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A new study reveals the extent to which companies are using tax havens to avoid U.S. taxes and undermines the case for any tax proposal that would allow companies to repatriate their U.S. profits at a special low tax rate.
In 2016, nearly three in four Fortune 500 companies maintained subsidiaries in offshore tax havens, according to “Offshore Shell Games,” an annual study of offshore tax avoidance released today by the U.S. PIRG Education Fund and the Institute on Taxation and Economic Policy. Fortune 500 companies’ offshore cash hoard now totals $2.6 trillion, a sum on which these companies are avoiding up to $752 billion in U.S. taxes.
Corporate tax avoidance is a central part of the current tax reform debate. Republican lawmakers have proposed not only to lower the statutory corporate tax rate, but also to allow corporations to repatriate offshore profits and pay just a fraction of the current statutory 35 percent corporate tax rate.
“With Congress looking to pass tax cuts that would cost upwards of $5 trillion, it’s all the more unacceptable to leave open these absurd loopholes and gimmicks for the biggest multinational corporations,” said Michelle Surka, program director with U.S. Public Interest Research Group Education Fund. “Tax reform should inject some common sense into our tax code, and it shouldn’t balloon our deficit. Closing tax haven loopholes would both eliminate some of the most ridiculous tax gaming and help prevent tax cuts from blowing up our deficit.”
Loopholes in the U.S. tax code, such as one that allows corporations to indefinitely defer taxes on profits booked offshore, gives companies an incentive to artificially shift U.S. profits to countries with zero- or super-low tax rates to avoid taxes.
"Real tax reform would fix the deferral loophole, not reward companies for using the loophole to avoid taxes year after year,” said Richard Phillips, a senior policy analyst at the Institute on Taxation and Economic Policy. “Lawmakers shouldn't be discussing how to sweeten the pot and give corporations a huge tax break that amounts to a huge financial reward for engaging in bad corporate behavior."
Key findings from the report include:
At least 366 companies, or 73 percent of the Fortune 500, operate one or more subsidiaries in tax haven countries.
These 366 companies collectively maintain at least 9,755 tax haven subsidiaries. The 30 companies with the most money officially booked offshore for tax purposes collectively operate 2,213 tax haven subsidiaries.
Four companies (Apple, Pfizer, Microsoft and General Electric) account for 25 percent of Fortune 500 companies' offshore cash.
Thirty Fortune 500 companies account for 68 percent, or $1.76 trillion, of these offshore profits.
About 57 percent of companies with tax haven subsidiaries have set up at least one in Bermuda or the Cayman Islands — two particularly notorious tax havens. The profits that all American multinationals — not just Fortune 500 companies —implausibly claimed they earned in these two island nations according to the most recent data totaled 1,884 percent and 1,313 percent of each country’s entire yearly economic output, respectively.
Only 58 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if their profits were not officially booked offshore. In total, these 58 companies would owe $240 billion in additional federal taxes. The average tax rate the 58 companies currently pay to other countries on this income is a mere 6.1 percent, implying that most of it is booked to tax havens.
Companies that are particularly egregious examples include:
Apple: Apple holds at least $246 billion offshore, a sum greater than any other company’s offshore cash pile. It owes $76.7 billion in U.S. taxes if these profits were not officially held offshore for tax purposes. A recent ruling by the European Commission, which is under appeal, found that Apple used this tax haven structure in Ireland to pay a rate of just 0.005 percent on its European profits in 2014, and has required that the company pay $14.5 billion in back taxes to Ireland.
Citigroup: The financial services company officially reports $47 billion offshore for tax purposes on which it owes $13.1 billion in U.S. taxes. That implies that Citigroup currently has paid only a 7 percent tax rate on its offshore profits to foreign governments, indicating that most of the money is booked in tax havens levying little to no tax. Citigroup maintains 137 subsidiaries in offshore tax havens.
Nike: The sneaker giant officially holds $12.2 billion offshore for tax purposes on which it owes $4.1 billion in U.S. taxes. This implies Nike has paid a mere 1.4 percent tax rate to foreign governments on those offshore profits, indicating that nearly all of the money is officially held by subsidiaries in tax havens. Nike likely does this by licensing trademarks for its products to subsidiaries in Bermuda and then essentially charging itself royalties to use those trademarks. The shoe company, which operates 1,142 retail stores throughout the world, does not operate one in Bermuda.
Corporate tax reform should be part of the current public dialogue about our nation's tax system. But the current focus on substantially lowering the effective corporate tax rate while also rewarding companies that have been stockpiling cash offshore to avoid taxes is short-sighted. To end tax haven abuse, Congress should end incentives for companies to shift profits offshore, close the most egregious offshore loopholes, strengthen tax enforcement and increase transparency.
To read the full study, go to: https://uspirgedfund.org/reports/usf/offshore-shell-games-2017
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