US PIRG Education Fund & Institute on Taxation and Economic Policy
U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to paying taxes. Corporate lobbyists and their congressional allies have riddled the U.S. tax code with loopholes and exceptions that enable tax attorneys and corporate accountants to book U.S.-earned profits in subsidiaries located in offshore tax haven countries with minimal or no taxes. Often a company’s operational presence in a tax haven may be nothing more than a mailbox.
Overall, multinational corporations use tax havens to avoid an estimated $100 billion in federal income taxes each year. Every dollar in taxes that corporations avoid must be balanced by higher taxes on individuals, less public investments and services and more federal debt.
But corporate tax avoidance is not inevitable. Congress could act tomorrow to shut down tax haven abuse by revoking laws that enable and encourage the practice of shifting money into offshore tax havens. This should be the cornerstone of any congressional tax reform effort. Instead, many in Congress are considering proposals that would make offshore tax avoidance worse. By failing to act, our elected officials are tacitly approving a status quo in which corporations don’t pay what they owe and ordinary Americans inevitably must make up the difference.
This study explores how in 2016 Fortune 500 companies used tax haven subsidiaries to avoid paying taxes on much of their income. It reveals that tax haven use is now standard practice among the Fortune 500 and that a handful of the country’s biggest corporations benefit the most from offshore tax avoidance schemes.
The main findings of this report are:
Most of America’s largest corporations maintain subsidiaries in offshore tax havens. At least 366 companies, or 73 percent of the Fortune 500, operate one or more subsidiaries in tax haven countries.
- All told, these 366 companies 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.
The most popular tax haven among the Fortune 500 is the Netherlands, with more than half of the Fortune 500 reporting at least one subsidiary there.
Approximately 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. Despite the small size of their economies, American multinationals implausibly claim to have earned billions each year in these island nations. In fact, the profits that all American multinationals claimed to earn in Bermuda and the Cayman Islands totaled 18 times and 13 times each country’s entire yearly economic output, respectively.
In fact, a Congressional Research Service report found that American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments. By contrast, American multinationals reported earning just 14 percent of their profits in major U.S. trading partners with higher taxes — Australia, Canada, the UK, Germany, and Mexico — which accounted for 40 percent of their foreign workforce and 34 percent of their foreign investment.
Fortune 500 companies are holding more than $2.6 trillion in accumulated profits offshore for tax purposes. Just four of these companies, Apple, Pfizer, Microsoft and General Electric, account for a quarter of the total. Just 30 Fortune 500 companies account for 68 percent or $1.76 trillion of these offshore profits.
Only 58 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore. In total, these 58 companies owe $240 billion in additional federal taxes. Based on these 58 corporations’ public disclosures, the average tax rate that they have collectively paid to foreign countries on these profits is a mere 6.1 percent, indicating that a large portion of this offshore money has been booked in tax havens. If we assume that the average tax rate of 6.1 percent applies to all 293 Fortune 500 companies with offshore earnings, they would owe a 28.9 percent rate upon repatriation of these earnings, meaning they would collectively owe $752 billion in additional federal taxes if the money were repatriated at once. Some of the most notable cases include:
- Apple: Apple has booked $246 billion offshore, a sum greater than any other company’s offshore cash pile. It is currently avoiding $76.7 billion in U.S. taxes on these earnings. A 2013 Senate investigation found that Apple has structured two Irish subsidiaries to be tax residents of neither the United States, where they are managed and controlled, nor Ireland, where they are incorporated. 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.
Some companies that report a significant amount of money offshore maintain hundreds of subsidiaries in tax havens, including the following:
- Pfizer, the world’s largest drug maker, operates 157 subsidiaries in tax havens and holds $198.9 billion in profits offshore for tax purposes, the second highest among the Fortune 500. Pfizer recently attempted the acquisition of a smaller foreign competitor so it could reincorporate on paper as a “foreign company.” Pulling this off would have allowed the company a permanent tax-free way to avoid an estimated $40.7 billion in taxes on its offshore earnings, but fortunately the Obama Treasury Department issued new anti-inversion regulations that stopped the deal from taking place.
- PepsiCo maintains 133 subsidiaries in offshore tax havens. The soft drink maker reports holding $44.9 billion offshore for tax purposes, though it does not disclose what its estimated tax bill would be if it didn’t book those profits offshore.
- Goldman Sachs reports having 905 subsidiaries in offshore tax havens, 511 of which are in the Cayman Islands, despite not operating a single office in that country, according to its own website. The group officially holds $31.2 billion offshore.
The proliferation of tax haven abuse is exacerbated by lax reporting laws that allow corporations to dictate how, when, and where they disclose foreign subsidiaries, allowing them to continue to take advantage of tax loopholes without attracting governmental or public scrutiny.
- An ITEP analysis of 25 Fortune 500 companies that disclose subsidiary data to both the Securities and Exchange Commission (SEC) and the Federal Reserve revealed that weak SEC disclosure rules allowed these companies to omit 91 percent of their subsidiaries on average compared to Federal Reserve data. For this report we use the Federal Reserve data for the 25 companies for which it is available and SEC data for every other company. If the rate of omission shown for these 25 companies held true for the entire Fortune 500, the number of tax haven subsidiaries could be nearly 95,000, rather than the 9,755 that are being publicly disclosed now.
- Walmart reported operating zero tax haven subsidiaries in 2016 and for the past decade to the SEC. Despite this, a recent report released by Americans for Tax Fairness revealed that the company operates as many as 75 tax haven subsidiaries (using this report’s list of tax haven countries). Over the past decade, Walmart’s profits officially held offshore have grown from $10.7 billion in 2007 to $26.6 billion in 2016.
- Google (which recently changed its corporate name to Alphabet) reported operating 25 subsidiaries in tax havens in 2009, but in 2010 only reported two tax haven subsidies, both in Ireland. In its latest 10-K the company reports just one tax haven subsidiary in Ireland. This could lead investors and researchers alike to think that Google either shut down many of its tax haven subsidiaries or consolidated them into one. However, an academic analysis found that as of 2012, despite no longer publicly disclosing them, all of the newly unlisted tax haven subsidiaries were still operating. Since 2009, Google has increased the amount of earnings it reported offshore from $12.3 billion to $60.7 billion. This combination of ending disclosures for tax haven subsidiaries and simultaneously increasing reported offshore earnings allows the corporation to create an illusion of being a legitimate international business while still being able to book profits to low- or no-tax countries.
Congress can and should take action to prevent corporations from using offshore tax havens, which in turn would restore basic fairness to the tax system, fund valuable public programs, possibly reduce annual deficits, and ultimately improve the functioning of markets.
There are clear policy solutions that lawmakers can enact to crack down on tax haven abuse. They should end incentives for companies to shift profits offshore, close the most egregious offshore loopholes and increase transparency. At a minimum, lawmakers should reject proposals to make it easier for companies to shift profits offshore to avoid taxes.