Tag: Archive

February 7, 2014 10:05 AM | Permalink |

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International Business Machines (IBM) has paid U.S. corporate income taxes equal to just 5.8 percent of its $45.3 billion in U.S. profits over a five year period from 2008 through 2012. This finding is consistent with recent revelations by reporters Alex Barinka and Jesse Drucker of Bloomberg News that suggest IBM engages in gimmicks to make its U.S. profits appear (to the IRS) to be earned in low-tax or no-tax countries, in order to avoid federal corporate income taxes.[1]

While some analysts examine corporations’ worldwide taxes as a percentage of their worldwide profits, the figures above provide a more nuanced picture by isolating the U.S. corporate income taxes IBM has paid on its U.S. profits, and the foreign corporate income taxes IBM has paid on its foreign profits.

The figures are taken from the information IBM makes available to shareholders and the public by filing reports with the Securities and Exchange Commission (SEC). There is no reason to believe that the company is being dishonest in reporting to the SEC where it earned its profits and the amount of taxes it paid to the U.S. and to foreign governments.

For example, IBM reports that it had $51.0 billion in pretax profits in foreign countries over this five year period, and that it paid corporate income taxes to foreign governments equal to 26.8 percent of these profits. So, apparently, these profits were earned in countries where IBM has genuine business activities.

In the U.S., IBM reports $45.3 billion in pretax profits over this five year period and paid corporate income taxes of $2.6 billion, which is just 5.8 percent of its U.S. profits.

One possible explanation for IBM’s low effective U.S. income tax rate is that the company is telling the IRS something different about these U.S. profits than it tells its shareholders. For example, IBM may engage in accounting gimmicks to make most of its U.S. profits appear (to the IRS) to be earned in subsidiaries in Bermuda, the Cayman Islands or other countries that do not tax these profits. Of course, IBM does little or no real business in these countries and its subsidiaries there may be nothing more than post office boxes.  

This would mean that most of the U.S. profits that IBM reports to the SEC and its shareholders are escaping the U.S. corporate income tax, which would explain the low effective U.S. income tax rate.

One thing that is clear from these figures is that IBM pays higher corporate income taxes in the foreign countries where it does real business than it pays here in the U.S. on its U.S. earnings. This is true of most consistently profitable multinational corporations, and directly contradicts the claim by corporate lobbyists that corporate taxes must be reduced in order to make America “competitive.” IBM’s five year foreign effective tax rate of 26.8 percent is almost five times as high as its U.S. effective tax rate of only 5.8 percent.

The real problem with the U.S. corporate tax is that it allows a corporation like IBM to “defer” paying U.S. taxes on profits that it earns (or claims to earn) offshore until those profits are officially brought back to the U.S. (which may never happen). This provides an incentive for corporations to use accounting gimmicks to make their U.S. profits appear to be earned in offshore tax havens. This reduces the amount of revenue the federal government has to improve infrastructure, education, research, nutrition and other public investments that truly would make America more competitive.

 

 

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[1] Alex Barinka and Jesse Drucker, “IBM Uses Dutch Tax Haven to Boost Profits as Sales Slide,” Feb. 3, 2014. http://www.bloomberg.com/news/2014-02-03/ibm-uses-dutch-tax-haven-to-boost-profits-as-sales-slide.html

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January 17, 2014 09:55 AM | Permalink |

Citizens for Tax Justice, January 17, 2014

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The Senate Finance Committee’s discussion draft on international tax reform fails to accomplish what should be three goals for tax reform.

1. Raise revenue from the corporate income tax and the personal income tax.
2. Make the tax code more progressive.
3.Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

The discussion draft would, in a proclaimed revenue-neutral manner, impose U.S. corporate taxes on offshore corporate profits in the year that they are earned. But it would do so at a lower rate than applies to domestic corporate profits.

The goal of revenue-neutrality causes the discussion draft to fail the first goal of raising revenue as well as the second, because any increase in corporate income tax revenue would make our tax system more progressive, as explained below. The discussion draft also fails to meet the third goal. Although it would tax domestic corporate profits and offshore corporate profits at the same time, it would subject the offshore profits to a lower rate, preserving some of the incentive for corporations to shift investment (and jobs) offshore or to engage in accounting gimmicks to make their U.S. profits appear to be generated in offshore tax havens.

1. Raise revenue from the corporate income tax, as well as from the personal income tax.

Some lawmakers see no reason to raise any revenue from either the corporate income tax or the personal income tax. These lawmakers’ fixation with addressing the budget deficit solely with spending cuts rather than revenue increases has resulted in the “sequestration” of federal spending in effect today, which cuts even those programs that are supported by large majorities of Americans as investments in our economic future, like Head Start and medical research.

Almost all developed countries collect more in taxes as a share of their economies and therefore make greater public investments. As illustrated in the graph above, in 2011, the most recent year for which there is complete data, the U.S. collected less tax revenue as a percentage of its economy than did any other OECD country except for Chile and Mexico.

Other lawmakers believe that tax reform should raise revenue, but only from the personal income tax. This, too, is very misguided. According to the Department of the Treasury and the Congressional Budget Office, federal corporate tax revenue in the U.S. was equal to 1.2 percent of our economy in 2011[1] (1.5 percent if you include state corporate taxes). The average for other OECD countries (which include most of the developed countries) in 2011 was 2.9 percent.

The federal corporate income tax today is so weak that it allows some American companies to avoid it completely even when they are profitable over several years. The figures in the table to the right are from CTJ’s study of the Fortune 500 corporations that were consis­tently profitable for three years straight.[2] Another finding from that study was that, of those profitable Fortune 500 corporations with significant offshore profits, two-thirds paid a higher effective corporate tax rate in the other countries where they do business than they paid in the U.S.

In other words, there is ample evidence that American corporations are undertaxed in the U.S. and can reasonably be expected to contribute more in tax revenue.

 

 

2. Make the tax code more progressive.

Because the corporate income tax is itself a progressive tax, raising revenue by closing corporate tax loopholes would make our tax system more progressive.

Contrary to what many lawmakers and pundits claim, our tax system as a whole is just barely progressive today. In fact, if one accounts for all the of the federal, state and local taxes that Americans pay, it turns out that the share of total taxes paid by each income group is roughly equal to the share of total income received by that group, as illustrated in the graph below. For example, the poorest fifth of taxpayers paid only 2.1 percent of total taxes in 2013, which is not so surprising given that this group received only 3.3 percent of total income. Meanwhile, the richest one percent of Americans paid 24 percent of total taxes and received 21.9 percent of total income in 2013.[3]

The Treasury Department and the Joint Committee on Taxation (JCT) have recently confirmed that the corporate income tax is a progressive tax. It is clear that the corporate tax is, in the short-term, borne by the (mostly wealthy) owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. The Treasury Department concluded that even in the long-run, 82 percent of the tax is borne by owners of capital.[4] The rest is borne by labor.

Opponents of the corporate tax sometimes argue that a much higher portion is borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and jobs) offshore.

The Treasury Department concluded that such investment is not so mobile in this way. This is reinforced by JCT’s recent conclusion that, in the long-run, 75 percent of the corporate income tax is borne by owners of capital.[5]

The table below includes JCT’s estimates of the tax increase that would result for each income group if the corporate income tax was increased by $10 billion, along with CTJ’s calculations of the average tax increase and share of the total tax increase for each income group. It shows that over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $6 to $8.

3. Tax American corporations’ domestic and offshore profits at the same time and at the same rate.

Taxing the offshore profits of American corporations more lightly than their domestic profits can create two terrible incentives for corporations. First, in some situations it encourages them to shift their operations and jobs to a country with lower taxes. Second, it encourages them to use accounting gimmicks to disguise their U.S. profits as foreign profits generated by a subsidiary company in some other country that has much lower taxes or that doesn’t tax these profits at all.

The countries that have extremely low taxes or no taxes on profits are known as tax havens. And the subsidiary companies in the tax havens that are claimed to make all these profits are often nothing more than post office boxes.

There are two ways we can tax corporate profits that are officially “offshore” more lightly than domestic profits and thus create these terrible incentives. The first way is what our tax rules do now when they allow American corporations to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are officially “repatriated” (officially brought to the U.S.). The second way is to tax corporate profits that are officially offshore at a lower rate than domestic corporate profits. A version of this is the offshore minimum tax proposed in the Senate Finance Committee’s discussion draft on international tax reform.

Neither deferral nor a lower tax rate is needed to protect offshore corporate profits from double-taxation. Another feature of our tax rules, the foreign tax credit, prevents double-taxation by allowing American corporations to subtract whatever corporate tax they paid to foreign governments from the U.S. corporate tax owed on their offshore profits. In other words, the deferral rule we have now, and the lower tax rate for foreign profits proposed by the Finance Committee are both unnecessary breaks for profits characterized as “offshore.”

To be sure, the minimum tax for offshore profits proposed by the Finance Committee would certainly cause some of the worst corporate tax dodgers to pay some U.S. taxes on profits that are entirely tax-free under the current rules. These are profits that are earned in the U.S. (or in other countries with a corporate tax) but manipulated through accounting gimmicks to appear to be earned in tax haven countries.

There is ample evidence of specific American corporations holding their profits in offshore tax havens. Some corporations divulge, in their public filings with the Securities and Exchange Commission, how much they would pay in U.S. taxes if they “repatriated” their offshore profits (officially brought their offshore profits to the U.S.) And some of these corporations — like American Express, Apple, Dell, Microsoft, Nike and others — indicate that they would pay nearly the full U.S. corporate income tax rate of 35 percent.[6] This is another way of saying that these corporations would receive very little, if any, credits to offset foreign taxes paid, because they have not paid much, if anything, in taxes to any foreign government.  

This is an indication that the corporations’ offshore profits are held (officially, at least) in countries with no corporate income taxes — tax havens. Most of the countries that have consumer markets and developed economies where American companies can sell products also have corporate taxes. Most countries that do not have corporate income taxes are small countries like Bermuda and the Cayman Islands that provide little in the way of real business opportunities but are useful to multinational corporations as tax havens.

Recent data from the Congressional Research Service (CRS) confirms that this sort of corporate tax dodging involving offshore tax havens is happening on a massive scale. For example, CRS finds that the profits that American corporations claimed (to the IRS) to have earned through subsidiaries in Bermuda in 2008 equaled 1,000 percent of that tiny country’s economy, which is clearly impossible.[7]

The minimum tax for offshore profits proposed in the discussion draft would certainly raise corporate taxes on the profits shifted (on paper) into a tax haven like Bermuda because under the current rules these profits are not taxed at all.

But the incentive for corporations to use complicated tricks to make their U.S. profits appear to be earned in tax havens will exist so long as offshore profits continue to be taxed more lightly than domestic profits, which would continue to be the case under the Finance Committee’s discussion draft.

One version of the proposed minimum tax would require that profits generated in other countries be taxed at a rate that is at least some unspecified percentage of the regular U.S. corporate tax rate. The Committee has not yet decided what general corporate tax rate will be proposed or what percentage of that must be paid in tax on foreign profits. (The discussion draft suggests that it could be 80 percent of the regular corporate tax rate but says this will likely be adjusted as the tax reform plan takes shape.)

If one assumes that the general corporate tax rate is 28 percent and the minimum tax for offshore profits is 80 percent of that, then the proposed rule would require that foreign profits be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4).

If the minimum tax for offshore profits is lower than 80 percent of the regular corporate income tax rate, then the proposed rule would be even less effective. (On the other hand, if it is 100 percent of the regular corporate tax rate, then the proposed rule would be the approach that we favor.)

The other version of the minimum tax offered in the discussion draft would tax “passive” offshore profits at 100 percent of the regular corporate tax rate but would tax “active” offshore profits at a lower, unspecified percentage of the regular corporate tax rate. (The discussion draft suggests that “active” offshore profits could be 60 percent of the regular corporate tax rate.)

The concept of “active” income and “passive” income already is a major part of our tax code, but the discussion draft would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate.

This second option has some conceptual appeal if the only goal is to try to crack down on offshore profit shifting. But the definitions of passive and active would likely lead to schemes to characterize passive income as active, as happens under current law. Moreover, this rule would do little to reduce incentives to move actual investment and jobs offshore.

Conclusion

The first problem with the Finance Committee’s discussion draft on international tax reform is that it does not attempt to raise badly needed revenue from the corporate income tax.  This leads to the second problem, which is that the discussion draft passes by an opportunity to add some badly needed progressivity to America’s tax system.

The third problem with the discussion draft is that it would continue to tax corporate profits that are booked offshore more lightly than those booked in the U.S. Our position remains that a reformed code should tax corporate profits at the same time and at the same rate regardless of whether they are booked offshore or in the U.S.

In other words, our position remains that international corporate tax reform should include full repeal of deferral (along with a per-country rule for foreign tax credits) and a single tax rate for both offshore and domestic profits, as has been proposed by Senator Ron Wyden.[8] This simple approach would both solve the tax-haven problem and reduce tax incentives for moving investment and jobs offshore. And our position remains that the corporate tax rate should not be reduced significantly below the current 35 percent rate, because doing so would make it very difficult to meet the goals of raising revenue and increasing progressivity.

 

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[1] Congressional Budget Office, “Updated Budget Projections: Fiscal Years 2013 to 2023,” May 2013, “Historical Budget Data.” http://cbo.gov/publication/44197

[2] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011. www.ctj.org/corporatetaxdodgers

[3] For more see Citizens for Tax Justice, “Who Pays Taxes in America in 2013?,” April 1, 2013. http://ctj.org/ctjreports/2013/04/who_pays_taxes_in_america_in_2013.php; Citizens for Tax Justice, “New Tax Laws in Effect in 2013 Have Modest Progressive Impact,” April 1, 2013. http://ctj.org/ctjreports/2013/04/new_tax_laws_in_effect_in_2013_have_modest_progressive_impact.php

[4] Julie-Anne Cronin, Emily Y. Lin, Laura Power, and Michael Cooper, “Distributing the Corporate Income Tax: Revised U.S. Treasury Methodology,” Treasury Department, 2012. http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-T2012-05-Distributing-the-Corporate-Income-Tax-Methodology-May-2012.pdf

[5] Joint Committee on Taxation, “Modeling The Distribution Of Taxes On Business Income,” October 16, 2013. https://www.jct.gov/publications.html?func=startdown&id=4528

[6] Citizens for Tax Justice, “Apple Is Not Alone,” June 2, 2013. http://ctj.org/ctjreports/2013/06/apple_is_not_alone.php

[7] Mark P. Keightley, “An Analysis of Where American Companies Report Profits: Indications of Profit Shifting,” Congressional Research Service, January 18, 2013.

[8] Citizens for Tax Justice, “Working Paper on Tax Reform Options,” February 4, 2013. www.ctj.org/ctjreports/2013/02/working_paper_on_tax_reform_options.php

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December 12, 2013 04:56 PM | Permalink |

Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. This report explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs.

Read the report.

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December 4, 2013 12:00 AM | Permalink |

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Business lobbyists are pushing Congress to enact tax “extenders” — a bill to extend several temporary tax breaks for business that expire at the end of this year. A new report from Citizens for Tax Justice examines the largest of those provisions, the federal research and experimentation tax credit, a tax subsidy that is supposed to encourage businesses to perform research that benefits society. The report explains that the research credit is riddled with problems and should be either reformed dramatically or allowed to expire.

Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research — like fast food restaurants, fashion designers and hair stylists.

Reforms enacted in 1986 were supposed to prevent these abuses, but there is evidence that corporate tax planners have often out-maneuvered the reforms.

The report explains that many of the problems it describes are the work of accounting firms that wrote the book on abusing the credit — and quite literally wrote the credit regulations as well. The credit’s rules are so lax thanks in large part to Mark Weinberger, a Bush top Treasury appointee who had previously lobbied for a broader definition of “research” while he was at Ernst and Young and, after he left the Treasury, returned to a grateful Ernst and Young where he was eventually promoted to CEO.

Another firm behind abuses of the credit is Alliantgroup, a tax consulting firm with former IRS Commissioner Mark W. Everson serving as its vice chairman and Dean Zerbe, former senior counsel to former Senate Finance Committee Chairman Charles Grassley, as its managing director.

Members of Congress have pushed to remove what reasonable restrictions remain on the research credit. For example, the report explains that Senators Charles Grassley and Amy Klobuchar have both called on the Treasury Department to make it easier for businesses to claim the credit on amended returns for research done in previous years, which cannot possibly achieve the goal of providing an incentive to do research. (A business’s research cannot possibly be the result of a tax incentive that the business was unaware of until years after the research was carried out.)

Meanwhile, a report coauthored by former Clinton adviser Laura D’Andrea Tyson argues that Congress should simply repeal the reforms of 1986 and make legal the abuses that the IRS is trying to stop.

The CTJ report explains that even when the credit is claimed by companies doing legitimate research, it’s difficult to believe that the research was a result of the credit.

Congress should let the research credit expire, and redirect the billions of dollars that it costs into true, basic, truly scientific research, which businesses rarely engage in because the payoffs often take years to arrive.

The report explains that if lawmakers insist on extending the research credit once again when it expires at the end of 2013, they should address three broad problems. If these problems are not addressed, then the credit should be allowed to expire.

Read the full report.

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November 26, 2013 02:53 PM | Permalink |

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American Express’s Tax Avoidance Opposed by Most Small Businesses

Since 2010, American Express has boosted itself as a supporter of small businesses, by promoting “Small Business Saturday” as a counterpart to Black Friday. But American Express is no friend of American small business. Not only does it charge merchants high swipe fees, but it also uses and wants to expand offshore tax loopholes that most small businesses can’t use and want to close.

According to its SEC filings, American Express is holding $8.5 billion in low-tax offshore jurisdictions, including at least 22 offshore subsidiaries in 8 jurisdictions typically identified as “tax havens.” By its own estimates, American Express has avoided paying $2.6 billion in U.S. taxes by holding these profits offshore. To give some perspective, this amount is two and half times the budget of the entire Small Business Administration.[i]

Even on the $21.3 billion in pretax profits that American Express officially earned in the U.S. over the past five years, the company has paid only half the 35 percent federal statutory tax rate. This means that over the past five years, American Express received over $3.7 billion in tax subsidies through the US tax code.

Not satisfied with its current slate of loopholes, American Express is now part of the coalition behind the Campaign for Home Court Advantage,[ii] which advocates sharply expanding offshore loopholes by moving the United States to a territorial tax system.[iii] In contrast, as many as three-quarters of small business owners believe that their small business is harmed when loopholes allow big corporations to avoid taxes.”[iv]

While American Express pretends to support small business this Saturday, remember that the company supports rigging the tax system against those same small businesses they claim to support.

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[i] Office of Management and Budget, “The Budget for Fiscal Year 2014, Historical Tables”, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist.pdf

[ii] Citizens for Tax Justice, “Corporate-Backed Tax Lobby Groups Proliferating,” August 21, 2013. http://ctj.org/ctjreports/2013/08/corporate-backed_tax_lobby_groups_proliferating.php

[iii] Citizens for Tax Justice, “ Fact Sheet: Why Congress Should Reject A Territorial System and a Repatriation Amnesty,” October 9, 2011. http://ctj.org/ctjreports/2011/10/fact_sheet_why_congress_should_reject_a_territorial_system_and_a_repatriation_amnesty.php

[iv] The American Sustainable Business Council “Small Business Owners’ Views on Taxes and How to Level the Playing Field with Big Business,” February 6, 2012.
http://asbcouncil.org/sites/default/files/files/Taxes_Poll_Report_FINAL.pdf

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November 14, 2013 01:19 PM | Permalink |

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On November 12th, Washington Governor Jay Inslee signed into law the largest state business tax break package in history for Boeing.[1] The new law will give Boeing and its suppliers an estimated $8.7 billion in tax breaks between now and 2040. Even before this giant new subsidy, Boeing has already been staggeringly successful in avoiding state taxes. Over the past decade, Boeing has managed to avoid paying even a dime of state income taxes nationwide on $35 billion in pretax U.S. profits.

Nationwide, Boeing reported $96 million in net state income tax rebates over the 2003-2012 period. [2]  

Boeing also has aggressively pursued sales and property tax breaks in states around the country. It employs an army of site location and tax consultants, whose job has been to blackmail states into giving Boeing lavish tax breaks.[3]

Things are not any better at the federal level. From 2003 to 2012, Boeing received $1.8 billion in federal income tax rebates on its $35 billion in U.S. profits.

Perhaps Washington State’s new $8.7 billion tax subsidy will be a wake-up call to state lawmakers about how damaging their competition with other states has become and that they need to reject the policy of creating special corporate subsidies.

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[1] Washington Post, ” Washington just awarded the largest state tax subsidy in U.S. history,” November 12, 2013. http://www.washingtonpost.com/blogs/govbeat/wp/2013/11/12/washington-just-awarded-the-largest-state-tax-subsidy-in-u-s-history/

[2] Washington has no state income tax, but other states that Chicago-headquartered Boeing does business in do have corporate income taxes.

[3] Good Jobs First, “Case Study of Boeing Co.,” http://www.goodjobsfirst.org/corporate-subsidy-watch/boeing

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November 5, 2013 10:31 AM | Permalink |

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Tax breaks for executive stock options have become an increasingly effective corporate tax-avoidance tool. An April CTJ report identified 280 Fortune 500 corporations that disclosed benefiting from this tax break during the past three years.[i] But for many newer firms that have chosen to pay their executives in the form of lavish stock options, the lion’s share of these tax breaks have yet to be realized.  This CTJ report explains how twelve emerging tech firms (including Twitter, which has scheduled its IPO for this week) stand to eliminate all income taxes on the next $11.4 billion they earn—giving these companies $4 billion in tax cuts.

The tech companies profiled in this report typically issue stock options to their executives at an early stage of the companies’ development—which often means these companies aren’t sufficiently profitable to use these tax breaks immediately and must carry them forward to future years. When these companies eventually become profitable, they can sometimes use these stored-up tax breaks to avoid paying income taxes for years.  Some (but far from all) of these companies disclose, in their annual “10-K” financial reports, the cumulative amount of unused stock option deductions they forecast they will be able to use in the future.

Stock Option Tax Break Could Zero Out Tech Companies’ Income Taxes for Years

The table on this page shows a dozen emerging tech companies that have amassed enough unused stock option tax breaks to avoid tax on a total of $11.4 billion in income. For example:

–Priceline discloses having $900 million of unused stock option deductions—meaning that the next $900 million the company earns could be tax-free as a result. Since Priceline’s U.S. income averages $119 million a year, this means the company could face the prospect of paying no federal income tax for almost 8 years going forward.

–Twitter has $107 million of unused stock option deductions—meaning that the next $107 million the company earns could be tax-free as a result of this single tax break. (Since the company has not yet reported a profitable year in the US, it’s impossible to estimate how long it will take the company to earn this amount going forward.)

—Cloud-computing company NetApp holds $484 million in unused deductions for stock options. At their current profit levels, this means the company’s taxes could pay no income taxes for more than two years.

— Even after claiming a whopping $1 billion of stock option tax breaks in 2012, Facebook still has $2.17 billion in unused tax breaks that may be used to offset future income. At the 35 percent federal tax rate, this means the company’s next $6.2 billion in U.S. earnings could be tax free.[ii]

–LinkedIn can use the stock option tax break to eliminate income tax on $571 million in income going forward. This could zero out their taxes for the next ten years.

–Rackspace Hosting holds $734 million in unused deductions—potentially avoiding any income tax for more than a decade.

—Verisign’s $233 million in unused stock option deductions could offset all of the company’s taxable income for almost two years.

How It Works: Companies Deduct Executive Compensation Costs They Never Actually Paid

Most big corpora­tions give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages). But unlike the wages earned by most employees, the stock options granted to executives don’t result in a dollar-for-dollar cash outlay by corporations—so the case for allowing companies to deduct stock option “expense” as a cost of doing business is weak.

The stock option tax break can have a huge impact on companies’ tax payments in a given year. For example, this tax break allowed Amazon to reduce its federal and state income taxes by $750 million between 2010 and 2012. The company’s combined federal and state effective tax rate over this period was just 9.4 percent; absent the stock option tax break, the combined tax rate would have been 40.4 percent. Put another way, this tax break singlehandedly reduced the company’s effective tax rate by 31 percentage points over three years.

Pending Legislation Would Reduce, But Not Eliminate, the Stock Option Tax Break

Some members of Congress have recently taken aim at the stock option tax break. In February of 2013, Senator Carl Levin (D-MI) introduced the “Cut Unjustified Loopholes Act,” which would limit, but not repeal, the stock option tax break. This legislation could reduce the cost of the stock option tax break by $25 billion over a decade.[iii]

Allowing companies to deduct “expenses” they never actually paid, as the current stock option rules do, means that profitable companies rewarding their executives with lavish stock options have a simple strategy for avoiding their income tax liability. This shifts the cost of funding public investments onto ordinary taxpayers, including businesses that pay their employees in salaries and wages. Paring back the tax break in the manner proposed by Senator Levin, or eliminating it entirely, would help make the corporate tax fairer and more sustainable in the long run.

 

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[i] Citizens for Tax Justice, “Executive-Pay Tax Break Saved Fortune 500 Corporations $27 Billion Over the Past Three Years,” April 23, 2013. www.ctj.org/ctjreports/2013/04/executive-pay_tax_break_saved_fortune_500_corporations_27_billion_over_the_past_three_years.php

[ii] Some corporations report the amount of deductions from stock options they have accumulated (the amount of profits that will be sheltered from taxes because of these tax breaks), while others report the amount by which their taxes will be reduced because of these deductions. Facebook does the latter, reporting that its tax bills will be reduced by $2.17 billion, which implies that it has accumulated $6.2 billion in deductions for stock options.

[iii] Granting employees the right to buy stock at a set price even if the market price is higher does not cost the corporation anything and therefore should not result in a tax deduction for the corporation. The situation is analogous to airlines allowing their employees seats on flights that are not full, which costs the airlines nothing and does not result in any tax deduction for them.

Senator Levin’s bill would not address the unfairness of allowing corporations to take deductions for stock options, but would address a narrower problem that occurs when the corporations end up taking deductions that are greater than the expense that they report for “book” purposes (the expense they report to their shareholders). The book rules require the value of the stock options to be guessed at when the options are issued, while the tax deductions reflect the actual value when the options are issued. The value is very uncertain when the options are exercised and corporations have a significant incentive to guess on the low side.

Senator Levin’s legislation would bar companies from taking tax deductions for stock options that are larger than the expenses they booked for shareholder reporting purposes. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive.

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October 23, 2013 10:37 AM | Permalink |

Citizens for Tax Justice presents a detailed tax reform plan that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and end tax incentives for corporations to shift jobs and profits offshore.

CTJ’s tax reform proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations, including the special low tax rates for the investment income that mostly goes to the richest Americans and the rule allowing American corporations to “defer” (sometimes forever) paying U.S. taxes on their offshore profits. 

The result would be $2 trillion in increased revenue over a decade, plus some additional revenue that would be raised in the first decade due to shifts in the timing of tax payments. The top personal income tax rate would be 36 percent — but this would apply to all income, including capital gains and stock dividends that are now taxed at much lower rates. Corporations would no longer have any incentive to tell the IRS that their U.S. profits are actually earned in a tax haven like Bermuda or the Cayman Islands because they would be taxed at the same rate no matter where they are earned.

Read CTJ’s tax reform plan.

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September 23, 2013 01:56 PM | Permalink |

Most Americans and politicians probably like the idea of “tax reform,” but not everyone agrees on what “tax reform” means. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Tax measures before Congress generally begin as proposals before the House Ways and Means Committee, and the current chairman, Dave Camp of Michigan, has defined tax reform as a process by which Congress would lower tax rates on corporations and wealthy individuals and then offset the cost by eliminating or reducing “tax expenditures” (subsidies provided through the tax code) so that the net result is no increase in revenue. Camp argues that the goals of tax reform should be to make the tax code simpler and to make American companies more “competitive,” although neither of these vague terms addresses the greatest problems with our tax system.

Read the full report.

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September 11, 2013 01:51 PM | Permalink |

Read this report in PDF.

In July, a letter[1] signed by thirty national organizations and a report[2] from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.

The proposal, H.R. 2084, would allow American corporations to bring profits of their offshore subsidiaries to the U.S. (to “repatriate” offshore profits) without paying the U.S. corporate income tax that would normally be due. In return, the corporations would have to purchase bonds to provide $50 billion of financing for a bank that would fund infrastructure projects in the U.S. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds.

Profits Not Truly “Locked Offshore”

Conversations about this type of proposal begin with a mistaken assumption that Congress should lure to the U.S. the $2 trillion of “permanently reinvested earnings” that American corporations hold in foreign subsidiaries. These are profits that U.S. corporations have generated (or claim to have generated) in foreign countries and on which they have not yet paid U.S. taxes.

As the CTJ report on Delaney’s proposal explains, much, if not most of these “offshore” profits are actually already in the U.S. economy, and nothing prevents our corporations from using them to make investments here. A December 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 27 corporations, including the 15 corporations that repatriated the most offshore cash under the 2004 law, and concluded that in 2010, 46 percent of the “permanently reinvested earnings” held offshore by these corporations were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments.[3]

This fact, which seems to undercut the rationale for a tax amnesty on offshore corporate profits, is not addressed by Congressman Delaney’s rebuttal.

Rewarding the Most Aggressive Corporate Tax Dodgers

As the letter and the CTJ report explain, one of the troubling aspects of Congressman Delaney’s proposal is that it would reward the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Even more troubling, the Delaney proposal gives those corporations that purchase the most bonds and repatriate the most offshore profits (and therefore those likely to be the most aggressive tax dodgers) the power to appoint a majority of the directors of the infrastructure bank.

How Delaney’s “Rebuttal” Misinforms

In a document titled “Rebuttal to Inaccurate Claims on H.R. 2084,” Congressman Delaney’s staff provides the following descriptions of the criticisms of his proposal and responses. Each is based on misinformation or faulty logic, as explained below.  

Delaney staff’s description of opponents’ claim: “H.R. 2084 will not create jobs.”

Delaney staff’s response: “Building infrastructure creates jobs and helps businesses grow. According to conservative estimates used by the Federal Highway Administration every billion in infrastructure investment creates 13,000 jobs, so $750 billion in infrastructure financing would create well over a million jobs. While the past impacts of repatriation on job growth or the effects of broad or theoretical alternatives can be debated – this criticism simply isn’t valid to H.R. 2084. Past repartition efforts were not directly tied to infrastructure investment. This legislation requires that repatriation be chained to infrastructure and job creation.”

The truth about jobs and Rep. Delaney’s proposal:

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. (Up to $300 billion would be repatriated, and we have explained that this is likely to be in the form of offshore profits that have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.)

Second, given that this proposal would encourage corporations to shift more jobs and profits offshore (as discussed below), its net effect on U.S. job creation could be negative.

Delaney staff’s description of opponents’ claim: “H.R. 2084 creates a repatriation tax holiday.”

Delaney staff’s response: “H.R. 2084 does not create a tax holiday where any company can repatriate any amount of money tax free. Only those companies that purchase infrastructure bonds would be eligible to repatriate any earnings, at rates set competitively to provide taxpayers with the fairest deal.”

The truth about repatriation under Rep. Delaney’s proposal:

Relieving corporations of tax liability on their offshore profits on the condition that they agree make a much smaller payment (whether in taxes or to finance an infrastructure bank) is what reasonable people call a “tax amnesty” or perhaps more euphemistically, a “tax holiday” for offshore corporate profits.

The proposal would allow a corporation to repatriate up to $6.00 of offshore profits tax-free for every one dollar used to purchase bonds to capitalize the infrastructure bank. Each six dollars of offshore profits repatriated under the normal rules would be subject to up to $2.10 of U.S. taxes. (As we have explained, the profits repatriated are likely to be those that have not been taxed by any government and therefore would be subject to the full 35 percent U.S. tax rate under the normal rules.) The proposal would allow up to $6.00 of offshore profits to be tax-free for every $1 invested in the infrastructure bank. That’s considerable tax savings for the participating corporations, and therefore constitutes a “tax amnesty.”

Delaney staff’s description of opponents’ claim: “H.R. encourages corporations to move jobs and profits offshore.”

Delaney staff’s response: “This legislation strictly focuses on the profits that are already offshore, and that all sides of the political spectrum want to come back. H.R. 2084 only uses a small fraction, 10% of the roughly $2 trillion, of the overseas earnings and requires companies to aggressively bid for the right to purchase Infrastructure Bonds. Because of the one-time auction mechanism, a company would be ill-advised to increase their offshoring of jobs or profits. The winning bids will be those that require the highest effective tax rate, and no company can be assured that they will win the auction and be able to purchase the bonds in the first place.”

The truth about offshoring jobs and profits under Rep. Delaney’s proposal:

When Congress provided a tax amnesty for offshore corporate profits in 2004 (it was euphemistically called a “tax holiday” by its supporters back then) several experts pointed out[4] that corporations would be encouraged to shift even more profits offshore if they believed that Congress was likely to do this more than once. Given how easy it is to make U.S. profits appear to be profits generated in Bermuda, the Cayman Islands, Ireland, or some other tax haven, corporations would reasonably conclude that they should artificially shift profits to such tax havens and then wait for Congress to enact the next tax amnesty for offshore profits. Any attempt by Congress to repeat such a tax amnesty, even a limited one, reinforces the precedent set in 2004 that Congress is willing to provide such breaks more than once and encourages companies, particularly the very large multinational corporations likely to participate, to shift even more profits (and possibly operations and jobs) offshore.

Delaney staff’s description of opponents’ claim: “H.R. 2084 gives control of the Board to corporate tax dodgers.”

Delaney staff’s response: “This legislation has strong conflict of interest provisions that explicitly prohibit Board appointees from having financial ties with the purchasers of the Infrastructure Bonds. This claim is simply false.

Line 3, Pg. 7 (H.R. 2084) CONFLICTS OF INTEREST.—No member of the Board may have a financial interest in, or be employed by, a Qualified Infrastructure Project (‘‘QIP’’) related to assistance provided under this section or any entity that has purchased bonds under subsection (e).”

The truth about who controls the bank under Rep. Delaney’s proposal:

As we explained, the profits most likely to be repatriated under such a deal are those profits artificially shifted into offshore tax havens. These profits are subject to the highest U.S. taxes when repatriated under the normal rules (because they have not been subject to foreign taxes that would reduce their U.S. tax liability). And offshore profits generated in a country with a developed economy are more likely to be reinvested in something like a factory or equipment or buildings in that country and thus difficult to repatriate, while offshore profits that (on paper) are generated by a subsidiary that is just a post office box in, say, Bermuda, or easier to “move” from one country to another. In other words, the corporations most likely to benefit from the proposal are the most aggressive corporate tax dodgers.

And the corporations that benefit from the proposal are given the right to nominate the majority of the board of directors of the infrastructure bank.

Line 16, Pg. 5 (H.R. 2084)
(C) INITIAL MEMBERS- The Board shall initially consist of the following members, who shall be appointed not later than the end of the 60-day period beginning on the date that bonds are issued under subsection (e):

(i) Four members, appointed by the President, by and with the advice and consent of the Senate.

(ii) Seven additional members, appointed one each by the seven entities purchasing the largest amount of bonds (by aggregate face amount of bonds purchased) under subsection (e).

 

(Emphasis added.)

 

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[1] Americans for Tax Fairness press release, “Corporate Tax Amnesty Bill to Fund an Infrastructure Bank Slammed in Letter to U.S. House of Representatives,” July 16, 2013. http://www.americansfortaxfairness.org/press/2013/07/16/corporate-tax-amnesty-bill-to-fund-an-infrastructure-bank-slammed-in-letter-to-u-s-house-of-representatives/

 

[2] Citizens for Tax Justice, “Delaney’s Delusion: Latest Proposed Tax Amnesty for Repatriated Offshore Profits Would Create Infrastructure Bank Run by Corporate Tax Dodgers,” June 25, 2013. http://ctj.org/ctjreports/2013/06/delaneys_delusion.php 

 

[3] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Offshore Funds Located Onshore: Majority Staff Report Addendum,” December 14, 2011. http://www.hsgac.senate.gov/download/report-addendum_-psi-majority-staff-report-offshore-funds-located-onshore

 

[4] Citizens for Tax Justice, “Will Congress Make Itself a Doormat for Corporations that Avoid U.S. Taxes?,” January 30, 2009 https://ctj.sfo2.digitaloceanspaces.com/pdf/repatriation.pdf

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