BERKELEY, Calif. – Twenty of the largest U.S.-based multinational corporations have established hundreds of foreign subsidiaries combined, which they use to successfully evade U.S. corporate taxes by – on paper – shifting their profits overseas. The practice, exposed in a new study, if it were outlawed, would yield the government $3 billion in tax revenue from the nine top companies alone.
Most of those subsidiaries are in foreign “tax havens,” everywhere from Switzerland to the Cayman Islands. In that tiny Caribbean country alone, firms have established 580 subsidiaries, all virtually no more than postal-box adjuncts set up exclusively for the purpose of hiding profits.
The study, by the Berkeley, Calif.-based Greenlining Institute, also shows that those firms have reaped billions of dollars in federal contracts.
“America’s weak economic recovery has benefited some more than others. Since the recovery began in June 2009, corporate profits captured 88 percent of the growth [while] aggregate wages and salaries accounted for only slightly more than one percent of growth,” the Institute’s report summary adds.
“In 2010, U.S. corporations avoided approximately $60 billion in U.S. corporate income taxes by using a variety of devices and gimmicks to shift profits to foreign subsidiaries, while the Fortune 100 companies received some $89.6 billion in federal contracts,” the institute said. The firms have added 44 new subsidiaries in tax havens since the Government Accountability Office studied the issue three years ago.
“The lost revenue would be more than enough to fund the entire budgets of the Environmental Protection Agency and the Departments of Energy and Labor combined,” the institute added. And eight of the top 12 companies effectively paid no federal income taxes from 2008 through 2010.”
The leader, of course, was GE, which paid no U.S. federal income tax at all last year on $5 billion in U.S. profits. It showed a $14 billion worldwide profit, had an effective worldwide tax rate of 0.5 percent – yet forced its unionized U.S. workers into paying more for their health care.
The use of the tax havens to avoid U.S. taxes means “the official U.S. corporate tax rate of 35 percent largely exists in name only,” and the effective corporate rate is closer to 20-25 percent, the institute discovered.
“The U.S. collects less in corporate taxes as a share of GDP than 24 out of 26 industrialized countries,” ahead of only Chile and Mexico, it said.
A chart within the report showed the top 20 firms with foreign subsidiaries – with GE heading the list – reported a combined $464 billion in “undistributed earnings” from foreign subsidiaries in 2010.
Those firms also included three big drug companies, IBM, Microsoft, Google, Bank of America and Goldman Sachs. They reported a combined $56 billion in U.S. profits before taxes – and $86.26 billion in foreign profits. With the help of their foreign tax havens, those firms’ effective worldwide tax rate was 18 percent – including not just GE’s low rate, but also a 33 percent refund for Bank of America.
The report gave an example of how Google used what the Greenlining Institute called “A Double Irish Dutch sandwich” to lower and evade paying U.S. taxes.
“Using transfer pricing, companies like Google can lower their taxes by shifting profits from the U.S. to countries that have lower tax rates. The transaction is a paper transaction between Google, located in Mountain View, Calif., and its subsidiaries in Ireland, allowing Google to allocate expenses and profits among different countries.
“For instance, when Google Inc. licenses its patents to offshore subsidiaries in a low-tax country like Ireland, profits from sales overseas are recognized by the Irish subsidiary, not the U.S. parent.”
First, before it went public, Google set up an Irish subsidiary and assigned to it all rights to its technologies and search engines. The IRS, the study reports, calls this “transfer pricing:” Google’s Irish subsidiary pays Google for the rights – using Google’s own money. And the Irish subsidiary created yet another subsidiary in Holland.
But then Google incorporated the Irish subsidiary in Bermuda, which has a zero corporate tax rate. The net effect of all this subsidiary creation, to handle Google’s European, African and Asian business and profits – and to shift profits from the U.S. – was to make the Irish subsidiary “disappear” for U.S. tax purposes, the report said.
Such tactics are common in the corporate world, it added, and allowed many of the Fortune 100 companies to evade U.S. taxes.
As a result, U.S. individual taxpayers are paying for government services – and corporations aren’t – while fattening corporate coffers, the Greenlining Institute says.
“While receiving a tiny share of recent economic growth, individual taxpayers are contributing a far larger share of the federal budget than corporations: 42 percent of the 2010 federal budget, as compared to corporate America’s 9 percent. In dollar amounts, individuals paid $915 billion, six times corporations’ $138 billion.”
Photo: GE corporate offices? Paul W // CC 2.0