Ask The Lawyer – Why Do The Biggest Companies Not Pay Taxes? The World Turned Upside Down
By Robert S. Schriebman
When I was in high school we studied American History. Our teacher’s hobby was the American Revolution. He taught us that when the British surrendered to George Washington their military band played a tune entitled “The World Turned Upside Down.” It was an appropriate melody because the British had trouble reconciling how one of the world’s most powerful armies lost to a ragtag bunch of undisciplined colonials. I find myself using the surrender ceremony as a metaphor to the fact that the largest corporations in America get away with paying little or no income taxes. A recent newsletter from Commerce Clearing House (CCH), published May 21, 2014, provided the information for this article. This is what the CCH article had to say:
A new report from Citizens for Tax Justice (CTJ) finds 301 Fortune 500 companies hold a combined $2 trillion offshore, thus, avoiding U.S. corporate income tax on those profits. The report, entitled “Dozens of Companies Admit Using Tax Havens: Hundreds More Likely Do the Same, Avoiding $550 Billion in Taxes,” examines companies’ 2013 Securities and Exchange Commission filings.
The report identified 28 corporations, including Apple, Bank of America, Wells Fargo, Microsoft, Nike and others, that disclosed the U.S. corporate income tax rate they would pay if they repatriated their profits. The report also found 243 companies that disclosed “permanently reinvested income” but do not report how much corporate income tax they would pay if they repatriated their profits.
Twenty-eight companies admit using tax havens. While Apple and Microsoft are the main offenders, an array of companies are using offshore tax havens, including U.S. Steel, the pharmaceutical giant Eli Lilly, the clothing manufacturer Nike, the supermarket chain Safeway, the financial firm American Express, and banking giants Bank of America and Wells Fargo. Most corporations do not report what they would pay in U.S. taxes if their profits were officially brought to the United States, but if corporations that do disclose are representative, then the Fortune 500 as a group is saving $550 billion by holding profits offshore, according to the study.
CTJ found that companies already using tax havens are seeking other ways to avoid U.S. taxes. “Use of tax havens is an important issue right now because some companies with the most reported offshore profits, such as Pfizer, are currently pursuing inversions that would effectively make the companies residents of other countries for tax purposes – and would make it easier for these companies to never pay U.S. taxes on the $2 trillion they officially hold offshore,” stated CTJ.
A follow up report from CCH dated May 28, 2014, stated that these companies had subsidiaries headquartered in Bermuda, The Cayman Islands, The British Virgin Islands, The Bahamas, and Luxembourg. The nontaxable profits from these subsidiaries alone were great than the entire gross domestic product (GDP) of those nations in the year 2010. According to the CTJ this information demonstrates that these companies are obviously using “various tax gimmicks to shift profits actually earned in the U.S. and other countries.”
Other countries also serve as tax havens for huge American corporations. For example, profits from subsidiaries earned in Switzerland were equal to 9% of Switzerland’s GDP. In the United Kingdom the untaxed profits equal 3% of the GDP of the United Kingdom.
The CTJ report also states that there may be some income taxes paid on some profits in the above tax havens. If foreign taxes become too high for these companies they engage in a shell game of shifting profits to subsidiaries in countries where the effective tax rate may be as low as 7%.
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.). The CTJ said 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 taxes. The data demonstrate that this is happening on a large scale, according to the report.
In our office we represent small to medium-sized businesses in audits involving the IRS, FTB, and EDD. Most small companies are struggling to stay in business. No one has fully recovered from the 2008 recession (depression). Today, auditors are looking for any possible way to separate our clients from their hard won earnings. The old days of giving a taxpayer the benefit of the doubt are just that – the old days. Today, both the IRS and California look to impose every penalty they can from their arsenal of available penalties. Much time is devoted to convincing the tax authorities to drop the penalties. It is always an uphill battle. It seems that the little guy is made to carry the burden of the big guy who pays little or no taxes at all.
When one takes a step back and looks at what is going on in today’s world in light of the CTJ reports, one hears the surrendering British Army Band playing “The World Turned Upside Down.”
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.