday, he sounded the alarm on aggressive lobbying efforts to push for a territorial system. When large multinational corporations use tax loopholes and tricks, he noted, it allows them to pay a lower effective tax rate than smaller competitors,  Levin said.

As chair of the Senate Permanent Subcommittee on Investigations, Levin blasted Microsoft and Hewlett Packard in a hearing this summer over shell-game tactics to avoid paying U.S. taxes on intellectual property profits. Microsoft came under fire for shifting the proceeds of U.S. sales to Puerto Rico, a move that allowed it to avoid paying $4.5 billion in U.S. taxes.

The Double Irish Dutch Sandwich

In 2010, General Electric reported $14.2 billion in global profits, $5.1 billion of that amount earned in the United States. The company’s tax payment that year? Zero.

The U.S. Public Interest Group, study identified 30 companies that paid more in lobbying than in federal taxes from 2008 to 2010. General Electric is near the top of the list, having paid an effective tax rate of -45.3% for the three-year period, while reporting a total of $84.4 million in lobbying expenses.

According to a filing last month, Google evaded payments of $2 billion in income taxes in 2011 by shifting 80 percent of its pretax profits to a shell company in Bermuda. The company employs a convoluted technique known as the “double Irish Dutch sandwich.” The company establishes two subsidiaries in Ireland, one headquartered (on paper) in Bermuda. The profits are transferred from one of the Irish subsidiaries to the other, taking a pit stop in the Netherlands to avoid an Irish withholding tax. From 2008 to 2010, Google was able to save $3 billion using this scheme with a delicious-sounding nickname.

Former Treasury Department economist, Martin A. Sullivan, estimated that Apple, using shell companies in the British Virgin Islands and in Reno, Nevada — both with notoriously low tax rates — avoided $2.4 billion in U.S. taxes last year.

Who’s Fix?

Many CEOs of Fortune 500 companies have called for a bipartisan solution to the fiscal cliff, and declared a willingness to pay higher taxes to avoid the economic uncertainty.

“But behind the scenes they’re working really hard to get their corporate tax bill reduced,” said Rebecca Wilkins, senior counsel for federal tax policy at the nonprofit Citizens for Tax Justice.

She says defense contractors, CEOs and a powerful group of business leaders called the Fix the Debt Campaign are quietly working hard to get their corporate tax bill reduced, even as they declare a willingness to pay a higher individual tax rate. Senator Levin specifically named the group as a forceful voice for the territorial model on the sidelines of ongoing negotiations.

But Jon Romano, spokesperson for the Fix the Debt Campaign, says his group is only meeting with members of both parties, pressuring Congress and the president to reduce spending, reform entitlements and raise revenue.

“[The Fix the Debt Campaign] isn’t about special interests, this isn’t about self-interest, this is about what’s in the best interest of the American people,” Romano told 100Reporters.

Members of the group include the CEOs of giants like Microsoft, Goldman Sachs and Dow Chemical, as well as the chairman and CEO of Caterpillar, Inc., and Douglas Oberhelman, who has been one of the membership’s most vocal and aggressive supporters of a territorial tax plan.

Wilkins and other opponents of tax havens are calling for the international community to hammer out agreements on tax districts to help rein in rampant slight-of-hand in the banking sector.

She says real corporate tax reform isn’t going to be hammered out before the New Year’s deadline, but she’s concerned that those voices may influence or pass instructions to the tax writing committee that will lay the foundation for a territorial tax system or a repatriation holiday when Congress convenes in 2013. Panic about the ‘fiscal cliff’ could make some legislators vulnerable to those arguments, she says.

Wilkins says corporate lobbyists are throwing enormous weight into congressional offices to bear on this agenda.

“When we talk to staffers, they say things like ‘for every time you or someone that shares your position  comes in — we get ten visits from the other side,'” she said. “They’re letting them know that their support is dependent on how they show up on this issue.”

Supporters of a permanent tax holiday on overseas profits include the powerful chairman of the House Ways and Means Committee, Dave Camp, who is championing a proposal that would shield 95% of corporate profits earned offshore. Camp argues that lifting the tax burden on companies would encourage them to bring overseas profits back home, invest in their domestic operations, and create jobs.

House Ways and Means spokewoman Michelle Dimarob said that switching to a territorial system should be a key component of any corporate tax overhaul.

“America has the highest corporate tax rate in the industrialized world and an outdated worldwide system of taxation, both of which make us less competitive in the global marketplace.”

Proponents of the move argue that U.S. tax rates stand at about 35 percent, but economists say the effective tax rate, the one companies actually pay in practice, is between 12 and 18 percent, lower than many other nations.

Tax Holidays and History

The estimate of $90 billion in lost tax revenue comes from Reed College economist Kimberly Clausing, who used anonymous surveys to compile a ballpark amount for how much the Treasury hemorrhages due to tax-shifting tricks. She cautions that there’s no one “magic wand” corporate tax legislation that could close $90 billion worth in loopholes, but reform would go a long way in raising much-needed revenue.

And she says there’s no evidence that a repatriation holiday of any kind would stimulate domestic investment. When the country tried such a tax holiday in 2005, Clausing noted, firms repatriated 100s of billions of dollars, and most of it went to dividend payouts and share repurchases.

“It was basically just a windfall for the holders of those stocks,” she said. She adds that many companies have plenty of cash on hand, they’re just reticent to invest it because of the weak economy. Merely bringing home more piles of dough, she says, doesn’t mean companies will spend it.

Rather, her research, based on the history of other wealthy countries over the last 30 years, suggests that moving to a territorial system would result in the loss of 800,000 jobs.

Clausing says Camp and other supporters are floating a “cartoon” version of a territorial tax system, which does not include anti-abuse measures that other nations have in place. Countries like Japan have hybrid systems that tax some foreign income, even if it’s not repatriated, and have measures in place to discourage the shifting of income to tax havens.

Rebecca Wilkins adds that framing the debate in terms of competition is a race to the bottom.

“When companies compete, we get better product or better service at a lower price,” she said. “What happens when government compete against each other? The country with the lowest tax rate collects the least amount of revenue and has the worst public education system and the worst roads and the worst public health and no military.”

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Chad Bouchard

Chad Bouchard, a staff writer for 100 Reporters, is an investigative journalist focusing on politics and corruption. His stories have appeared in The Washington Post Magazine, The Sunday Telegraph, The Financial Times and other publications. His radio stories have aired on NPR, Public Radio International, the Canadian Broadcasting Corporation, and the Voice of America.

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