FacebookTwitterGoogle+RedditEmail

Corporate Tax Dodging Another Capitalist Innovation

by

Competition takes many forms in capitalism. Financial engineering by corporations to avoid paying taxes is one aspect of this competition — under the rigors of market competition, evading responsibility is an innovation to be emulated.

The magnitude of tax evasion on the part of multi-national corporations through one channel — the shifting of profits to countries and territories with low or nonexistent taxes — was quantified earlier this month by the U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice. Their study, “Offshore Shell Games 2014,” reports that the 500 largest U.S.-based multi-national corporations have squirreled away almost US$2 trillion in profits that lie untouched.

An estimated $90 billion a year in federal income taxes are not paid through the creative use of subsidiaries set up in offshore tax havens.

The Cayman Islands and Bermuda are favored locations, although other tax havens such as Hong Kong, Ireland and Switzerland are frequently used. The report illustrated the preposterous number of corporations with sham “offices” in the Cayman Islands:

“Ugland House is a modest five-story office building in the Cayman Islands, yet it is the registered address for 18,857 companies. … Simply by registering subsidiaries in the Cayman Islands, U.S. companies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them. The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing address in the U.S., even while they are officially registered in the Caymans.” [page 4]

The Cayman Islands has a corporate tax rate of zero. Not a cent. The government there raises revenue through taxes on imports (thus a consumption tax for the people who live there as virtually everything must be imported), but, as an added bonus should any corporate executive stop by to visit the company post office box, luxury goods such as diamonds are exempted. Bermuda also has no corporate tax.

U.S. tax laws allow profits earned abroad to remain untouched until the money is brought into the country. Profits booked in other countries are instead subject to the local tax rate, even if zero. Accounting, rather than geography, often controls what constitutes “offshore” profits, however. The “Offshore Shell Games 2014” study reports that:

“Many of the profits kept ‘offshore’ are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly ‘trapped’ offshore found that more than half of the offshore funds were invested in U.S. banks, bonds, and other assets.” [page 5]

Corporate money is “off shore” if the corporation says it is

A 2013 report in The Wall Street Journal revealed that many corporations, including Microsoft Corp. and Google Inc., “keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities.” Under federal tax law, those funds are “offshore” and thus exempt from taxation.

Microsoft, in its fiscal year 2013 filing with the U.S. Securities and Exchange Commission, said its funds held by its foreign subsidiaries are “deemed to be permanently reinvested in foreign jurisdictions.” It said, “We currently do not intend nor foresee a need to repatriate these funds.” It pays to be a monopoly in more ways than one.

A sampling of corporate highlights, according to “Offshore Shell Games 2014”:

*Bank of America reports 264 subsidiaries in offshore tax havens, more than any other company. The bank would otherwise owe $4.3 billion in U.S. taxes on the $17 billion it keeps offshore.

*Nike officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. Nike is believed to pay a 2.2 percent tax rate to foreign governments on those offshore profits.

*Apple holds more money offshore than any other company — $111.3 billion. It would owe $36.4 billion in U.S. taxes if these profits were they not offshore for tax purposes. Two of Apple’s Irish subsidiaries are structured to be tax residents of neither the U.S. (where they are managed and controlled) nor Ireland (where they are incorporated), ensuring no taxes are paid to any government.

*Google increased the amount of cash it reported offshore from $7.7 billion in 2009 to $38.9 billion. An analysis found that, as of 2012, the company has 23 tax-haven subsidiaries that it no longer discloses but continues to operate.

*Microsoft increased the amount of money it held offshore from $6.1 billion to $76.4 billion from 2007 to 2013, on which it would otherwise owe $19.4 billion in U.S. taxes. The company is believed to pay a tax rate of three percent to foreign governments on those profits.

You pay when corporations don’t

These arrangements don’t benefit working people in the tax havens. After Ireland’s then prime minister, Brian Cowen, announced that the government would assume all the debts of Ireland’s three biggest banks, he negotiated for what became an €85 billion bailout. In doing so, he demanded, and received, only one concession: There would be no increase in corporate tax rates, which are less than half the level of Ireland’s sales taxes. Taxes on incomes, cars, homes and fuel, however, did rise to pay for the bailout.

Critics, the authors of the “Offshore Shell Games 2014” study not excepted, propose various reforms and tend to discuss this issue in terms of morality. That massive corporate tax dodging is odious from any reasonable ethical standard is indisputable, but reducing it to immorality completely obscures the larger structural problems.

In the relentless competition fostered by capitalism, any successful innovation must be matched by competitors. Such an innovation could be a new production technique but also includes measures to lower costs. If production is moved to a location with low wages and little or no safety and environmental regulations, the boost to profits for the company that does this has to be matched by competitors that otherwise would become uncompetitive and/or fall into disfavor with financiers.

Financial engineering to avoid paying taxes is another boost to profits, and thus a competitive advantage. Other corporations, under the rigors of competition and the ceaseless necessity of expansion and pressure to increase profits, are compelled to copy these innovations.

However much we might wish to morally condemn such behavior, the personality of corporate executives is irrelevant. Expand or die is the remorseless logic of capitalism, and the executive who doesn’t do everything possible to maximize profits will soon be replaced by someone who will.

Nike, to provide an example, proudly announced that, in the past 10 years, it had “returned over $15 billion to shareholders through dividend payments and share repurchases” and assured it would provide more in the future. Nike’s shareholders’ report made no mention of what the company does to extract that money — through brutally exploitative sweatshop labor, paying workers less than a minimum wage set well below subsistence level in places where complaining leads to beatings or firings and striking lands you in prison. And by not paying taxes.

As a second example, Bank of America reported that it paid $3.2 billion to buy back its stock in 2013, money spent to boost its stock price and give extra profits to speculators. (Stock bought for this purpose is paid for at a price higher than the current stock-market value.) That money was available thanks to the billions of dollars it didn’t pay in taxes.

Reforms are good, but reforms can and are taken back when the pressure for them relents, and ultimately leaves the system that rewards such behavior untouched.

Pete Dolack writes the Systemic Disorder blog. He has been an activist with several groups.

Pete Dolack writes the Systemic Disorder blog and has been an activist with several groups. His book, It’s Not Over: Learning From the Socialist Experiment, is available from Zero Books.

Weekend Edition
April 29, 2016
Friday - Sunday
Andrew Levine
What is the Democratic Party Good For? Absolutely Nothing
Roberto J. González – David Price
Anthropologists Marshalling History: the American Anthropological Association’s Vote on the Academic Boycott of Israeli Institutions
Robert Jacobs
Hanford, Not Fukushima, is the Big Radiological Threat to the West Coast
Ismael Hossein-Zadeh
US Presidential Election: Beyond Lesser Evilism
Dave Lindorff
The Push to Make Sanders the Green Party’s Candidate
Ian Fairlie
Chernobyl’s Ongoing Toll: 40,000 More Cancer Deaths?
Pete Dolack
Verizon Sticks it to its Workers Because $45 Billion isn’t Enough
Richard Falk
If Obama Visits Hiroshima
Margaret Kimberley
Dishonoring Harriet Tubman
Deepak Tripathi
The United States, Britain and the European Union
Peter Linebaugh
Marymount, Haymarket, Marikana: a Brief Note Towards ‘Completing’ May Day
Eva Golinger
My Country, My Love: a Conversation with Gerardo and Adriana of the Cuban Five
Moshe Adler
May Day: a Trade Agreement to Unite Third World and American Workers
Vijay Prashad
Political Violence in Honduras
Paul Krane
Where Gun Control Ought to Start: Disarming the Police
David Anderson
Al Jazeera America: Goodbye to All That Jazz
Rob Hager
Platform Perversity: More From the Campaign That Can’t Strategize
Pat Williams
FDR in Montana
Dave Marsh
Every Day I Read the Book (the Best Music Books of the Last Year)
David Rosen
Job Satisfaction Under Perpetual Stagnation
John Feffer
Big Oil isn’t Going Down Without a Fight
Murray Dobbin
The Canadian / Saudi Arms Deal: More Than Meets the Eye?
Gary Engler
The Devil Capitalism
Brian Cloughley
Is Washington Preparing for War Against Russia?
Manuel E. Yepe
The Big Lies and the Small Lies
Robert Fantina
Vice Presidents, Candidates and History
Mel Gurtov
Sanctions and Defiance in North Korea
Howard Lisnoff
Still the Litmus Test of Worth
Dean Baker
Big Business and the Overtime Rule: Irrational Complaints
Ulrich Heyden
Crimea as a Paradise for High-Class Tourism?
Ramzy Baroud
Did the Arabs Betray Palestine? – A Schism between the Ruling Classes and the Wider Society
Halyna Mokrushyna
The War on Ukrainian Scientists
Joseph Natoli
Who’s the Better Neoliberal?
Ron Jacobs
The Battle at Big Brown: Joe Allen’s The Package King
Wahid Azal
Class Struggle and Westoxication in Pahlavi Iran: a Review of the Iranian Series ‘Shahrzad’
David Crisp
After All These Years, Newspapers Still Needed
Graham Peebles
Hungry and Frightened: Famine in Ethiopia 2016
Robert Koehler
Opening the Closed Political Culture
Missy Comley Beattie
Waves of Nostalgia
Thomas Knapp
The Problem with Donald Trump’s Version of “America First”
Georgina Downs
Hillsborough and Beyond: Establishment Cover Ups, Lies & Corruption
Jeffrey St. Clair
Groove on the Tracks: the Magic Left Hand of Red Garland
Ben Debney
Kush Zombies: QELD’s Hat Tip to Old School Hip Hop
Charles R. Larson
Moby Dick on Steroids?
David Yearsley
Miles Davis: Ace of Baseness
FacebookTwitterGoogle+RedditEmail