House Committee Votes to Increase Deficit by Nearly $300 Billion with “Bonus” Depreciation

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Once again, a Congress that cannot enact a $10 billion extension of emergency unemployment benefits is headed toward increasing the deficit by hundreds of billions of dollars to benefit corporations. 

Republicans on the House Ways and Means Committee voted today to make permanent “bonus” depreciation, the most costly provision within the “tax extenders.” Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service has reviewed quantitative analyses of the tax break and found that, “… accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

This conclusion is not surprising. What businesses need are customers. No business is going to invest to expand operations if there are no customers and thus no way of profiting from that expansion. A tax cut for investment cannot change that logic. The most likely effect of such tax cuts is that they subsidize investment that would have occurred anyway even without a tax break.

Bonus depreciation also departs from general rules on which the tax system is built. Companies are allowed to deduct from their taxable income business expenses so only net profit is taxed. Businesses can also deduct costs of purchases of machinery, software, buildings and so forth.  Since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

In most cases firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money. For example, inflation will erode the value of $100 over time, but $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is a temporary expansion of existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

Of course, this tax break makes even less sense if it is permanent. It was enacted to address a recession early in the Bush administration and then enacted again to address the much more severe recession at the end of the Bush administration. The theory behind it had been that firms would be encouraged to invest and expand right away, counteracting the immediate impacts of the recession, because the break would be available only for a limited time. Making the break permanent obviously destroys even this argument for bonus depreciation. 

Ohio Tax Cuts Would Disproportionately Benefit Top 1 Percent

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Since Ohio Governor John Kasich ran for office on a promise to gradually eliminate the state income tax, tax cuts have been almost constantly on the agenda in the Buckeye state. Last week, the state Senate advanced a $400 million tax cut plan that would accelerate already-scheduled income tax rate reductions and increase an existing tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. The plan next goes to a joint House-Senate conference committee.

An ITEP analysis of the Senate plan, featured in a  newly-released report from Policy Matters Ohio, shows that these tax cuts next year would disproportionately benefit the best-off Ohioans: the top 1 percent of Ohio taxpayers, would receive an average tax cut of $1,846, while the middle fifth of Ohio taxpayers would see an average tax cut of $36. The poorest 20 percent of Ohioans would see a tax cut averaging just $4.

Ohio’s tax break for “pass through” business income (that is, profits that are taxed under the personal income tax as they “passed through” to the owners) is already one of the more misguided carve outs in the state’s tax law. Described misleadingly by its supporters as a “small business” tax break, it allows any individual to deduct 50 percent of a whopping $250,000 of pass-through income. The Senate bill would ramp up the deduction to 75 percent for one year. But a better approach might be to examine the wisdom of the deduction that already exists. Policy Matters Ohio’s Zach Schiller notes sensibly in the Columbus Dispatch that “[w]e certainly haven’t seen some big job surge since this tax break was created.” The true cost of the existing deduction remains uncertain. Since some eligible business owners appear not to be claiming it, the $230 million the deduction has cost this year alone will likely be much higher in the long term.

Faced with a ballooning tax giveaway that offers little or nothing to middle-income families, the sensible solution would be to pull the plug on this tax break. Instead, Ohio lawmakers seem poised to expand it.

Pay-Per-Mile Tax is Not a Panacea

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There’s been an increasing amount of talk about whether hybrids and electric cars have made the gas tax obsolete, and whether the time has come to switch to a different system of taxing drivers—like a vehicle miles traveled tax (VMT tax).  In a new report, the Institute on Taxation and Economic Policy (ITEP) argues that the gas tax still has a lot of life left in it, and that lawmakers are setting themselves up for disappointment if they think switching to a flat, per-mile VMT tax is going to fix their transportation budget in the long-run.

As ITEP explains, our roads and bridges are crumbling mainly because federal and state gas tax rates are outdated.  It’s true that fuel-efficiency gains have chipped away at the gas tax base by letting drivers travel further on each tank of gas, but so far that issue has been dwarfed by the impact of inevitable increases in construction costs.  ITEP estimates that “for every $1 that fuel efficiency gains drained from the purchasing power of the nation’s transportation funds, inflation has taken a much larger $4.08.”

In other words, the biggest problem with the gas tax is also one that’s easy to fix: gas tax rates should gradually rise alongside inflation, just like many features of federal and state income tax law.  Or as ITEP explains in a Huffington Post op-ed, “The fact that asphalt tends to become more expensive over time doesn’t mean that we need to throw out the gas tax entirely. It only means that we shouldn’t expect decades-old gas tax rates to keep pace with the cost of building and maintaining the nation’s infrastructure.”

ITEP’s report also reminds readers that the funding problems created by flat tax rates are not unique to the gas tax.  Oregon, for example, is in the process of launching a pilot project that will allow 5,000 volunteer drivers to exempt themselves from gas taxes in exchange for paying a VMT tax.  But Oregon decided to set their experimental VMT tax rate at a flat 1.5 cents per mile—despite the fact that 1.5 cents is guaranteed to buy less asphalt and machinery in the future when those materials become more expensive.  By 2025, Oregon’s VMT tax rate will likely need to rise to 1.89 cents per mile just to maintain the value it has today.

Before completely overhauling its system of taxing drivers, states like Oregon should join the growing list of states that plan ahead for inflation with a “variable-rate” gas tax where the tax rate can grow over time.  And VMT tax proponents should be aware that this more sustainable “variable-rate” style tax rate will need to be carried over into any VMT tax that might eventually be enacted.

Read the report:

Pay-Per-Mile Tax is Only a Partial Fix

American Corporations Tell IRS the Majority of Their Offshore Profits Are in 12 Tax Havens

May 27, 2014 08:17 AM | | Bookmark and Share

Read this report in PDF.

A few days after Americans filed their tax returns last month, the Internal Revenue Service released data on the offshore subsidiaries of U.S. corporations. The data demonstrate, in an indirect way, that these companies are not playing by the same rules as the rest of us.

The figures show how much profit American corporations tell the IRS that their subsidiaries have earned in each foreign country. Amazingly, American corporations reported to the IRS that the profits their subsidiaries earned in 2010 in Bermuda, the Cayman Islands, the British Virgin Islands, the Bahamas and Luxembourg were greater than the entire gross domestic product (GDP) of those nations in that year.

It is obviously impossible for American corporations to actually earn profits in a given country that exceed that country’s total output of goods and services. Clearly, American corporations are using various tax gimmicks to shift profits actually earned in the U.S. and other countries where they actually do business into their subsidiaries in these tiny countries. This is not surprising, given that these countries impose little or no tax on corporate profits.

Besides the five countries just mentioned, the data also indicate that other countries also serve as tax havens for American multinational corporations. For example, American corporations report to the IRS that the profits their subsidiaries earned in Switzerland were equal to 9 percent of Switzerland’s GDP. This is a much higher share of GDP than the profits reported in more significant European countries: about half a percent of GDP in Germany and France, and 3 percent in the United Kingdom. This suggests that American corporations are exaggerating how much of their profits are earned in Switzerland, which is not surprising given that some corporations are able to obtain very low tax rates in that country.

The dozen countries with the highest reported American offshore corporate profits as a percentage of their GDP in 2010 had only four percent of the total GDP for all the foreign countries included in the IRS figures. But American corporations report to the IRS that 54 percent of their offshore subsidiary profits were earned in these tax-haven countries. This is obviously impossible. The only plausible conclusion is that American corporations are engaging in various accounting gimmicks to make large amounts of their profits appear, for tax purposes, to be earned in these dozen tax-haven countries. 

These 12 countries have either zero tax rates or provide loopholes that allow corporate profits to go largely untaxed in many circumstances. The two columns on the right side of the table on page one show the amount of corporate income taxes paid on the subsidiary profits to the country where they were supposedly earned or any other foreign country. This is shown first as a dollar figure and then as a percentage of the profits supposedly earned in that country.

There are apparently foreign income taxes paid on some profits even in countries known to have a zero corporate tax rate like Bermuda or the Cayman Islands. This may often occur because the profits are shifted from a subsidiary in another foreign country that imposes some tax on profits when they are shifted to a tax haven country. Overall, however, these subsidiary corporations are able to avoid paying almost any taxes. The effective rate of foreign taxes paid on subsidiary profits in the dozen countries was only 7 percent.[1]

The U.S. allows its corporations to defer paying U.S. corporate income taxes on profits of their offshore subsidiaries until those profits are officially “repatriated” (officially brought to the U.S.). This creates an incentive for American corporations to engage in accounting gimmicks to make their U.S. profits appear to be earned in countries where they will not be taxed. These data demonstrate that this is happening on a large scale. In fact, American corporations reported that more than half a trillion dollars of their profits were earned, for tax purposes, in the 12 tax haven countries shown in the table.

Amazingly, some lawmakers are calling for even greater tax breaks for the offshore profits of American corporations. Some proposals would largely exempt previously accumulated offshore profits from U.S. taxes on an (allegedly) one-time basis (often called a “repatriation holiday”). Others would provide a permanent exemption (often called a “territorial tax system”). Perhaps these lawmakers do not realize that over half of the profits that American corporations claim their subsidiaries earn offshore — over half of the profits that could benefit from such new tax breaks — are reported by the companies to have been earned in 12 obvious tax havens.

Corporate profits that are genuinely earned through real business activities abroad are typically subject to taxes in the countries where they are earned, and if they are repatriated, the U.S. tax that is due is reduced by whatever amount of tax was paid to foreign governments. For this reason, the only offshore profits that are potentially subject to nearly the full 35 percent U.S. tax rate upon repatriation are those artificially shifted to tax havens. Companies engaging in these tax-avoidance games would therefore be the main beneficiaries of a repatriation holiday or territorial system.

Congress could end this corporate tax avoidance in a straightforward way by ending the rule allowing American corporations to defer paying U.S. taxes on their offshore subsidiary profits. They would still be allowed to reduce their U.S. income tax bill by whatever amount of tax was paid to foreign governments, in order to avoid double-taxation. But there would no longer be any reason to artificially shift profits into tax havens because all profits of American corporations, whether earned in the U.S. or in any other country, would be taxed at least at the U.S. corporate tax rate in the year they are earned.   


[1] The Tax Foundation recently issued a report stating that the “effective tax rate on foreign income was 27.2 percent in 2010, prior to paying additional taxes to the United States,” but that report only examines those offshore subsidiary profits actually repatriated to the U.S. Of course, the offshore profits most likely to be repatriated are those that were taxed at relatively high rates by foreign countries, because these profits generate the largest foreign tax credits that reduce the U.S. tax that would be due upon repatriation. For the same reason, tax haven profits, which generate little or no foreign tax credits, are not as likely to be repatriated. In other words, the Tax Foundation report simply excludes tax haven profits from its analysis of foreign taxes paid on subsidiary profits. See Kyle Pomerleau, “How Much Do U.S. Multinational Corporations Pay in Foreign Income Taxes?,” Tax Foundation, May 19, 2014.

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Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model

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When anti-tax groups working in the states need a data point to help them argue in favor of their newest tax cutting idea, they often look to the Beacon Hill Institute (BHI).  BHI is housed in the economics department at Suffolk University, but its mission is more ideological than academic: providing research to voters and policymakers that promotes a “limited government” and “free market” perspective.  The cornerstone of BHI’s research is a computerized economic model it calls the State Tax Analysis Modeling Program (STAMP).

To a casual observer, STAMP may appear to be a rigorous model worthy of consideration.  But new research from the Institute on Taxation and Economic Policy (ITEP) explains in great detail the myriad ways in which STAMP is rigged to portray tax cuts as hugely beneficial to state economies, and tax increases as an inefficient drag on economic growth.

The broad ways in which STAMP fails to accurately gauge the impact of taxes on state economies include:

  • STAMP underestimates the economic importance of public services such as education and infrastructure to both the short- and long-term health of state economies.
  • STAMP assumes that workers, consumers, and businesses are hypersensitive to tax changes, causing private sector economic activity to boom (or bust) as a result of modest changes in after-tax incomes and prices.
  • STAMP depicts tax changes as having an instantaneous impact on the economy, even when that impact involves long-run issues such as migration, property value changes, and business formation.
  • STAMP assumes a simplistic, perfectly efficient marketplace where everybody who wants a job already has one.  This assumption simplifies the math behind the model, but is a poor reflection of the economy that actually exists today.

ITEP’s report also describes a number of instances where STAMP’s findings have been contradicted by academic researchers and state revenue officials.  In one particularly implausible analysis, for example, STAMP actually found that cutting Rhode Island’s sales tax rate by more than half would not only benefit the state’s economy—it would actually raise $61 million in tax revenue.

In another analysis, STAMP predicated that roughly 40,000 jobs would be created by a tax cut enacted in Kansas.  Since that analysis was released, Kansas’ economy has underperformed and the state actually saw its credit rating downgraded because of slow economic growth and lagging tax revenues.

As ITEP’s report explains: “STAMP’s flimsy foundation, biased assumptions, and highly questionable results are ample reason to avoid using it as a tool for understanding how changes to a state’s tax system will affect its economy.”

Read the report:

STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes

Credit Suisse Gets Off Easy for Aiding Tax Evasion

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On Monday, the Department of Justice announced that Credit Suisse, the second largest bank in Switzerland, has agreed to plead guilty to criminal charges for helping Americans open secret bank accounts and use them to evade U.S. taxes. The bank will pay $1.9 billion to the federal government and $715 million to the state of New York in restitution and fines. 

Surprisingly, the agreement does not require the bank to hand over the names of its U.S. customers. In a statement issued the same day, Senator Carl Levin remarked “it is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts. More than 20,000 Americans were Credit Suisse accountholders in Switzerland, the vast majority of whom never disclosed their accounts as required by U.S. law. This leaves their identities undisclosed, with no accountability for taxes owed.”

This is in stark contrast to the 2008 deferred prosecution agreement with UBS, the largest Swiss bank. The financial giant agreed to pay $780 million in penalties and, unlike Credit Suisse, handed over 4,700 names of American account holders.

The Credit Suisse agreement comes after years of investigations into the bank’s illegal activities aiding tax evasion which were detailed in a February report by the Homeland Security Permanent Subcommittee on Investigations. The report lambasted the American and Swiss governments for dragging their feet in efforts to stop it.

The report noted that Switzerland has bank secrecy laws that prevent banks from disclosing the identities of account holders to U.S. tax enforcement authorities. Switzerland enacted a law specifically allowing UBS to provide that information to the U.S. government, but no such law was enacted this time around for Credit Suisse. Instead, the Department of Justice relied on the convoluted process outlined in a U.S.-Swiss treaty to get the information. That process has given greater power to the Swiss government and Swiss courts that have provided as little cooperation as possible.

Although the agreement imposes big fines, it does not revoke Credit Suisse’s license to continue to operate in the U.S. Apparently some fear the repercussions of taking a harder line against the big banks, apprehensive that stronger actions might precipitate a financial crisis. The possibility that the Department of Justice wanted to avoid this and did not push as hard as it might (for example, by demanding the disclosure of account holders) may mean that some banks really are “too big to jail.”

Switzerland has long been known as a tax haven for individuals from all over the world who want to hide their income from tax authorities with the help of banks like UBS and Credit Suisse. It has also been known as a tax haven for corporations like Alliance Boots that want to artificially shift profits there to avoid paying taxes in the countries where their profits are really earned. One might think it would be easier to solve the problem of individuals using tax havens to evade taxes, since that is illegal, whereas the tax avoidance of big corporations like Alliance Boots is not actually illegal (but should be). But the laws against tax evasion by individuals using Credit Suisse and other banks to hide their income are only as strong as the will of governments to enforce them.

Legislation Introduced to Stop American Corporations from Pretending to Be Foreign Companies

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A commonsense bill introduced today would prevent American corporations from pretending to be “foreign” companies to avoid taxes even while they maintain most of their ownership, operations and management in the United States.

Sponsored by Sen. Carl Levin and Rep. Sander Levin, the Stop Corporate Inversions Act requires the entity resulting from a U.S.-foreign merger to be treated as a U.S. corporation for tax purposes if it is majority owned by shareholders of the acquiring American company or if it is managed in the U.S. and has substantial business here.

These are common sense rules and many people might be surprised to learn that they are not already part of our tax laws. In fact, the law on the books now (a law enacted in 2004) recognizes the inversion unless the merged company is more than 80 percent owned by the shareholders of the acquiring American corporation and does not have substantial business in the country where it is incorporated.

The current law therefore does prevent corporations from simply signing some papers and declaring itself to be reincorporated in, say, Bermuda. But it doesn’t address the situations in which an American corporation tries to add a dollop of legitimacy to the deal by obtaining a foreign company that is doing actual business in another country.

The management of Pfizer recently attempted to acquire the British drug maker AstraZeneca for this purpose and a group of hedge funds that own stock in the drug store chain Walgreen have been pushing that company to increase its stake in the European company Alliance Boots for the same purpose.

The Stop Corporate Inversions Act is based on a proposal that was included in President Obama’s most recent budget plan, which is projected by the administration and the Joint Committee on Taxation to raise $17 billion over a decade. The only difference between the House and Senate version of the bill is that the House version is permanent while the Senate version is effective for just two years. Apparently the Senate cosponsors include some lawmakers who believe that the issue of inversions can be addressed as part of tax reform at some point over the next two years and a stopgap measure is needed until then.

Either way, Congress needs to act now. House Ways and Means Committee chairman Dave Camp and Senate Finance Committee ranking Republican Orrin Hatch have both suggested that Congress should do nothing at all except as part of a major comprehensive tax reform. Given that the only tax reform plan Camp has been able to produce was a regressive $1.7 trillion tax cut that didn’t even meet his own stated goals of revenue and distributional neutrality, it’s obvious that Congress is a long way off from settling all the issues related to tax reform. In the meantime, how often will we be asked to play along as major American corporations pretend to be “foreign” in order to avoid paying taxes?

Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes

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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable

State News Quick Hits: How to Tax Twix and Much More

The Illinois Fiscal Policy Center just unveiled its new Earned Income Tax Credit (EITC) website called EITC Works! The site allows users to plug in an address and learn the number of households in their House district currently receiving the credit, the number of children who benefit, and the economic benefits of the credit. Policymakers should be especially interested in this new resource because it also shows the impact of doubling the credit to 20 percent of the federal. The site is a great tool for anyone interested in understanding the local impact of this successful anti-poverty policy.

File this under things that make you go, “hmm.” Did you know that in some states plain Hershey bars are subject to the sales tax, but Twix bars are not because Twix contain flour?  Here’s an interesting read on the intricacies of taxing food, specifically take-and-bake pizzas. The piece affirms the importance of the Streamlined Sales Tax Governing Board and its goal “To assist states as they administer a simpler and more uniform sales and use tax system.”

Why would voters be inclined to vote for local referenda that raise taxes, but seem less supportive of state or national efforts to raise taxes? Read about the central Louisiana experience that may help answer this question here.

On the heels of the Missouri state legislature’s override of Governor Jay Nixon’s veto of a costly income tax cut package, a proposal that would increase the state sales tax to fund transportation projects is looking increasingly unlikely. Calling the proposed hike “hypocritical” in the face of the newly passed income tax cuts, which will largely benefit higher-income individuals, House Democrats are beginning to withdraw their support. Read about it here.

Dozens of Companies Admit Using Tax Havens

May 19, 2014 01:04 PM | | Bookmark and Share

Hundreds More Likely Do the Same, Avoiding $550 Billion in U.S. Taxes

Read this report in PDF (Includes Company by Company Appendixies)

Download the Company by Company PRE Data (XLS)

American Fortune 500 corporations are likely saving about $550 billion by holding nearly $2 trillion of “permanently reinvested” profits offshore. Twenty-eight of these corporations reveal that they have paid an income tax rate of 10 percent or less to the governments of the countries where these profits are officially held, indicating that most of these profits are likely in offshore tax havens.

While congressional hearings over the past few years have focused attention on the tax avoidance strategies of technology corporations like Apple and Microsoft, this report shows that a diverse array of companies are using offshore tax havens, including U.S. Steel, the pharmaceutical giant Eli Lilly, the apparel manufacturer Nike, the supermarket chain Safeway, the financial firm American Express, and banking giants Bank of America and Wells Fargo.

How We Know When Multinationals’ Offshore Cash is Largely in Tax Havens

Some American multinational corporations complain to members of Congress that their offshore profits would be taxed at the U.S. corporate income tax rate of 35 percent if those profits were subject to U.S. taxes. However, this can only be true if those profits are mostly held in tax havens — countries in which they are subject to little or no corporate tax.

The general rule is that offshore profits that an American corporation “repatriates” (officially brings back to the United States) are subject to the U.S. tax rate of 35 percent minus a tax credit equal to whatever taxes were paid to foreign governments. Thus, if an American corporation says it would pay a U.S. tax rate of 25 percent or more on its offshore profits, that means it has paid foreign governments a tax rate of 10 percent or less.

Twenty-eight American corporations have acknowledged paying less than a 10 percent foreign tax rate on the $409 billion they collectively hold offshore. The table on the following page shows the disclosures made by these 28 corporations in their most recent annual financial reports.

It is almost always the case that profits reported by corporations to the IRS as earned in tax havens were actually earned in the United States or another country with a tax system similar to ours.  Most economically developed countries (most of the countries where there are real business opportunities for American corporations) have a corporate income tax rate of at least 20 percent and rates are typically higher than that. The countries that have no corporate income tax or a very low corporate tax — countries like Bermuda, the Cayman Islands, and the Bahamas — provide very little in the way of real business opportunities for American corporations like U.S. Steel, Safeway, and Microsoft. But large Americans corporations use accounting gimmicks (most of which are, unfortunately, allowed under current law) to make profits appear to be earned in tax haven countries.

Hundreds of Other Fortune 500 Corporations Don’t Disclose This Information

These 28 companies are not alone in shifting their profits to low-tax havens—they’re only alone in disclosing it. A total of 301 Fortune 500 corporations have disclosed, in their most recent financial reports, holding some of their income as “permanently reinvested” offshore profits. At the end of 2013, these permanently reinvested earnings totaled a whopping $1.95 trillion. (A full list of these 301 corporations is published as an appendix to this paper.) Yet the vast majority of these companies — 243 out of 301 —decline to disclose the U.S. tax rate they would pay if these offshore profits were repatriated. (58 corporations, including the 28 companies shown on this page, disclose this information. A full list of the 58 companies is published as an appendix to this paper.) The non-disclosing companies collectively hold $1.4 trillion in unrepatriated offshore profits at the end of 2013.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of their offshore profits — but these standards also provide a loophole allowing companies to assert that calculating this tax liability is “not practicable.”  Almost all of the 243 non-disclosing companies use this loophole to avoid disclosing their likely tax rates upon repatriation — even though these companies almost certainly have the capacity to estimate these liabilities.

20 of the Biggest “Non-Disclosing” Companies Hold $801 Billion Offshore

While hundreds of companies refuse to disclose the tax they likely owe on their offshore cash, just a handful of these companies account for the lion’s share of the permanently reinvested foreign profits in the Fortune 500. The nearby table shows the 20 non-disclosing companies with the biggest offshore stash at the end of the most recent fiscal year. These 20 companies held $801 billion in unrepatriated offshore income — more than half of the total income held by the 243 “non-disclosing” companies. Most of these companies also disclose, elsewhere in their financial reports, owning subsidiaries in known tax havens. For example:

General Electric disclosed holding $110 billion offshore at the end of 2013. GE has subsidiaries in the Bahamas, Bermuda, Ireland and Singapore, but won’t disclose how much of its offshore cash is in these low-tax destinations. [Some of it is clearly there; see text box below.]

Pfizer has subsidiaries in Bermuda, the Cayman Islands, Ireland, the Isle of Jersey, Luxembourg and Singapore, but does not disclose how much of its $69 billion in offshore profits are stashed in these tax havens.

Merck has12 subsidiaries in Bermuda alone. It’s unclear how much of its $57 billion in offshore profits are being stored (for tax purposes) in this tiny island.

Even “Non-Disclosers” Slip Up SometimesAs noted above, General Electric does not disclose the U.S. tax it would owe if its $110 billion offshore stash was repatriated. But in its 2009 annual report, GE noted that it had reclassified $2 billion of previously earned foreign profits as “permanently reinvested” offshore, and said that this change resulted “in an income tax benefit of $700 million.” Since $700 million is 35 percent of $2 billion, this is an admission that the expected foreign tax rate on this $2 billion of offshore cash was exactly zero, which in turn strongly suggests that GE’s “permanent reinvestment” plan for this $2 billion involved assigning it to one of its tax haven subsidiaries.

Even “Non-Disclosers” Slip Up Sometimes

As noted above, General Electric does not disclose the U.S. tax it would owe if its $110 billion offshore stash was repatriated. But in its 2009 annual report, GE noted that it had reclassified $2 billion of previously earned foreign profits as “permanently reinvested” offshore, and said that this change resulted “in an income tax benefit of $700 million.” Since $700 million is 35 percent of $2 billion, this is an admission that the expected foreign tax rate on this $2 billion of offshore cash was exactly zero, which in turn strongly suggests that GE’s “permanent reinvestment” plan for this $2 billion involved assigning it to one of its tax haven subsidiaries.

Time is of the Essence

While the $2 trillion in offshore profits detailed in the appendix has grown gradually over the past decade, there are two reasons why it is vital that Congress act promptly to deal with this problem. First, a large number of the biggest corporations appear to be increasing their offshore cash significantly. 105 of the companies surveyed in this report increased their declared offshore cash by at least $500 million each in the last year alone. Eight particularly aggressive companies each increased their permanently reinvested foreign earnings by more than $5 billion in the past year. These include Apple, Microsoft, IBM, Google, and Cisco.

A second reason for concern is that there is some evidence companies are aggressively seeking to permanently shelter their offshore cash from U.S. taxation by engaging in corporate inversions, through which companies acquire smaller foreign companies and reincorporate in foreign countries, thus avoiding most or all U.S. tax on their profits. Drug giant Pfizer is currently attempting this move.

Hundreds of Billions in Tax Revenue at Stake

It’s impossible to know precisely how much income tax would be paid, under current tax rates, upon repatriation by the 243 Fortune 500 companies that have disclosed holding profits overseas but have failed to disclose how much U.S. tax would be due if the profits were repatriated. But if these companies paid the same 28 percent average tax rate as the 58 disclosing companies, the resulting one-time tax would total $403 billion for these 243 companies. Added to the $148 billion tax bill estimated by the 58 companies who did disclose, this means that taxing all “permanently reinvested” foreign income of the 301 companies at the current federal tax rate could result in more than $550 billion in added corporate tax revenue.

What Should Be Done?

Many large multinationals that fail to disclose whether their offshore profits are officially in tax havens are the same companies that have lobbied heavily for tax breaks on their offshore cash. These companies propose either to enact a temporary “tax holiday” for repatriation, under which companies officially bringing offshore profits back to the U.S. would pay a very low tax rate on the repatriated income, or a permanent exemption for offshore income in the form of a “territorial” tax system. Either of these proposals would actually increase the incentive for multinationals to shift their U.S. profits, on paper, into tax havens.

A far more sensible solution would be to simply end “deferral,” that is, repealing the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States in the year they are earned. Of course, American corporations would continue to receive a “foreign tax credit” against any taxes they pay to foreign governments, to ensure profits are not double-taxed. 


The limited disclosures made by Apple and a handful of other Fortune 500 corporations show that they have moved profits into tax havens — and that some have managed to avoid virtually all taxes on these profits. But the scope of this tax avoidance is likely much larger, since the vast majority of Fortune 500 companies with offshore cash refuse to disclose how much tax they would pay on repatriating their offshore profits.

Lawmakers should resist calls for tax changes, such as repatriation holidays or a territorial tax system, that would reward U.S. companies for shifting their profits to tax havens. If the Securities and Exchange Commission required more complete disclosure about multinationals’ offshore profits, it would become obvious that Congress should end deferral, thereby eliminating the incentive for multinationals to shift their profits offshore once and for all. 

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