Apple's CEO was apparently all smiling and charming in his testimony on Apple's international tax gimmicks. Not surprisingly, he claimed that Apple pays tax on all its US profits and doesn't shift US profits offshore. See, e.g., Michael Shear, Torches and Pitchforks for IRS but Cheers for Apple, New York Times (May 22, 2013); Schwartz & Chen, In disarming testimony, Apple chief eases tax tensions, New York Times (May 21, 2013) (noting that Apple effectively claims a rate of about 30% but that is misleading).
Mr. Cook was especially disarming. “It’s important to tell our story, and I’d like people to hear directly from me,” he told Mr. McCain and the other senators. Apple, he testified, pays “all the taxes we owe — every single dollar.” Schwartz & Chen, In disarming testimony, Apple chief eases tax tensions, New York Times (May 21, 2013) (paragraphing changed).
But that's just wordsmanship and the kind of self-interested political schmoozing at which the "best" of Big Business leaders have always been rather adept. The fact is that Apple transfered essential intellectual property--developed with economic and other subsidies in the US--to an offshore shell that merely collects the offshore profits from that intellectual property offshore. That resulted in a significantly lower tax rate than Apple claims. Jesse Drucker, Apple's Tax Rate Ignores Profit-Shifting Offshore, Bloomberg.com (May 23, 2013).
While nobody at the hearing questioned the figure, it provides a distorted picture of Apple’s total tax burden. Based on its public filings, the company pays just under 14 percent of its income in taxes worldwide, according to Scott D. Dyreng, an assistant professor of accounting at Duke University’s business school whose research specializes in the actual tax rates of large U.S. companies.
Cook’s statistical spin goes to the heart of the debate over corporate tax avoidance. By shifting income from countries where they operate to offshore tax havens, multinational companies such as Apple, maker of the iPhone and iPad, can manipulate their tax rates and boost their profit.
Apple’s calculation “ignores the issue of profit shifting, which is the central controversy that was the subject of the hearing,” said Martin Sullivan, a former U.S. Treasury Department economist and chief economist at Tax Analysts, a nonprofit organization. “Apple has shifted enormous amounts of profits from the United States to an untaxed entity overseas.
Our ability to handle offshoring of assets hasn't advanced enough to take into account the ready globalization of intangible assets in any way that makes sense, and our tax administrators (bludgeoned by the heavily financed corporate lobbyists and their Congressional enablers, constantly underfunded and understaffed and therefore outmanned, constantly attacked by the right, as in the craziness currently underway against the division that attempts to appropriately categorize tax exempt applicants to avoid subsidizing their political activity without at least demanding disclosure of donors) and our courts (with too many ideologically driven right-wing activist judges that favor Big Business interests, appointed mostly by GOP presidents but even some by DEM presidents) don't usually have the desire or the guts to take on the use of offshore corporate shells under well-established statutory and judicial anti-abuse doctrines.
Those existing federal tax common law doctrines would permit courts (and therefore administrators) to disregard circular flows of cash, non- economic reality based ontax-avoidance dreams, and use of corporate shells with no or few employees and no or few actual commodities and management from a distant headquarters as conduits. But the companies have gotten away with it for so long, and have so effectively lobbied tax administrators who have too cozy a relationship with the tax bar and legislators who have a much cozier relationship with Big Business principals, that almost everybody now talks of use of seeminglyh endless chains of empty shell corporations or corporations tweaked with "just enough" superficial semblance of an actual business function to avoid US taxes as "common practices" that "everybody" considers legal under the "letter of the law."
This is hyper-textualism that condones doing anything you think you can get away with so long as it isn't clearly prohibited by a specific provision. Of course, the creation of specific provisions to counter discovered abuses requires considerable effort to get through a Big-Business friendly Congress. Those that do make it through increase the complexity of the Code. And then the lobbyists who lose on one-in-a-hundred of these innovative interpretations of what's allowable just go to work on tax administration to get a more friendly interpretation, and then go to work on Congress to "simplify" the Code and "cut rates" so they can be "competitive." It is a vicious cycle that is driving corporate taxes to zero, while most of the wealthy elite who own the corporate stock and business debt and business partnership interests are also driving their own rates down, as the myth of "job creation" by owners of capital who "deserve" lower capital gains rates is pushed by the same funding sources through well-funded so-called 'think tanks' and hired academic guns.
Tomorrow's Congressional hearing on the ability of major multinationals to shift profits offshore to avoid US tax (and everywhere-else tax) may finally get the attention of the American public onto a tax issue worth thinking about.
As today's New York Times makes clear, Apple has used sophisticated tax planning to shift its assets offshore, often to employee-less shells that are run from Apple's US headquarters. See Nelson Schwartz, Apple avoided billions in US taxes, Congressional panel says, New York Times (May 20, 2013).
Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found.
Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.
***
Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California.
Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction.
Even John McCain seems to recognize that Apple's offshoring gimmicks stretch the notion of what should be acceptable: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.” Id. Apple's gimmicks take advantage of a tax system that does not adequately address the nature of intellectual property as the core of a company's profit-making business nor the nature of the economic sham of claiming to sell such property to affiliates at "arm's length prices", when the purported affiliates are nothing but names on a tiny office door and the purported arm's length price would never be accepted from a genuine unrelated party. As Sen. Levin noted, Apple has succeeded in avoiding taxes "creat[ing] offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.” Id.
Apple's CEO Cook is expected to claim that Apple doesn't use gimmicks. Id. Of course, like Clinton's equivocations, that all depends on your definition of a "gimmick." When you create a vast community of subsidiaries with shell companies that exist to allow you to claim your profits are earned by employee-less companies that just happen to reside where there is no tax, that is using a gimmick, even if it is one that is perfectly legal under an outdated code that has been incessantly weakened by corporate lobbyists for the last three decades, at least.
Cook is also expected to argue that the solution is just to hand over to the big MNEs what they want--tax-free repatriation of profits they have shifted offshore. That's the same crazy idea that the Bush administration and Republicans in Congress promoted in 2004, one that essentially rewarded companies for engaging in gimmicks and encouraged even more companies to shift even more income offshore and hold it there even longer to avoid US taxes. Congress would be foolish to reward poor social responsibility behavior with an even better tax outcome than that already generated by the poor social responsibility behavior!
The current transfer-pricing regime is not fitted for today's global commerce. What Congress should consider doing is (1) eliminate offshore deferral altogether, and (2) apply a substance-over-form analysis to all transfers of intellectual property to offshore affiliates that would in most cases treat them as not occurring for tax purposes. It could phase in the end of deferral by permitting companies to treat their current stash of offshore profits as being repatriated on a straight-line basis over five years, so they avoid a humongous one-time tax hit. The legislation should also restrict the use of loss carryovers against such repatriated cash in much the way that loss carryovers are restricted after major acquisitions.
(And, by the way, that idea I had that I might make the iPhone my next smartphone? I've just thrown that in the waste basket. Rather not support a company that is so disloyal to the country that fostered the possibility of its existence and high profits.)
Orrin Hatch was the keynote speaker for the ABA Tax Section luncheon today in DC. Having never heard the man in person, I was surprised at the bumbling nature of his speech. He came across as an old man reciting a set of platitudes from the GOP talking-points rulebook.
Asserting that the tax code is "complicated, inefficient, unjust, unfair," he claimed that all are agreed on a need for tax reform, because the tax code is "the major obstacle standing between us and sustained prosperity."
Now, folks. You all know that's bunk, right? The major obstacles standing between us and sustained prosperity are (1) the billions we squandered on two unnecessary preemptive wars and other costs of excessive militarization of our society, along with (2) the billions spent supporting the 'too big to fail' financial giants that have plundered the middle class while continuing to benefit from cheap (subsidized) funding.
Of course, there are a number of areas of the tax code that also stand in the way of prosperity--the preference for capital over labor, the extensive provisions incentivizing consolidation of business empires, the provisions favoring private equity enterprises that eat up and spit out workers for their own profits. Those were clearly not the target of Sen. Hatch in his favored tax "reform."
So what did he say about tax reform? Let's see.
1) The goal is "to produce bipartisan tax reform that can pass the House and Senate."
For my part, I'd just as well stick with the current Code. ANYTHING that the GOP is willing to go along with will be beneficial to Big Business and harmful to ordinary Americans. About the only thing that is bipartisan these days is something that Wall Street likes, so it gets the support of Baucus and other Dems-in-name-only.
2) The Obama Administration has accepted the idea of "revenue neutral corporate tax reform" but Hatch wants broad reform of individual, corporate and pass-through.
Interestingly, the Teaching Tax Committee had a program, staged as a debate, on corporate tax reform. The audience voted overwhelmingly in favor of retaining the corporate tax and against doing reform as "lowering the rate with revenue neutrality". Corporate tax reform as envisioned by most on the right is just another piece of the "tax cuts create growth" mythology that has been repeated ad nauseum in spite of the evidence of the last decade of tax cuts with minimal growth.
Hatch of course says we should do corporate tax reform (lowering the rates) while ALSO lowering the rates on dividends and capital gains yet again. And he wants to lower individual rates generally at the same time that we lower corporate rates--claiming, of course, that such lowering of rates is a "fairness" issue for those pass-through businesses that have only an owner-level tax in order to encourage small business growth, entrepreneurs and job creation.
Funny how no matter what the rate is or how low the effective rate is--Apple's is less than 10%, GE's is even lower--the DC gang will still claim that if we only get the rates lower there will be more jobs.
And he says not doing individual tax reform at the same time would be "unfair," because we'd be "extending a helping hand to corporations and leaving individuals benind, whether families or small businesses" This is the right's typical claim that they care about ordinary Americans. But behind that claim is the perennial desire to 1) aid the owners of capital, with no concern for labor whatsoever and 2) cut taxes generally so that the very government that people like Sen. Hatch serve can be cast as the devil and shrunk to ensure that it provides the minimum services imaginable, in 'starve the beast' fashion.
Hatch then launched into some scattered comments about the "principles" that should guide tax reform. They were the predictable ones from the right
1) Hatch claims the main goal of tax reform is to promote growth through lowering rates
2) Hatch claims that international competitiveness is terribly important. He wants US multinationals to be able to repatriate their overseas profits easily (meaning--no tax). He says competitiveness requires that the U.S. adopt a "reasonable territorial system". That, he claims will increase exports and encourage investment at home.
This is, of course, garbage. Companies go abroad to exploit cheap labor in impoverished countries like Bangladesh where workers have no rights and company owners take all the profits. Having no US taxes would just be the icing on the cake. Until we end the primitive transfer pricing game that companies are allowed to play, companies like Apple and Google will continue to pretend to sell to their offshore affiliates assets that are their core business and never ever would be sold to a third party, purely to avoid US tax on intellectual property generated in the US. The reform we need is to eliminate deferral entirely. (And we certainly don't need to keep extending the ridiculous "active financing exception" that serves as yet another subsidy for financial institutions.)
Here Hatch engaged in a gratuitous insult to every union member in the country. He asserted that the only thing holding the country back from the territorial system he wants is the unions' lobbying of President Obama. He went on to claim that workers "have to join unions and pay unions dues"--this of course is the anti-union screed of the right that misstates the way agency shops work. In my case, faculty can be paying members of the union or they can pay a "fair share" fee for the services the union provides them (grievances, representation, negotiation) or they can contribute to a university scholarship fund and pay nothing to a union and still get those services. Hatch's tone (and facial expression) here was one of sheer hate--I literally had to bite my tongue to avoid standing up to challenge him for his misrepresentations about unions.
Of course, in his hatred of unions, Hatch reveals the contempt in which the right generally holds ordinary workers in the US. They want companies to be competitive--meaning that they want companies to make huge profits from exploiting labor and they don't give a damn about workers' being able to have jobs and decent living.
3) Hatch, like all those who elevate simplicity over distributional justice and compliance needs, talked about the complexity of the tax code, claiming that $168 billion is spent annually in complying with the tax code, while there are 51% who "don't pay tax".
Not sure where Hatch got the $168 billion figure (federal? state and federal? tax shelter planning included?). Much sophisticated tax planning is tax avoidance planning--businesses make the calculation that they're willing to pay accountants and lawyers a good bit to avoid a bigger tax hit. They could avoid much of that expenditure by just doing transactions in commonly accepted ways and not doing transctions that are primarily tax motiviated at all.l
As for the 51% 'shades of Romney's 47%" comment. it didn't even fit in. Came across as another gratuitous insult to those in the lower income distributions who barely make a sustainable living and who pay considerable sales and payroll taxes even though perhaps not income tax. We did, after all, DESIGN our tax system to try to protect lower income taxpayers from paying income tax. That's the reason, for example, that we have a standard deduction and presonal exemptions.
4) At this point, Hatch's speech became somewhat incoherent as he wanted to hit Obama for a "sea change" from the purported wonder years of the Bush tax cuts to the new era of tax increases. So he praised the unfortunate Bush tax cuts of 2001-2003 and contrasted that with the "awful" fact that the estate tax came back after the 10-year gimmick expiration reached its sunset. (He called it, of course, by the right-wing term "death taxes") He noted the "problem" of having to extend the various extender provisions--"tax reform should be more permanent" because, he claimed, the uncertainty "hinders long-term growth."
Actually, almost every single one of those corporate extenders should be let go. The R&D credit, the active financing exception, etc.
5) Another of the perennial GOP tax goals popped up as Hatch claimed we need a "tax environment more favorable to saving and capital investment that will lead to a better standard of living for future generations."
Hey, Congress had the sense to write the capital gains preference out of the Code in the thoughtful reform of 1986. But then the lobbyists for the wealthy got it right back in and they've whittled the rate down to a paltry 20%. We haven't seen any of that promised "better standard of living". IN fact, more of the profits have gone to the capitalists and workers' wages continue to deteriorate.
The rest of the tax reform "discussion" in the speech was one platitude after another. Tax reform will "help the entire economy", help companies "compete better", "help all Americans." It's an "economic necessity" that is worth struggling to achieve even in this "toxic political environment" because we are, after all, the "greatest nation in the world."
Wait a minute, folks. The party that is responsible for the "toxic political environment" is the GOP, the obstructionist party of no that has determined that it doesn't care what it does to the country as long as it can stay in power.
And that claim about "greatest nation" status is highly suspect: we are horribly unequal in resources. We have a high illiteracy rate. We have high deaths in childbirth. We have high teen pregnancies. We have an obscenely high incarceration rate. We have a lower life expectancy than countries with a greater quality of living. We have fewer citizens that are college-educated than other developed countries. We have more children living in poverty. We are fast becoming an oligarchy in which the wealthy buy the laws they want and exploit the rest of us. Guns run rampant in our society and are used for heinous crimes but even when a vast majority supports simply measures like universal registration and limited magazines our Congress heeds only the gun lobby. That "greatest nation" status is highly dubious.
Hatch ended his speech with another political item --you'd think he thought that the ABA tax section must be mostly rich lawyers that are good Republicans from the tone of much of this speech. It has come to the media's attention that the IRS office that review tax-exempt organization applications has focused on those that have "tea party' in their title. But that's the note that Hatch ended on--claiming that this was "harassment and intimidation" and that Congress would folloow up to find out "who was behind it, when it began, and what was done (or not done) to correct it" since "in a country with the First Amendment, no organization should be singled out" so "this is not over by any stretch of the imagination."
Now, what readers should know is that scrutinizing applications for social welfare organization stauts is in fact an important role of the IRS. There is an office in Cinncinati that scrutinizes the apps. Among other things, it looks for those organizations that shouldn't apply as social welfare organizations because their primary activity (greater than 50%) is political so they should be a "527" organization. The IRS office has very limited resources and personnel (another of the 'starve the beast' methods of the right), so it seeks to find efficient ways to focus on organizations that should potentially be denied social welfare status and moved to 527 status. Somebody in that office found that 'tea party' was a reasonable search item--probably somebody who didn't have very good political attenna to be aware of how the Fox News types like O'Reilly would present it as "targeting conservatives'. What was really targeted was any organization, conservative or liberal, that inappropriately applied for social welfare organization status.
The right is making a mountain of a molehill here. And once again creating a media frenzy out of the public's ignorance of the way the IRS has to work to avoid abuse of tax exempt status.
Once again, Congress has demonstrated that it notices mostly what affects rich people and can't quite identify with ordinary Americans. And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us. Tax policies operate for the high and mighty: once again, inequality is the real characteristic that matters.
The sequestration--a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don't have to pay much in taxes--was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs. The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less.
But we all know that latter wise move didn't happen. Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes. Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration's giveaway mode--the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.
So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy--especially when Keynesian theory (the only kind of economic theory that hasn't been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases. IN fact, these damaging cuts were never actually expected to go into effect--Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases. Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they've been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are "exaggerated," and "they have relished the success of forcing visible spending cuts on a Democratic administration." Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013).
Few in Congress were ever willing to stop the gravy trains for the rich--carried interest for private equity, publicly traded "master limited partnerships" for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today's biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the "step up in basis at death" that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).
But hark, what is this? The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations! Such suffering. So incomprehensible how we could allow it. The Senate swiftly moves into action--this was something they hadn't anticipated--that the sequester could actually bother some of their own class. Suddenly, They acted. In just a short time last night, with unanimous consent, the Senate voted to "let the FAA transfer some money from the Transportation Department to pay air traffic controllers." See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013). The House was expected to act today.
At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans. That story changes only when the rich feel any squeeze at all. As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:
the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.
Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014. He has been the top Democrat on the Finance Committee since 2001. See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).
As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss. His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks). He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses. In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration. He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date. In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively). The tradeoff provided only token items on the progressive menu.
Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats. See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much. I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies.
That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code. He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.
Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism? His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies. The main reasons for complexity are two-fold: (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying. To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake. To the extent that simplication results in changes to the tax expenditures, it can be useful but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries. Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden. Baucus did not serve the publci well in regards to these issues. Let's hope that Wyden does better.
On Monday, Congressman Lloyd Doggett, a long-time member of the House Ways and Means Committee, releases a GAO report showing the continued advance of corporate tax expenditures that allow corporations to pay little or no taxes year after year.
“Of the many Americans who are right now getting their taxes ready to file, I doubt there are very many that think they will be able to pay a mere nickel on the dollar. But there are many of America’s largest corporations that continue lobbying the Administration, and this Congress to let them pay a nickel on the dollar in taxes on a significant portion of their earnings. Over a three-year period, 30 Fortune 500 companies devoted more of their monies to lobbying this Congress than they did in paying taxes to the Treasury. Some have a negative tax rate. Many of our largest corporations are paying effective rates that are single digits.
On Monday, he will again propose legislation to deal with the way corporations can so easily avoid tax liabilities in the US. A press release from Doggett's office lists the following pieces of legislation to be introduced:
The Stop Tax Haven Abuse Act aims to close several different loopholes by deterring the use of tax havens for tax evasion and strengthening the enforcement of our tax laws. The bill would also require SEC-registered corporations to report annually on the number of employees, sales, financing, tax obligations, and tax payments on a country-by-country basis, shedding more light on the extent of use of tax havens. This bill also provides for additional penalties for failing to disclose offshore holdings and for promoting abusive tax shelters.
The International Tax Competitiveness Act addresses a large and growing area of tax abuse: the practice of developing a trademark, patent, or copyright in the U.S. and then transferring that intellectual property abroad to avoid taxes on the vast income it generates. This bill would treat income from the U.S. intellectual property as U.S. income and tax it accordingly.
The Fairness in International Taxation Act would end the current practice of treaty shopping to avoid U.S. taxes. The United States has tax treaties with a number of trading partners that reduce the amount of taxes that a U.S. based entity owes on interest and royalties paid to a foreign parent. Since many of these foreign parent companies are set up in tax havens, these companies now bypass U.S. taxes by routing the payment through a tax-treaty country that then just transfers the funds to the tax-haven parent. This bill would end that legal fiction and say that you only get the tax-treaty discount if the parent company is actually located in a tax-treaty country.
Doggett has tried to get Congress to act on corporate loopholes for more than a decade. The lobbying money has enormous influence. Just as in the gun control arena, where a majority of Americans want stronger gun controls but the manufacturer of weapons want lax provisions, most Americans think that corporations ought to pay a larger share of taxes but Congress is heavily influenced by lobbyists who wine and dine staffers and provide numerous purported "educational" briefings on what Big Business wants.
Each of these legislative proposals has merit. Of particular interest is the "international competitiveness" provision, which would finally make some inroads in corporations' ability to move intangible properties developed in the US into tax haven countries in order to eliminate taxes. We have for too long relied on an outdated transfer pricing mechanism for this kind of transfer. It doesn't work, since no company would ever actually sell intellectual property that is the core of the company's business. These cross-border transfers of IP are shams, and we should finally legislate to prevent this .
David Cay Johnston, former NY Times reporter and now Syracuse professor, writes about the thing that most journalists don't bother to (or are told not to) write about--the way that Big Business successfully lobbies legislators and regulatory agencies to write the rules to favor Big Business, at the expense of ordinary Americans, all under the false claim that they are pushing de-regulation for the good of competition and ordinary consumers. Johnston, Missing the Story, American Journalism Review (March 2013).
Johnston describes a number of ways that state legislatures, Congress and state and federal regulatory agencies have made life easy-street for Big Business at the cost of ordinary consumers. He notes it is often discussed as "deregulation" but that "is a misnomer because, literally, no such thing exists in commerce....Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have.... [Thus, d]eregulation typically means reregulation under new rules that favor business interests." Id.
Businesses claim that the 'deregulation' they seek is just another step towards their ideal of "free markets" to help competitiveness. Not so, Johnston replies. The regulatory climate that results is almost always one that creates "moats" making competition much harder for small businesses and allowing duopolies or monopolies to arise that can set prices as high as they wish. And often the captured regulatory agencies allow the most absurd subsidies imaginable.
The Bush Treasury did that in spades. One example is the changes the pro-business Treasury under Paulsen made in the regulations under section 368 governing corporate reorganizations, in which the Bush Treasury (many officials of whom are still part of the Obama Treasury) promulgated rules that provide, for the first time, the possibility of a loss recognition by shareholders in the nonrecognition reorg exchange. Settled law at the time said no such loss could be recognized. And the Bush Treasury also did it in setting up (through regulations) yet another tax subsidy of Big Oil (as an add-on to an already ridiculous subsidy enacted by Congress when it allowed Big Oil to operate as limited partnerships). Here's how Johnston describes this.
The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.
The cost of this fake tax is both tiny and huge.
The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes. Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year — or $3.3 billion at three cents per day per American. Id. (emphasis added).
Note, folks. That's an unnecessary $3.3 billion subsidy provided to already-profitable businesses that comes entirely at the cost of ordinary Americans. It is a subsidy put into law entirely through Big-Busienss-friendly tax administrators in ways that most Americans do not see it--or, if they see it, they believe it is a "real" tax cost of the businesses rather than just another theft subsidy.
This is another aspect of the problem of the way the media treats any discussion of "free markets." The fundamentalist approach to free markets (that I have sometimes labeled "free marketarianism" or "friedmania") claims to believe that deregulation helps people by increasing competition and opening up markets. In fact, it is usually the opposite. Deregulation helps Big Business by decreasing competition and allowing the development of powerful oligarchs and powerful monopolies or near-monopolies. Brute capitalism, that is, allows those who hold capital to hold power, and those who hold power act against the interests of ordinary people in order to consolidate their power. Another blog addressed this well:
A free market requires that everybody plays nice and follows the rules. Guess what. There’s always someone who will do whatever evil they think is required to make money. Once you realize that, you know there can be no such thing as the free market.
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That’s one of the primary reasons that uncontrolled capitalism has been such a gross failure since the Reagan/Thatcher “revolution”, leaving us with record inequality and damaged democracy, and bringing the world economy to the brink of total collapse that simply evaporated trillions of dollars. Random Notes from the Exasperation File, Class War In America.
I have often noted that the media treat the daily ups and downs of the stock market as though it is an accurate reflection of the entire economy. It is not. When the stock market is up, it is likely that one or another segment of Big Business is doing well or exceptionally well. That means the affluent--those in the top 30% who own most of the financial assets of this country, including Big Business's CEOs and board members, are doing well. So as the stock market has resurged after the 2007 financial crisis brought on by the excess of Big Financial Businesses, the wealthy who run and own those Big Businesses are doing mighty well indeed.
This is corporatism at its worst--the takeover of the economy and all of its institutions by a corporate mindset that favors the wealthy and the managers/owners of Big Business over ordinary people, leaving ordinary people's views unheard. It often is associated with class warfare, wherein the rich ensure that their money buys laws and regulations written by, for, and of the rich. Corporations pay less in taxes and ordinary workers pay more--either in direct taxes or in the indirect tax of wage and benefit loss that is a tax subsidy for the wealthy.
Those at the bottom of the economic distribution are of course the ones most hurt by the decline and by the class warfare policies of the rich. They are most likely still doing poorly or just barely getting by, mostly because those big profits at Big Business are taken at their expense--through constantly rising prices not reflected in increased quality or costs of production, or through increasingly unfair worker wages and benefits that have been cut in order to increase the rents to the owners/managers. And usually with the assistance of legislators and regulators.
Take a friend of mine, who was laid off from an auto parts manufacturer for almost three years and has been struggling to make a full-time living at it since he was reinstated--at a much lower salary then before the crash (conveniently for the company but not so good for the workers). He bought a new truck about a year before the financial crash. The payments were supposed to be around 250 a month. In the first months of the layoff he couldn't find any substitute work, and he fell behind in payments on the truck (his family depends on him as the sole breadwinner; his family has almost no assets and no liquid assets; he depends on the truck to allow him to take odd jobs when his job at the factory is on hiatus--often landscaping, mowing, etc.). The interest rate on the loan went up to 32% almost immediately. That would once have been treated as illegal usury. Not now, since "deregulation" has allowed financial firms to rip off their customers coming and going for their own profits. Now his payments are around $400 a month and he owes as much on the truck as he did several years ago in spite of all the payments he has worked hard to make since then. This Thursday he missed the payment again, after keeping up for most of the year. He missed it because his company began selectively laying off workers for a week or 3 days at a time during the winter, and he didn't work for about ten days of the month before the payment was due. On Wednesday he talked to his adviser at the financial firm that gave him the loan. It was a new "adviser". They replaced a more understanding one with one who was considerably harsher. The adviser told him on Wednesday that he would give him til Friday to make the next payment. On Thursday, however, he sent a repo man who took the truck. Friday my friend got a paycheck and could have made the payment (as he'd told the adviser on Wednesday). Instead, when he went to make the payment thinking he could get the truck back that day, the financial firm advised him that he now had to pay off the truck in full--as well as a bunch of additional charges due to the repossession. What would that be, he asked? He assumed he owed about $3500, in his calculations the amount still due on the original loan. Oh, no, the finance guy told him. You will have to pay $4975 on Monday, and that amount will increase by $25 a day for every day you do not pay. It's that much because of all the late fees we added on the bill. Oh, and we are charging you $400 for repo-ing the vehicle on Thursday (even though we had promised we would not do so).....
Again, deregulation of financial institutions has made these rent-seeking add-on charges customary for anyone in the lower part of the income distribution. Big Business sells it as competitive services for the underprivileged but it is really deregulated excess profits for the financial firms for acting like modern equivalents of plantation owners with a captive workforce unable to ever build up financial assets and always dependent on the firms' calculations as to what they owe or are owed.
How is my friend (who happens to be an African American) supposed to ever advance beyond the near-serfdom in which he currently exists? Lucky for him, we are willing to offer him a personal loan at market-rate interest so that he can finally pay off his overseer and begin to dig himself out of the hole that our deregulated, GOP-ideology-driven state puts most Detroit low-income residents in. Mass transit hardly operating and not permitted to expand as it should to permit low-income residents to commute easily to work in the region. White suburbs that cannot be annexed into the city, so continue their oblivious lives exploiting Detroit's assets while pitying the poor black residents that just can't seem to do anything right. Businesses that charge white folks in the suburbs less than black folks in the city. Insurance companies that rip off their Detroit clients. And on and on.
This is all happening in a world where white folks with money set all the rules and now, in Michigan, have made it very hard for any union to form and exert some worker-power on behalf of the employees. Michigan's new, so-called "right-to-work" law that the religiously right-wing Republican party of Michigan passed with no input at all from the people and with misinformation galore--all of the newspaper coverage talked about workers being "forced" to join a union unless you have "right-to-work" and how "right-to-work" would free them not to have to pay for the union and encourage more economic growth and more jobs. None of the newspaper articles or the legislators reported the fact that right-to-work states tend to have lower wages for their workers, less good jobs, and poorer economies. Of course, the information was wrong to start with--no one was forced to join a union without right-to-work laws--they were merely required to pay some amount (less than union dues) for the services that the union provides. Now, they can demand the same services and pay nothing. No Republican business would provide services on that basis, but Republican legislators serving their oligarchic base ensure that no true freedom exists for anybody without money.
Michigan, of course, has also just taken over the City of Detroit, with Gov. Snyder's appointment of an emergency manager. This is as undemocratic as it gets, given the state vote rejecting the last EM law and the fact that the EM will have dictatorial power to ignore the Mayor, the City Council and all other elected officials. Snyder is a right-wing tool, in office backed by a majority-GOP legislature that reflects the racism of most of the "upstate" part of Michigan and blames Detroit's problems on its predominately black residents. The legislature passed right-to-work to retaliate against unions for trying to get protection for workers' rights in the constitution. Apparently, the GOP thinks the constitution should only protect the wealthy, as it does by prescribing a flat tax, ensuring that the wealthy in Michigan get to choose what they support but are hardly taxed at all by the State. The rabid right in this state forget that what condemned Detroit was the "white flight" to the suburbs and Michigan's foolish state constitution which does not allow Detroit to take the suburbs into the city. So Royal Oak's mayor a few years ago could refuse to fund metropolitan buses because he didn't want Detroit's black population able to cross the border into Royal Oak and pollute the city by taking jobs there. And the wealthy residents of the 90% white suburbs of 80% black Detroit come into the city for its amenities--opera, plays, sports, museums--and its work, but take their pay out of the city to maintain their schools and shops and amenities while complaining about how awful Detroit is. We Detroit residents are very worried that the GOP's takeover of the Democratically elected city government will result in the rape of the city's assets--Belle Isle is a jewel in Detroit's crown that the state covets; Detroit's water system is another asset that the state--and the white suburbs--covet and want to control. The EM will be pressured by Snyder and the rest of the upstate Detroit haters to take over those assets and make Detroit pay for being a center of unionism and Democratic voters.
The Michigan passage of the so-called "right-to-work" law and the renewal of the emergency manager law AFTER it was defeated by the people in Novemberare perfect illustrations of the contempt that the current Republican party shows for ordinary people when it is in power in a state. And it also illustrates well the capture of legislators and agencies by oligarchs, monopolies and duopolies. This is, as Johnston notes, a sad state of affairs that will only get worse unless the press reinvigorates itself to inform rather than kiss Big Business's ass.
The New York Times today reiterated what many Americans lament--Big Banks went uncharged for serving as the main engine of the Great Recession that cost ordinary Americans jobs, homes and futures. See Andrew Ross Sorkin, Big Banks Go Wrong, but Pay a Little Price, New York Times, at B1 (March 12, 2013).
Big Banks (and especially their managers), however, made out like bandits through the socialisation of losses and privatisation of gains. The aftermath of the crisis provided lower cost of funds from the perceived government TBTF subsidy. Big Bank managers made big bucks leading their institutions into disaster and "staying on" after the disaster because their "expertise" was essential. The stock market, but not ordinary Americans' pocketbooks or paychecks, has recovered from the recession, forging a return of lucrative M&A activity and, of course, the management of wealthy people's assets. No Big Bank has faced criminal indictment for "the damage caused to the economy and millions of Americans" by their sloppy mortgage financing, sloppy foreclosure procedures, and casino capitalism "bets" with credit default swaps and other derivatives.
The reason--the lesson from Enron and Arthur Andersen, where thousands of lower-level employees who had no control over corporate actions lost their jobs when the firms collapsed after wrongdoing and charges. Any Big Corp can be TBTF. "[S]imply charging a company with a crime reaises the possibility of putting the firm out of business." Id. at B5. Collateral damage is therefore a major hurdle to bringing a criminal case against a corporation.
The takeaway, according to the Times article, is that "prosecutors should focus on the individuals responsible for the misconduct" rather than indict corporations, which can result in "condemnation of one person [many employees] for the actions of another [boards and managers or 'rogue' employees]" (quoting, in the latter case, Elizabeth Ainslie's paper on indicting corporatrions).
While protecting employees of rogue firms (where management and directors have pursued aggrandisement of their own status and riches at the cost of society's well-being) is important, it is not clear that the takeway outlined above is a complete answer. Several additional components should be addressed, by a combination of Congressional and state legislative action and regulating agencies. And actions to limit the size of corporations would have another advantage--acting as a deterrent to their power in dictating the well-being of ordinary employees, and thus helping to deflect the growth of corporatism in our society.
First, boards that make irresponsible judgements that allow CEOs and managers to engage in reckless bets with their companies should be able to be held personally responsible more easily, without corporate protection for the ultimate costs.
Second, anti-trust needs to be expanded to limit the interwoven boards and contractual relationships that permit a few TBTF institutions in an industry to dominate the market and set the "Wall Street Rule" for what is acceptable behavior. ULtimately we need forced split-up of TBTF institutions, through anti-trust or new means, as necessary.
Third (and most relevant for this blog, of course), tax policies encouraging corporate consolidation should be strictly limited. The section 368 reorganization provisions should be tightened to require a much higher percentage of continued shareholder interest: the current requirement for a tax free reorg of only 40% (under an example in the reorg regulations) should be tighted to at least 70%. The opportunities for loss recognition in reorgs provided by the Bush Treasury under regulations should be eliminated. Spins of parts of mega corporations to existing shareholders should remain tax-free, but spins that amount to initial steps in acquisitions should be more limited.
Will Congress (or state legislators) take any of these actions? It is highly dubious. The left is too often too cowardly to act and mostly funded by wealthy interests. Most on the right--disproportionately represented in Congress because of gerrymandering in the House and the disproportionate Senator-to-population ratios in the Senate--dogmatically favor market fundamentalism no matter the evil it causes when it comes to advantages for business to make more profits, even if it comes at the expense of ordinary people through market power to defeat unions, defeat reasonable pay requests, etc. (Of course, when it comes to exploiting government , the right tends to favor government subsidies--look at Wisconsin's recent move to remove pesky environmental regulations protecting wetlands to support a mine owner, in the purported interest in supporting job creation, even when the mine is likely to cause long-term environmental damage and potentially devastating water pollution and destruction of wetlands.)
Rep. Camp's Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks.
Regarding those Camp objectives--they are not generally the right ones.
Lowering rates is the wrong objective. We already have very very low tax rates, especially when you consider that we do not have a VAT alongside the income tax as most European countries do. The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP "starve the beast" game. Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees. Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
Simplifying the Code is the wrong objective. About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple. For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don't need it. A tax system intended to cover the many complex transactions of today's globalized economies cannot be simple without being naive.
Curbing some tax breaks is a good idea. But it should be more than "some" and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions. The tax breaks that should be curbed are the ones that are most regressive in nature--i.e., the ones that provide the majority benefit to the very rich.
The hearing today included lots of representatives of charities who were arguing their interest--keeping the tax-incentivized flow of money coming. The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities. If it weren't there, the argument goes, rich people might not give at all, or at least not nearly so much money.
There's not a whole lot of empirical evidence to back this up. On the one hand, there are studies showing that non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don't get any break at all because they don't itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too. Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they've sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.). Does what a rich person says about why he gives hold a lot of weight in this debate? I'd argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times.....
Does the tax incentive come into play in determining how much a person will give? Indubitably. But it isn't clear that people who want to give $20 million to their alma matter wouldn't do so even without the charitable contribution deduction! All that put together suggests that the deduction is highly inefficient. Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.
In addition to the inefficiency of the charitable contribution deduction--at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10% of adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy. They pay tax at the highest rates (well, except when the system doesn't work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute. They invariably itemize, whereas most lower-bracket taxpayers do not. They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).
Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes. The implication is that such a result is disastrous, putting the recipients of the charity's charitableness at risk. But the truth is otherwise. The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations. How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy? And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true). Shouldn't democracies favor taxation and redistribution via program selection over subsidizing the wealthy's favored charities?
So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism. My suggestion would be to limit the deduction to 10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)
What about other changes that would be easier to pass and make lots of sense?
Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties. This is a sheer giveaway to the wealthy that cannot be justified. It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value. This provision should simply be deleted from the Code. That's one simplification that would actually result in more fairness.
Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory--a deduction in excess of their cost basis and for more than the value of the inventory. It's not clear that the deduction incentivizes any additional donations--if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function). IN most cases, it would likely give it away without the enhanced deduction. Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a "level playing field" by letting them get the enhanced deduction too. See NAEIR President Gary Smith's comments, below (in email).
Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations. In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.” In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products. (NAEIR email release Feb 14, 2013)
Not surprisingly, NAEIR is busy promoting the "enhanced" tax deduction (for up to two times the value of the excess inventory) to businesse--see here.
David Cay Johnston writes for Tax Analysts, in Dell's Multiple Restructurings Aid It in Tax Avoidance (2013), about a global reorganization disclosed by Dell in its January 2007 Form 8-K filed with the SEC: "just before the end of 2006, [Dell] issued more than 475 million shares worth $12 billion to invest in a subsidiary." In the Form 8-k, Dell notes that "Dell has modified the corporate structure of certain of its subsidiaries to achieve more integrated global operations and to provide various financial, operational and tax efficiencies" (as quoted in the Johnston article).
What Dell did was remake itself in a way that lets it escape taxes on profits earned in the United States by running them through a Netherlands entity and newly formed subsidiaries in Singapore and the Cayman Islands.
Dell later quietly dropped the Singapore and Cayman Islands entities in what appears to be a pattern of remaking its corporate structure every few years. This nuanced timing pattern may have great significance as a tool for tax avoidance because IRS corporate audit practices were established on the assumption that companies tend to have stable structures. The IRS rarely audits newly formed entities.
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The documents suggest that Dell created companies with no apparent purpose except to funnel profits into jurisdictions where they would be untaxed. In some cases, subsidiary names existed for a day or so and then were changed to the names of existing entities. The company shuffled its subsidiaries like a deck of cards -- a deck stacked against shareholders and the IRS.
Sometimes the deals used companies with identical addresses, suggesting circular flows in which what would be taxable profits in the United States were run through offshore entities with no discernible purpose except escaping tax. Id.
Describing the work of a copule who sleuthed through Dell's state filings and court papers to examine its tax compliance, Johnston reports:
Before one restructuring, Dell Inc. sold products to domestic customers through Dell Catalog Sales Corp., which shared the same address in Texas.
The couple distilled from annual corporate ownership and sales tax filings with state governments, as well as stipulations in various civil lawsuits, that Dell then replaced this simple organizational structure with a hierarchy of tax haven holding companies.
In all, Dell inserted four new companies between the parent and operating entities, which use the same Texas street address.
The result was that a Texas company reported to a Netherlands company that reported to a Singapore company that reported to a Caymans company that reported to what appears to be another Netherlands company that then reported back to the Texas headquarters.
This makes business sense? I cannot fathom how -- except to escape taxes.
And because Dell publicly discloses its untaxed offshore profits and the expected tax rate upon repatriation of those profits, those numbers support the suggestion that the elaborate creation (and killing) of subsidiaries has one primary purpose--the reduction of taxes owed to the US.
Citizens for Tax Justice, in a report last year (Doc 2012-21457, 2012 TNT 202-22), noted that Dell is one of the few multinationals that discloses how much untaxed profits it holds offshore and the expected tax rate if it brought the money back to the United States.
Dell said it had $15.9 billion of untaxed profits offshore on which it would owe a tax of $5.2 billion, or 33 percent. Since that is almost equal to the 35 percent corporate tax rate, it suggests Dell paid virtually no tax anywhere in the world on those profits, because Congress gives a dollar-for-dollar tax credit on corporate income taxes imposed by other countries.
So what, Johnston asks, is the public benefit of allowing this kind of corporate shell game? He suggests tht for shareholders, the question is whether they are being told enought to evaluate the risks and rewards of holding Dell securities. And he concludes probably not. For the IRS, it is whether regular audit techniques will miss what they should catch. And again, he wonders if the IRS policy of letting companies know what will be audited, sticking to those points, and completing audits in fixed time periods isn't just a giveway to those who are manipulating their tax rates. Dell's tax counsel, he notes, would undoubtedly advise that they have reviewed each reorganization step and that they are perfectly legal. But Johnston wants an audit, and one that looks at the whay sophisticated companies are adept at working around audit policies. Dell's reorganizations, he says, are apparently timed at two-year intervals, injecting considerable complexity into the work of any IRS auditor trying to track their impact. And "the business purpose for this management structure is elusive", he notes, on one set of slides showing a shuffle of entities that ultimately lands a company still located in Texas under a foreign sandwich of companies and ultimately avoiding US tax on the operating company income. He surmises that Dell owes a billion or more in US corporate income taxes that have escaped capture because of this endless restructuring.
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