Push multinational corporate tax dodgers over the fiscal cliff

The Wall Street Journal
December 5, 2012

By Carl Levin

America stands at the edge of a fiscal cliff with drastic budget cuts and painful tax increases on the middle class unless we can agree on a comprehensive, balanced deficit-reduction plan.
This challenge lends new urgency to cutting loopholes and gimmicks to avoid paying taxes.

Tax loopholes are one significant cause of the budget deficit, and they add to the tax burden ordinary Americans bear.

The Senate Permanent Subcommittee on Investigations, which I lead, this year exposed how multinational corporations have taken advantage of loopholes in tax law and weaknesses in enforcement to shift their profits overseas to avoid paying taxes.

The first step in shifting profits offshore is when a U.S. company sells or licenses a valuable asset, such as software developed in the United States, to a subsidiary in a low-tax jurisdiction for a price below fair market value.

Profits from the software's sale are shifted to that tax haven.

We showed how Microsoft used this process, called "transfer pricing," to shift $8 billion in income from products developed in the United States to subsidiaries based in Singapore and Ireland to dodge taxes.

We also showed how, through complex transactions, Microsoft was able to use a subsidiary in Puerto Rico to shift nearly half the profits from Microsoft products sold in the United States to Puerto Rico, avoiding a stunning $4 million a day in U.S. taxes.

The second step involves games played with profits shifted from one offshore entity to another.

Under our tax law, companies with income offshore normally don't have to pay U.S. taxes until they bring that money home to the United States.

If the income consists of royalties, licensing fees or other funds that don't require the active involvement of the business, that "passive" income is supposed to be taxed, even when it's offshore.

Our hearing showed how some companies use an IRS regulation, which changed a provision in the tax code, to dodge those taxes.

Literally, they're able to check a box on an IRS form and make offshore subsidiaries, and their taxable income, invisible for tax purposes.

From 2009 to 2011, Apple has been able to defer taxes on more than $35.4 billion using this loophole.

Google has deferred more than $24.2 billion in the same period.

For Microsoft, the number is $21 billion.

Yet many multinationals have at the same time launched a massive lobbying effort, promising to bring billions of offshore dollars back to the United States if they get a "repatriation tax holiday," a large tax break for returning offshore funds to the United States.

These companies assert they intend to indefinitely or permanently invest this money offshore while planning to bring it home as soon as Congress grants them a tax holiday.

That's not any definition of "permanent" that I understand.

We simply can't afford these corporations' offshore tax dodges.

Carl Levin is the senior U.S. senator from Michigan and chairman of the Senate Armed Services Committee. Write him at Russell Senate Office Building Room SR-269, Washington, D.C. 20510; call him at (202) 224-6221; or e-mail him at http://levin.senate.gov/contact/.

 

Happy Thanksgiving

Sorry I’ve not been blogging much recently.  Many other pressing things have come up.  So to give you a worthy blog to read over the holidays, below is one by my friend Nicole Tichon, executive director of the Tax Justice Network USA.   This blog ran recently in The Huffington Post.  Enjoy.

Happy Thanksgiving!

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The Huffington Post
November 20, 2012

Free Enterprise is Not Free
By Nicole Tichon

There's been a lot of talk about what we can't afford as a nation and who is getting what "gift" or which free ride. When President Obama recently met with CEOs and chatted with Jamie Dimon over the weekend, we should hope he issued a stern warning that the tax avoidance games (legally) played by big banks and multinational corporations are on the chopping block. When it comes to cutting, eliminating and restructuring things, these loopholes should be top-of-mind for all leaders.

For all the talk of the importance of giving corporations "certainty" to make sure they can remain "competitive," we aren't hearing a whole lot about what's being asked of them. After all, free enterprise is not free.

In the coming days, weeks and months there will be many pivotal conversations about how and where to tax corporations and how to reform our corporate tax system. Don't believe the hype that these issues are too complicated. They're not. If you paid more than 1.9 percent in income tax, you paid a higher rate than Apple. Period.

Collecting taxes on profits shifted offshore by corporations that benefit from government tax credits, tax loopholes, huge government contracts and, yes, doing business here should be like collecting low-hanging fruit. Both political parties need to work together to combat the damaging effects of the offshoring of jobs and revenues. Our current system drains our treasury. It threatens basic services and national security.

Citizens get it. According to a new poll by Hart Research on behalf of Americans for Tax Fairness, "84 percent of voters approve of increasing taxes on the profits American corporations make

These issues were put on the national stage because of a presidential candidate who uses offshore accounts, and by the reporting of tax shell games by Apple, Google, Starbucks, Microsoft and General Electric. In the U.S., Microsoft and Hewlett-Packard have been investigated, with troubling results. A Senate investigation found that from 2009 to 2011, "Microsoft shifted $21 billion offshore, almost half its U.S. retail sales revenue, saving up to $4.5 billion in taxes on goods sold in the United States." Now, in the U.K., Amazon, Starbucks and Google are being questioned by the government for shady tax practices.

The Obama administration and Congress need to correct a flawed system that has fostered legal tax avoidance and thus raised the ire of progressives, such as Sen. Carl Levin (D-Mich.), and conservatives, such as Senator Tom Coburn (R-Okla), alike.

Who can defend companies making record profits skipping out on their tax bills? Who can honestly keep holding up the disingenuous argument that multinational corporations in the U.S. pay the highest rate in the world when the fact is that it just ain't so?

Consider: According to the Congressional Budget Office, the average tax rate that corporations pay on domestic profits in the U.S. is about 12 percent. In fact, the current system is basically a yearly backdoor bailout: "a system that barely taxes them as it is."

Moving forward, we'll hear lofty-sounding ideas about "broadening the base, lowering the rates, closing loopholes," and more technical ideas about moving to a "territorial system" of taxation.

Let's start with the former: The loopholes that need to be closed are those that enable the largest corporations to pay extraordinarily low tax rates or no tax at all by shifting profits, patents and headquarters offshore. These cost us $100 billion per year. Let's talk about the multinational corporate tax base and those low or non-existent rates. If you're thinking that a corporation can't get lower than a 0-percent tax rate, think again.

With respect to the latter, lawmakers are in danger of making a bad situation worse. A "territorial system" would be tantamount to a permanent tax holiday for corporations. Under this system, companies would not have to pay U.S. federal income taxes on foreign earnings when they bring the profits back to the United States. These "foreign" earnings include the money that companies such as Google pay themselves for their own products or patents conveniently parked offshore. The sieve that is our system of taxing multinational corporations would become a gaping gulf into which even more revenues and jobs will fall.

Powerful special interests and CEOs have already lined up their money, their lobbyists and their media machine to try to lull lawmakers and citizens into believing that they're the grownups at the table and know what's best for you. They don't. Instead, they benefit from a system rigged for their interests. And now they want more, at your expense. According to the Institute for Policy Studies, 63 "Fix the Debt" companies that are publicly held stand to gain as much as $134 billion in windfalls if Congress approves one of their main proposals: a territorial tax system.

This is a critical time, and decisions made about taxation will have long-term and profound effects. It's not fair to continue to ask taxpayers and those who have paid into the system to sacrifice, while failing to collect existing tax revenue from corporations making record profits.

Free enterprise is not free. The nation's budget situation may be reason enough for some to close these loopholes, but the ramifications go much further. American corporations that benefit from the workforce, infrastructure, courts, markets and national security of the United States of America should not be allowed to avoid their responsibilities. In other words, passable roads, clean water, research grants and our national defense are not free.

Former U.S.-based corporations that have benefited from U.S. government research and development dollars and do the majority of their business in the U.S. should not be allowed to simply call a post office box in the Cayman Islands or an empty law office in Switzerland their "headquarters" to pass their tax burden to all other taxpayers.

Waxing on about loopholes without actually showing any real plan to close the most egregious kind is not leadership. False bravado about tough choices and hand-wringing about sacrifice regarding the debt by those who are driving the debt is patently ridiculous.

There's real money in cracking down on offshore tax dodging. Congress needs to close these loopholes and make large corporations pay taxes in the same country that provides them with the benefits and legal protections that make it so profitable to operate in the United States in the first place.

Follow Nicole Tichon on Twitter: www.twitter.com/TaxJusticeUSA

http://www.huffingtonpost.com/nicole-tichon/free-enterprise-is-not-free_b_2160577.html

End tax cuts for the wealthiest

This afternoon President Obama will hold a press conference to talk about growing the U.S. economy and reducing the deficit.  He will certainly address the fictitious “fiscal cliff” you’ve heard so much concern about.  You can watch it live here.

The talking point on this scary fall is that the country’s economy will dive into a recession on January 1 if we don’t take action by the end of the year.  The truth is that Congress can act on all the fiscal issues involved in the early part of January and the average American won’t feel any pain. (Wall Street investors will make all their money back from any stock losses during December so don’t cry for them.) 

We aren’t in jeopardy of falling off a cliff.  It will be more like a slow motion rappel down the hill with a secure harness allowing us to zip right back to the top when compromise is achieved.

We can expect the President to talk about the Bush-era tax cuts that are set to expire for everybody on December 31^st.  The President ran on the pledge to only allow these tax cuts to end for individuals making over $200,000 and joint filers making over $250,000 a year. 

The controversy over this tax policy has been going on for several years.  My first opinion editorial in The Hill ran in September 2010.  The message was very simple then as it is now—end tax cuts for the wealthiest.

The Hill's Congressional Blog
September 23, 2010

End tax cuts for the wealthiest

By Frank Knapp, Jr.

The Board of Directors of The South Carolina Small Business Chamber of Commerce voted this week to support the effort in Congress to end tax cuts for the very rich. Here’s why.

First, letting the tax cuts for the top two income brackets expire will impact very few real small business owners. The reality is that almost all small business owners are middle-class Americans with middle-class incomes. Of those who aren’t, more small business owners are lower income than upper income. Only two to three percent of tax filers who claim income from a business make over $250,000 a year. Many of these people are wealthy passive investors or part of large corporate law and accounting firms who invest in financial and real estate partnerships — not hands-on small business owners.

While big business CEOs, Congressional lobbyists, Wall Street bankers, some attorneys and other professionals will lose their tax cuts on the portion of their incomes that is over $250,000 (they keep the tax cuts on the portion under $250,000) — the vast majority of small business owners will not be impacted at all.

Second, if our government is going to borrow $700 billion from China and other nations, using it to cut taxes on the very rich is an extremely counterproductive way to put American’s back to work and grow our economy.

The Congressional Budget Office this year looked at 11 policy options in terms of boosting small business and creating local jobs. It found that keeping the tax cuts for the top two income brackets was the least effective because higher-income households simply don’t spend as much of their income as middle and lower-income households. Remember — spending money in your local economy helps small businesses, not sending checks to hedge funds or putting money into “too big to fail” banks that favor quick buck speculation at the expense of Main Street investment.

Instead of handing more money to those who won’t create main street jobs, the money would be better used to help the real engine of our economy — the small businesses that create most of our new jobs. We should be stimulating more customers for our small businesses through infrastructure projects and keeping teachers and law enforcement officers working. We could also be giving incentives to small businesses to start hiring again by reducing their payroll taxes or other measures. And we can do all of this for a lot less money and reduce our nation’s deficit at the same time.

Allowing the tax cuts on the top two income tax brackets to expire and putting the money into more productive “job creating” or deficit reduction uses is the right business decision for our country’s small businesses and our nation’s economy.

Frank Knapp, Jr. is the President & CEO of The South Carolina Small Business Chamber of Commerce.


Source:
http://thehill.com/blogs/congress-blog/economy-a-budget/120545-end-tax-cuts-for-the-wealthiest