Every year, corporations and wealthy individuals use complicated gimmicks to shift U.S. earnings to subsidiaries in offshore tax havens – countries with minimal or no taxes – in order to reduce their federal and state income tax liability by billions of dollars. While tax haven abusers benefit from America’s markets, public infrastructure, educated workforce, security and rule of law – all supported in one way or another by tax dollars – they avoid paying their fair share for these benefits.
Small business owners are hit twice by the effects of tax dodging by large multinational corporations. Small businesses are placed at a competitive disadvantage because they rarely have subsidiaries in tax havens and the armies of tax lawyers and accountants necessary to exploit the loopholes that come with such subsidiaries. Meanwhile, nearly 73% of Fortune 500 companies operate subsidiaries in tax haven countries. Small businesses are forced to compete with multinational corporations based on the cleverness of their tax gimmicks rather than on their innovation or quality of product.
As a result, these small businesses, which pay their taxes without the loopholes, end up picking up the tab for offshore tax avoidance in the form of higher taxes, cuts to public programs, or increases to the federal debt.
The United States loses approximately $147 billion in federal and state revenue each year due to corporations using tax havens to dodge taxes. This report calculates the extent that tax responsibilities would be shifted to small businesses in each state if that business sector picked up the tab – divided equally among the small businesses.
▪ The federal government loses $128.5 billion in corporate tax revenue due to tax haven abuse. Every small business would need to pay an additional $4,481 in federal taxes to account for the revenue lost.
▪ Corporate tax haven abuse costs state governments an estimated $18.5 billion in lost tax revenue. Small businesses across the country would have to pay on average an additional $647 to make up for the lost state taxes.
▪ Because state corporate tax rates vary considerably, small businesses in some states would have to pay as much as $2,520 to make up for state tax revenue lost to tax haven abuse.
Most of America’s biggest companies use tax havens to avoid tax obligations in the United States, including many that have taken advantage of government bailouts or rely on government contracts. At least 367 companies, making up 73 percent of the Fortune 500, maintained subsidiaries in tax haven jurisdictions as of 2015.[i]
PepsiCo maintains 135 subsidiaries in offshore tax havens. The soft drink maker reports holding $40.2 billion offshore for tax purposes.
Apple in 2016 booked $214.9 billion offshore – more than any other company. It would owe $65.4 billion in U.S. taxes if these profits were not officially held offshore. 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. This arrangement ensures that they pay no tax to any government on the lion’s share of their offshore profits.
Citigroup, bailed out by taxpayers in the wake of the financial crisis of 2008, kept $45.2 billion in offshore jurisdictions. If that money had not been booked offshore, Citigroup would have owed an additional $12.7 billion in taxes.
Pfizer, the world’s largest drug maker, operates 181 subsidiaries in tax havens and officially holds $193.6 billion in profits offshore for tax purposes, the second highest among Fortune 500 companies.
Companies have a large variety of accounting tricks and legal dodges that are used to avoid paying their fair share of taxes. To restore fairness to the tax system, decision makers should end incentives for companies to book their income to offshore tax havens, close the most egregious loopholes, and increase transparency.
➢ – Reduce the incentive for corporations to license intellectual property to shell companies in tax haven countries before paying inflated – and tax-deductible – fees to use them in the United States.
➢ – Restrict companies from being able to invert, or incorporate a smaller foreign entity and artificially re-designate their headquarters abroad, solely to lower their tax bill.
➢ – End the ability of multinational corporations to indefinitely defer paying taxes on the profits they attribute to their foreign entities.
➢ – Reject a “territorial” tax system, which would allow companies to temporarily shift profits to tax haven countries, pay minimal tax under those countries’ laws, and then bring the profits back to the United States tax-free.
➢ – Stop companies from deducting interest expenses from their U.S. tax liability when that interest is paid to a foreign affiliate, a practice known as a form of “earnings stripping” that makes U.S. income appear to disappear.
➢ – End the “check-the-box” rule, which currently allows multinational companies to make inconsistent claims about their corporate status.