With a record-breaking federal deficit of $1.34 trillion, it’s no wonder that lawmakers are eyeing American corporations with subsidiaries in low-tax overseas locations. Overall, 83 of the 100 largest publicly traded U.S. corporations have subsidiaries in locations listed as tax havens or financial privacy jurisdictions, according to the Government Accountability Office. Although what they’re doing is perfectly legal, the cost to the U.S. Treasury is enormous: U.S. multinational firms avoid anywhere from $10 billion to $60 billion a year in taxes, according to the Congressional Research Service.
The U.S. has a higher corporate tax rate than many other developed nations — a top rate of 35 percent compared with, for example, Ireland at 12.5 percent, Hong Kong at 16.5 percent, Singapore at 18 percent, and Bermuda and the Cayman Islands, which have no corporate income taxes for companies based there.
Saving on U.S. taxes by shifting operations to offshore locations is a time-honored practice in the corporate world. ConocoPhillips has 44 foreign units that help lower the company’s tax bill to the U.S., while General Motors and General Electric also have foreign operations that curtail their tax bills. Exxon Mobil, the largest U.S corporation by market capitalization, operates 32 of its 122 foreign subsidiaries in tax havens — jurisdictions with little or no income tax, according to 2008 GAO data.
A July report from a coalition of small businesses claims that "in 2008, Goldman Sachs, with 29 subsidiaries located in offshore tax havens, reported profits of over $2 billion and paid federal taxes of $14 million, an effective tax rate of just one percent, and less than one third what they paid their CEO Lloyd Blankfein ($42.9 million)."
It’s hardly surprising that businesses do everything they can to reduce their taxable income in the U.S., said Howard Gleckman, a resident fellow at the Tax Policy Center. "What they do is legal, but it does push the envelope of the law," he said.
There are various ways companies can use overseas operations to save on U.S. taxes, all of them legal. They can base some operations in a tax haven, which may not exchange financial information with foreign tax authorities or require a substantive local presence.
The current U.S. tax code generally allows companies to defer paying taxes on profits earned by foreign subsidiaries until they repatriate, or bring back home, that income — which in some cases is never. President Obama’s 2011 budget proposal seeks to limit that practice by requiring companies in certain situations to pay U.S. tax immediately upon "excessive return." To avoid taxing companies’ overseas profits both in a foreign country and in the U.S., the tax code allows foreign tax credits on up to 35 percent of the company’s foreign source income.
Last month, Congress modified the tax code to capture some of this lost tax revenue to offset part of the cost of a $26 billion package of state health and education aid, imposing new limits on U.S. multinational firms’ use of foreign tax credits. Those limits will bring in about $10 billion over 10 years. Similarly, the $18 billion jobs bill Obama signed into law in March 2009 was in part paid for by imposing stricter reporting and withholding requirements on corporations with foreign accounts worth more than $50,000.
While corporations have done little to push back on some of the more modest moves, companies are speaking out against the larger proposals from Obama, Levin and Doggett. "At a time of historic economic weakness … Administration proposals [would] impose new punitive taxes on one of the few industries that has been contributing to the U.S. economy rather than receiving a bailout," Exxon Mobil vice president of public and government affairs Ken Cohen wrote in a blog on the company’s website.
In another post, Cohen points to a study by IHS Cambridge Energy Research Associates and Deloitte & Touche, which found that U.S. oil and gas companies are at a competitive disadvantage to non-U.S.-based companies because of U.S. tax policies. "Why should our own government offer BP, Shell, Total and many other international companies a head start over U.S.-based firms?" Cohen wrote.
Exxon-Mobil refutes claims that it doesn’t pay its fair share in U.S. taxes. Exxon-Mobil’s U.S. taxes exceeded its U.S. earnings by $19 billion between 2005 and 2009, said spokeswoman Cynthia Bergman White. The company paid more than $500 million in U.S. federal income tax for 2009, she said.
Some say the campaign against tax havens could push multinational firms to relocate their headquarters, and jobs, outside the U.S. "These companies can walk at any time and don’t have any loyalty toward any country, because their shareholders are all over the world," said Douglas Shackelford, director of the University of North Carolina Tax Center. "For them to give up a dollar of value, it doesn’t make any difference whether they give it to Washington or to Tokyo or Zimbabwe — it’s still a dollar." But he says comprehensive tax reform is "inconceivable" in the near future with the midterm elections looming and Congress gearing up to debate extending the 2001 and 2003 tax cuts enacted under George W. Bush.
Sen. Carl Levin, D-Mich., and Rep. Lloyd Doggett, D-Tex., have pushed more sweeping bills aimed specifically at clamping down on U.S. multinational firms using the tax code to minimize what they owe, with no success. "This is a fight that should have been won, frankly, long ago," Levin told a group of small business leaders rallying behind his Stop Tax Haven Abuse Act bill in July. Levin and Doggett are pressing again to try to win passage in the House and Senate, but prospects remain dim. President Obama is also eager to crack down on U.S. multinational companies avoiding taxes, and included $122 billion worth of international tax reforms, over 10 years, in his fiscal 2011 budget proposal, although little has been enacted so far.
NYU Law School International Tax Program director H. David Rosenbloom says industry pushback is a major reason that Levin and Doggett don’t stand a chance of getting their proposed legislation through Congress. "The screams would be so loud you couldn’t believe it," he said. Instead, Congress will continue to enact "tiny, small-bore proposals that raise a couple billion here, and a couple billion there."