Offshore Games

Offshore Shell Games 2014

Citizens for Tax Justice

Many large U.S.-based multinational cor­porations avoid paying U.S. taxes by using accounting tricks to make profits made in America appear to be generated in offshore tax havens—countries with minimal or no taxes. By booking profits to subsidiaries registered in tax havens, multinational corporations are able to avoid an estimated $90 billion in fed­eral income taxes each year. These subsidiaries are often shell companies with few, if any em­ployees, and which engage in little to no real business activity.

Congress has left loopholes in our tax code that allow this tax avoidance, which forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.

This study examines the use of tax havens by Fortune 500 companies in 2013. It reveals that tax haven use is ubiquitous among America’s largest companies, but a narrow set of compa­nies benefit disproportionately.

Most of America’s largest corporations maintain subsidiaries in offshore tax ha­vens. At least 362 companies, making up 72 percent of the Fortune 500, operate subsid­iaries in tax haven jurisdictions as of 2013.

• All told, these 362 companies maintain at least 7,827 tax haven subsidiaries.

• The 30 companies with the most money officially booked offshore for tax purposes collectively operate 1,357 tax haven subsid­iaries.

Approximately 64 percent of the companies with any tax haven subsidiaries registered at least one in Bermuda or the Cayman Islands—two notorious tax havens. Fur­thermore, the profits that all American multi­nationals—not just Fortune 500 companies—collectively claim were earned in these island nations in 2010 totaled 1,643 percent and 1,600 percent of each country’s entire yearly economic output, respectively.

Six percent of Fortune 500 companies ac­count for over 60 percent of the profits re­ported offshore for tax purposes. These 30 companies with the most money offshore—out of the 287 that report offshore profits—collectively book $1.2 trillion overseas for tax purposes.

Only 55 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore. All told, these 55 companies would collectively owe $147.5 billion in ad­ditional federal taxes. To put this enormous sum in context, it represents more than the en­tire state budgets of California, Virginia, and Indiana combined. Based on these 55 cor­porations’ public disclosures, the average tax rate that they have collectively paid to other countries on this income is just 6.7 percent, suggesting that a large portion of this offshore money is booked to tax havens. This list includes:

• Apple: Apple has booked $111.3 billion offshore—more than any other company. It would owe $36.4 billion in U.S. taxes if these profits were not officially held off­shore for tax purposes. A 2013 Senate in­vestigation found that Apple has structured two Irish subsidiaries to be tax residents of neither the U.S.—where they are managed and controlled—nor Ireland—where they are incorporated. This arrangement en­sures that they pay no taxes to any govern­ment on the lion’s share of their offshore profits. 

• American Express: The credit card com­pany officially reports $9.6 billion offshore for tax purposes on which it would other­wise owe $3 billion in U.S. taxes. That im­plies that American Express currently pays only a 3.8 percent tax rate on its offshore profits to foreign governments, suggesting that most of the money is booked in tax ha­vens levying little to no tax. American Ex­press maintains 23 subsidiaries in offshore tax havens.

• Nike: The sneaker giant officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. That implies Nike pays a mere 2.2 percent tax rate to foreign governments on those offshore profits, suggesting that nearly all of the money is officially held by subsidiaries in tax havens. Nike does this in part by licensing the trademarks for some of its products to 12 subsidiaries in Bermu­da to which it then pays royalties.

• Some companies that report a significant amount of money offshore maintain hun­dreds of subsidiaries in tax havens, includ­ing the following: 

• Bank of America reports having 264 sub­sidiaries in offshore tax havens—more than any other company. The bank officially holds $17 billion offshore for tax purposes, on which it would otherwise owe $4.3 bil­lion in U.S. taxes. That means it currently pays a ten percent tax rate to foreign gov­ernments on the profits it has booked off­shore, implying much of those profits are booked to tax havens.

• PepsiCo maintains 137 subsidiaries in off­shore tax havens. The soft drink maker re­ports holding $34.1 billion offshore for tax purposes, though it does not disclose what its estimated tax bill would be if it didn’t keep those profits booked offshore for tax purposes.

• Pfizer, the world’s largest drug maker, oper­ates 128 subsidiaries in tax havens and offi­cially holds $69 billion in profits offshore for tax purposes, the third 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 tax-free way to use its supposedly offshore profits in the U.S.

Corporations that disclose fewer tax haven subsidiaries do not necessarily dodge fewer taxes. Many companies have disclosed fewer tax haven subsidiaries, all the while increas­ing the amount of cash they keep offshore. For some companies, their actual number of tax haven subsidiaries may be substantially greater than what they disclose in the official docu­ments used for this study. For others, it suggests that they are booking larger amounts of income to fewer tax haven subsidiaries.

Consider:

• Citigroup reported operating 427 tax hav­en subsidiaries in 2008 but disclosed only 21 in 2013. Over that time period, Citigroup more than doubled the amount of cash it re­ported holding offshore. The company cur­rently pays an 8.3 percent tax rate offshore, implying that most of those profits have been booked to low- or no-tax jurisdictions. 
• Google reported operating 25 subsidiar­ies in tax havens in 2009, but since 2010 only discloses two, both in Ireland. During that period, it increased the amount of cash it reported offshore from $7.7 billion to $38.9 billion. An academic analysis found that as of 2012, the 23 no-longer-disclosed tax haven subsidiaries were still operating. 
• Microsoft, which reported operating 10 subsidiaries in tax havens in 2007, disclosed only five in 2013. During this same time period, the company increased the amount of money it reported holding offshore by more than 12 times. Microsoft currently pays a tax rate of just 3 percent to foreign governments on those profits, suggesting that most of the cash is booked to tax ha­vens.

Strong action to prevent corporations from using offshore tax havens will re­store basic fairness to the tax system, make it easier to avoid large budget deficits, and improve the functioning of markets.

There are clear policy solutions policy­makers can enact to crack down on tax haven abuse. Policymakers should end in­centives for companies to shift profits off­shore, close the most egregious offshore loopholes, and increase transparency.

Ugland House is a modest five-story office building in the Cayman Islands, yet it is the registered address for 18,857 companies.1 The Cayman Islands, like many other offshore tax havens, levies no income taxes on companies incorporated there. Simply by registering sub­sidiaries in the Cayman Islands, U.S. com­panies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them.

The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing ad­dress in the U.S., even while they are officially registered in the Caymans.2 This unabashedly false corporate “presence” is one of the hall­marks of a tax haven subsidiary.

Companies can avoid paying taxes by booking profits to a tax haven because U.S. tax laws al­low them to defer paying U.S. taxes on profits they report are earned abroad until they ”repa­triate” the money to the United States. Cor­porations receive a dollar-for-dollar tax credit for the taxes they pay to foreign governments in order to avoid double taxation. Many U.S. companies game this system by using loop­holes that let them disguise profits legitimately made in the U.S. as “foreign” profits earned by a subsidiary in a tax haven.

Offshore accounting gimmicks by multina­tional corporations have created a disconnect between where companies locate their actual workforce and investments, on one hand, and where they claim to have earned profits, on the other. The Congressional Research Service found that in 2008, 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 workforce and just 7 percent of their foreign investment. 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.5 The IRS released data this year showing that American multinationals collectively reported in 2010 that 54 percent of their foreign earnings were on the books in 12 notorious tax havens.

Profits booked “offshore” often remain on shore, invested in U.S. assets 

Many of the profits kept “offshore” are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly “trapped” offshore found that more than half of the offshore funds were in­vested in U.S. banks, bonds, and other assets.7 For some companies the percentage is much higher. A Wall Street Journal investigation found that 93 percent of the money Microsoft has officially “offshore” was invested in U.S. assets.8 In theory, companies are barred from investing directly in their U.S. operations, pay­ing dividends to shareholders or repurchasing stock with money they declare to be “perma­nently invested offshore.” But even that re­striction is easily evaded because companies can use cash supposedly “trapped” offshore for those purposes by borrowing at negligible rates using their offshore holdings as collateral. Either way, American corporations can benefit from the stability of the U.S. financial system without paying taxes on the profits that are of­ficially booked “offshore” for tax purposes.9

Average Taxpayers Pick Up the Tab for Offshore Tax Dodging

Congress has left loopholes in our tax code that allow offshore tax avoidance, which forces ordinary Americans to make up the difference. The practice of shifting corporate income to tax haven subsidiaries reduces federal revenue by an estimated $90 billion annually.10 Ev­ery dollar in taxes companies avoid by using tax havens must be balanced by higher taxes paid by other Americans, cuts to government programs, or increased federal debt. If small business owners were to pick up the full tab for offshore tax avoidance by multinationals, they would each have had to pay an estimated $3,206 in additional taxes last year.11

It makes sense for profits earned in America to be subject to U.S. taxation. The profits earned by these companies generally depend on access to America’s largest-in-the-world consumer market, a well-educated workforce trained by our school systems, strong private property rights enforced by our court system, and American roads and rail to bring products to market.12 Multinational companies that de­pend on America’s economic and social infra­structure are shirking their obligation to pay for that infrastructure if they “shelter” the re­sulting profits overseas.

Most of America’s Largest Corporations Maintain Subsidiaries in Offshore Tax Havens

This study found that as of 2013, 362 Fortune 500 companies—over 72 percent—disclose subsidiaries in offshore tax havens, indicating how pervasive tax haven use is among large companies. All told, these 362 companies maintain at least 7,827 tax haven subsidiaries.13 The top 30 companies with the most money held offshore collectively disclose 1,357 tax ha­ven subsidiaries. Bank of America, Citigroup, JPMorgan-Chase, AIG, Goldman Sachs, Wells Fargo and Morgan Stanley—all large financial institutions that received taxpayer bailouts in 2008—disclose a combined 702 subsidiaries in tax havens.Cash Booked Offshore

Companies that rank high for both the number of tax haven subsidiaries and how much profit they book offshore for tax purposes include:

• Bank of America, which reports having 264 subsidiaries in offshore tax havens. Kept afloat by taxpayers during the 2008 financial meltdown, the bank reports hold­ing $17 billion offshore, on which it would otherwise owe $4.3 billion in U.S. taxes.14 That implies that it currently pays a ten percent tax rate to foreign governments on the profits it has booked offshore, suggest­ing much of those profits are booked to tax havens.

• PepsiCo maintains 137 subsidiaries in off­shore tax havens. The soft drink maker re­ports holding $34.1 billion offshore for tax purposes, though it does not disclose what its estimated tax bill would be if it didn’t keep those profits offshore.

• Pfizer, the world’s largest drug maker, op­erates 128 subsidiaries in tax havens and of­ficially reports $69 billion in profits offshore for tax purposes, the third highest among the Fortune 500.15 The company made more than 40 percent of its sales in the U.S. between 2010 and 2012,16 but managed to report no federal taxable income six years in a row. This is because Pfizer uses account­ing techniques to shift the location of its taxable profits offshore. For example, the company can license patents for its drugs to a subsidiary in a low or no-tax country. Then, when the U.S. branch of Pfizer sells the drug in the U.S., it must pay its own offshore subsidiary high licensing fees that turn domestic profits into on-the-books losses and shifts profit overseas.

Pfizer recently attempted a corporate “in­version” in which it would have acquired a smaller foreign competitor so it could rein­corporate on paper in the UK and no longer be an American company. A key reason Pfiz­er attemped this maneuver is that it would have allowed the company to more aggres­sively shift U.S. profits offshore and have full, unrestricted access to its offshore cash.


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http://ctj.org/ctjreports/2014/06/offshore_shell_games_2014.php#.VA9rQ0jTxFQ