| | Bookmark and Share

A new report from the Center for American Progress (CAP) explains that, despite the well-known complaints of America’s largest multinational corporations, our tax system is not trapping corporate profits offshore. In fact, the profits characterized as “offshore” are invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But nothing restricts corporations from investing these profits in the U.S. The CAP report cites a study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 and finding that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks.

American corporations continue to designate these profits as “permanently reinvested earnings” offshore (to use the technical term) because these profits will be subject to U.S. corporate taxes when they are officially “repatriated” (brought to the U.S.).

Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes. Because these companies have so much accumulated profits (offshore and often in the U.S. also) they are effectively able to borrow money at very low or even negative interest rates. The report explains how Apple and Microsoft both borrowed in this way to finance dividends and share buybacks.

Apple and Microsoft are also examples of another problem, which is that much of these “offshore” profits are actually U.S. profits that the companies characterize, using accounting gimmicks, as earned in countries like Bermuda or the Cayman Islands that do not tax them (offshore tax havens). The existing rule allowing American corporations to “defer” U.S. taxes on their offshore profits already encourages companies to engage in these tricks. Rather than expanding that break into a bigger one (a territorial system or a repatriation amnesty), the CAP report suggests either repealing deferral or cracking down on the worst abuses of deferral, as Senator Carl Levin has proposed.