Some U.S.-based multinational firms and individuals avoid paying U.S. taxes by using accounting tricks to shift profits made in America to offshore tax havens—countries with minimal or no taxes. They benefit from their access to America’s markets, workforce, infrastructure and security; but they pay little or nothing for it—violating the basic fairness of the tax system and forcing other taxpayers to pick up the tab.
Even when tax haven abusers act perfectly legally, they force other Americans to shoulder their tax burden. Every dollar in taxes they avoid by using tax havens must be balanced by other Americans paying higher taxes, coping with cuts to government programs, or increasing the federal debt.
Academic studies conclude tax haven abuse costs the United States approximately $150 billion in tax revenues every year. Multinational corporations account for $90 billion and individuals the rest.
- Based on the $150 billion in avoided taxes, the average U.S. tax filer filling out their 1040 form would need to pay $1,026 in additional taxes to make up for lost revenue from tax havens. That’s enough money to feed a family of four for a month.
- The states where taxpayers pick up the largest share of the tab are Connecticut and the District of Columbia. On average, tax filers in those states would pay an additional $1,965 and $1,938, respectively.
- To pick up the tab for the $90 billion multinational corporations avoid, the average small business in the United States would need to pay an average of $3,067 each in additional taxes. Large multinational corporations that use tax havens also gain an artificial competitive advantage over responsible small business owners.
- If the $90 billion burden from multinational companies using tax havens were shouldered entirely by small businesses, each state’s small businesses would have to chip in hundreds of millions or even billions of dollars more. The largest total sums would be shouldered by small businesses in California ($21.4 billion), Texas ($14.6), New York ($14.0 billion), Florida ($10.6 billion), Illinois ($6.5 billion), and New Jersey ($5.4 billion).
Some of America’s biggest companies use tax havens, including many that have taken advantage of government bailouts or rely on government contracts. As of 2008, 83 of the 100 largest publicly traded U.S. corporations maintained revenues in offshore tax haven countries.
- Pfizer, the world’s largest drug maker, made 40 percent of its sales in the U.S., but managed to report no taxable income in the U.S. for the past five years. Pfizer uses accounting gimmicks to shift the location of its taxable profits offshore. The company operates 172 subsidiaries in tax havens and currently has $73 billion parked offshore that is untaxed in the U.S., according to its most recent SEC filing. That is the second highest amount of money sitting offshore among U.S. multinational corporations.
- Microsoft avoided $4.5 billion in federal income taxes over three years by using sophisticated accounting tricks to artificially shift its income to tax-friendly Puerto Rico. All told, Microsoft keeps $60.8 billion offshore, on which it would owe $19.4 billion in U.S. taxes; that is 70 percent of the company’s cash. It maintains five tax haven subsidiaries.
- Citigroup maintains 20 subsidiaries in tax havens and has $42.6 billion sitting offshore, on which it would owe $11.5 billion in taxes, according to its most recent SEC filing. Citigroup currently ranks 8th for most money sitting offshore among U.S. multinationals. The bank was also bailed out by taxpayers during the financial meltdown of 2008.
- 60 of the largest U.S. multinational companies account for $1.3 trillion of the estimated $1.7 trillion parked offshore by all U.S. companies. That $1.3 trillion is 40 percent of the 60 companies’ total revenue, according to a Wall Street Journal analysis. Ten of the companies moved more cash offshore in 2012 than they earned in profits for the year.
To restore fairness to the tax system by preventing corporations and wealthy individuals from avoiding taxes through the use of tax havens, policymakers should:
End incentives to shift profits offshore.
- End the ability of U.S. multinational corporations to indefinitely defer paying U.S. tax on the profits they attribute to their foreign entities. Instead, they should pay U.S. taxes on them immediately. “Double taxation” is not an issue because the companies already subtract any foreign taxes they’ve paid from their U.S. tax bill. This reform would raise nearly $600 billion in revenue over the next decade.
- Reject a “territorial” tax system. Tax haven abuse would be worse under a system in which companies could temporarily shift profits to tax haven countries, pay minimal tax under those countries’ laws, and then bring the profits back to the United States without paying any U.S. tax. A territorial tax system would add $130 billion to the deficit over the next decade.
Close the most egregious offshore loopholes.
- Eliminate the incentive for U.S. companies to transfer intellectual property (e.g. patents, trademarks, licenses) to shell companies in tax haven countries for artificially low prices and then pay inflated fees to use them in the United States. This common manipulation masks what would otherwise be U.S. taxable income. This deception can be prevented by implementing stricter transfer pricing rules with regard to intellectual property.
- Treat the profits of publicly traded “foreign” corporations that are managed and controlled in the United States as domestic corporations for income tax purposes.
- Stop the ability of multinational companies to manipulate how they define their corporate status to minimize their taxes. Companies should be required to make consistent claims about their type of corporate entity instead of maximizing their tax advantage by telling different countries inconsistent claims about what type of entity they are.
- Close the swap loophole, which allows companies that receive swap payments from the U.S. to claim that those payments originated offshore for tax purposes.
- Close the current loophole that allows U.S. companies that shift income to foreign subsidiaries to place that money in American financial institutions without it being considered earned in the U.S. for tax purposes. This “foreign” U.S. income should be taxed when the money is deposited in U.S. financial institutions.
- Stop companies from taking bigger tax deductions than they are entitled to for the taxes they pay to foreign countries by simply requiring companies to report full information on foreign tax credits. This would save taxpayers $57 billion over ten years.
- End two expensive and unnecessary “tax extenders” that make it easier for multinational companies to stash their U.S. earnings offshore and avoid paying taxes on them. The first provision, known as the “active financing exception,” adds $11.2 billion to the deficit over two years. Likewise, the “controlled foreign corporation (‘CFC’) look-through rule” costs $1.5 billion over two years, according to estimates by the Senate Joint Committee on Taxation.
- Stop companies from deducting interest expenses paid to their own offshore affiliates, which put off paying taxes on that income. Right now, an offshore subsidiary of a U.S. company can defer paying taxes on interest income it collects from the U.S. – based parent, even while the U.S. parent claims those interest payments as a tax deduction. This reform would save nearly $60 billion over ten years, according to the Senate Joint Committee on Taxation.
Strengthen tax enforcement and increase transparency.
- Require full and honest reporting to expose tax haven abuse. Multinational corporations should report their profits on a country-by-country basis so they can’t mislead each nation about how much of their income was taxed in the other countries.
- Give the Treasury Department the enforcement power it needs to stop tax haven countries and their financial institutions from impeding U.S. tax enforcement.
- Fully and promptly implement the Foreign Account Tax Compliance Act (FATCA), which was adopted by Congress in March 2010. FATCA has been stalled by multinational companies in an extraordinarily protracted stakeholder process.