FacebookTwitterGoogle+RedditEmail

Corporate Tax Avoidance is the New Normal

by

Last month, Medtronic, a leading U.S. medical device maker, announced plans to merge with its smaller Irish rival Covidien and move its headquarters to Ireland.  The reason? Medtronic wants to make Ireland its tax home and avoid paying U.S. taxes It comes close on the heels of U.S. pharmaceutical company Pfizer’s recent, aborted hostile attempt to take over AstraZeneca in order to move its headquarters to the U.K. The Medtronic merger is just the latest example of a wave that began in the 1980s, but is now a tsunami of measures taken by leading American corporations to exploit loopholes in the tax code and avoid paying U.S. taxes.

Gabriel Zucman – a student of Thomas Piketty – analyzed data on U.S. international transactions from the Bureau of Economic Analysis to document just how extensive tax avoidance by U.S. companies has become.  He finds that U.S. multinationals attribute 55 percent of their foreign profits to six tax havens. Today, close to 20 percent of all U.S. corporate profits – domestic as well as foreign – are squirreled away in these countries, up from about 2 percent in 1984. This is a tenfold increase in the use of tax havens over the last three decades. The effective tax rate on U.S. multinationals has fallen dramatically as a result, saving them a total of $200 billion in 2013 alone in avoided tax payments to the governments of the U.S. and other countries.

Central to this strategy is the transfer of rights to intellectual property developed the U.S. to a subsidiary in a low tax country. Reducing the U.S. corporate tax rate is not likely to halt efforts by U.S. multinationals to sock away profits in low- or no-tax jurisdictions. Ireland’s corporate tax rate is just a third of the U.S. rate. Yet some American multinationals have figured out how to avoid paying taxes to Ireland as well, using a technique known as the ‘double Irish Dutch sandwich to render profits stateless so that no taxes are owed to any government. Consider the example of Google.

In the “double Irish,” Google establishes two subsidiaries in Ireland. Google Ireland Holdings, managed from Bermuda, licenses the rights to intellectual property developed in the U.S. to Google Ireland Limited, which sells advertising rights in Europe, Africa and the Middle East and collects the advertising revenue. At this stage, much of Google’s foreign profits end up in Ireland, where the corporate tax rate is 12.5 percent. However Google Ireland Limited avoids these taxes by, ultimately, paying out these profits as royalties to Google Ireland Holdings which, under Irish tax law, is a Bermuda company. No taxes are paid on these royalties because Bermuda has no corporate tax. Because Ireland withholds taxes on royalty payments to Bermuda, Google has established a Dutch subsidiary, Google Netherlands Holdings, ‘sandwiched’ between the two Irish subsidiaries. Google Ireland Limited actually pays the royalties to the Dutch subsidiary, which then pays the royalties to Google Ireland Holdings. Irish law exempts this type of royalty payment to companies in other EU countries from the withholding tax.

IT companies like Apple and Microsoft, pharmaceutical companies like Pfizer and Eli Lilly, and medical device companies like Medtronic and GE hold numerous patents on intellectual property developed in the U.S., often with taxpayer dollars. They are especially well-positioned to take advantage of loopholes in the tax codes of various countries to minimize, if not avoid entirely, taxes paid to any government. Medtronic failed to mention the tax benefits of the merger with Covidien in its press release announcing the merger, but these were quickly noted by financial analysts viewing the 50 percent premium over Covidien’s share price prior to the announcement that Medtronic will pay Covidien shareholders.

It’s unclear where this will end if Congress doesn’t act soon to close the loopholes that enable multinational corporations to avoid paying profits taxes in the U.S. Covidien was a U.S. company until it moved its headquarters to Ireland five years ago while maintaining most of its operations in Massachusetts.

The share of corporate profits in national income has increased dramatically in recent years, but the share of corporate taxes in national income remains at 3 percent. The shortfall has to be made up through higher taxes on smaller businesses and individuals not wealthy enough to avail themselves of tax havens, and through cuts in vital government services that, wealthy as the U.S. is, our representatives in Congress maintain we are no longer able to afford. It is past time for Congress to take up tax reform and assure that every person, every business, and every corporation pays its fair share of taxes. A political system in which only the ‘little people’ pay taxes invites corruption, undermines the principle of shared civic responsibility, and puts our democracy at risk.

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research. 

This article originally appeared on US News and World Report.

More articles by:
July 28, 2016
Paul Street
Politician Speak at the DNC
Jeffrey St. Clair
Night of the Hollow Men: Notes From the Democratic Convention
Renee Parsons
Blame It on the Russians
Herbert Dyer, Jr.
Is it the Cops or the Cameras? Putting Police Brutality in Historical Context
Russell Mokhiber
Dems Dropping the N Word: When in Trouble, Blame Ralph
Howard Lisnoff
The Elephant in the Living Room
Pepe Escobar
The Real Secret of the South China Sea
Ramzy Baroud
Farewell to Yarmouk: A Palestinian Refugee’s Journey from Izmir to Greece
John Laforge
Wild Turkey with H-Bombs: Failed Coup Raise Calls for Denuclearization
Dave Lindorff
Moving Beyond the Sanders Campaign
Jill Richardson
There’s No Such Thing as a “Free Market”
Patrick Cockburn
Erdogan Moves Against the Gulen Movement in Turkey
Winslow Myers
Beyond Drift
Edward Martin - Mateo Pimentel
Who Are The Real Pariahs This Election?
Jan Oberg
The Clintons Celebrated, But Likely a Disaster for the Rest of the World
Johnny Gaunt
Brexit: the British Working Class has Just Yawned Awake
Mark Weisbrot
Attacking Trump for the Few Sensible Things He Says is Both Bad Politics and Bad Strategy
Thomas Knapp
Election 2016: Think Three’s a Crowd? Try 2,000
Corrine Fletcher
White Silence is Violence: How to be a White Accomplice
July 27, 2016
Richard Moser
The Party’s Over
M. G. Piety
Smoke and Mirrors in Philadelphia
Jeffrey St. Clair
The Humiliation Games: Notes on the Democratic Convention
Arun Gupta
Bernie Sanders’ Political Revolution Splinters Apart
John Eskow
The Loneliness of the American Leftist
Guillermo R. Gil
A Metaphoric Short Circuit: On Michelle Obama’s Speech at the DNC
Norman Pollack
Sanders, Our Tony Blair: A Defamation of Socialism
Claire Rater, Carol Spiegel and Jim Goodman
Consumers Can Stop the Overuse of Antibiotics on Factory Farms
Guy D. Nave
Make America Great Again?
Sam Husseini
Why Sarah Silverman is a Comedienne
Dave Lindorff
No Crooked Sociopaths in the White House
Dan Bacher
The Hired Gun: Jerry Brown Snags Bruce Babbitt as New Point Man For Delta Tunnels
Peter Lee
Trumputin! And the DNC Leak(s)
David Macaray
Interns Are Exploited and Discriminated Against
Brett Warnke
Storm Clouds Over Philly
Ann Garrison
Rwanda, the Clinton Dynasty, and the Case of Dr. Léopold Munyakazi
Chris Zinda
Snakes of Deseret
July 26, 2016
Andrew Levine
Pillory Hillary Now
Kshama Sawant
A Call to Action: Walk Out from the Democratic National Convention!
Russell Mokhiber
The Rabble Rise Together Against Bernie, Barney, Elizabeth and Hillary
Jeffrey St. Clair
Don’t Cry For Me, DNC: Notes From the Democratic Convention
Angie Beeman
Why Doesn’t Middle America Trust Hillary? She Thinks She’s Better Than Us and We Know It
Paul Street
An Update on the Hate…
Fran Shor
Beyond Trump vs Clinton
Ellen Brown
Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation?
Richard W. Behan
The Banana Republic of America: Democracy Be Damned
FacebookTwitterGoogle+RedditEmail