One of the (many) ways by which rich, sophisticated taxpayers who are also ultra-greedy have managed to avoid paying their fair share of taxes is to move money offshore through trusts and "companies" set up in various no-tax/lo-tax, hi-sun jurisdictions like the Cayman Islands, British Virgin Islands, Cook Islands, Singapore, etc. I suppose for many years this scheme served multiple objectives--it stashed the cash beyond the reach of the US government, it provided a nice place to visit the cash, and it had the cachet of belonging to the exclusive jet set behind it.
That's becoming less so as the US continues to pursue tax cheats with unreported offshore accounts. The dam started bursting with the revelation of the way Swiss bankers groveled at their American clients' feet, from smuggling diamonds into the country in toothpaste tubes to secreting gold in deep, hidden vaults to setting up sham companies in the Phillipines or other countries. Over the last half decade, more people have participated in voluntary disclosure and more have been identified for more serious penalty programs (including criminal prosecution). Each voluntary disclosure included full information about those who facilitated the offshoring--bankers' names, other involved lawyers, accountants, and bankers, other entities. That groundswell of information facilitated identification of even more tax cheats, and those identifications yielded a new trove of relational data--those who had assisted them. That finally seemed to begin to put some teeth into enforcement efforts and some gnashing of teeth into the lives of the otherwise obliviously happy tax evaders.
But various commentators (including my colleague at Wayne Law, Professor Michael McIntyre) have been concerned that the offshore gambit can't be cleaned up until countries begin more automatic sharing of the tax information they have without requiring the requesting country to have already identified the accountholder well enough to ask for information specifically about that person. If they can ask specifically, of course, it means they have already been found, which makes for a catch-22 that has made pursuing secret bank account holders an overly arduous task.
That makes the IRS's announcement today of a new coordinated effort among the U.S., U.K, and Australia heartening news. They have agreed to share information about trusts and companies holding assets in tax havens like the British Virgin Islands, the Cayman Islands, and Singapore. See IRS news release IR-2013-48 (May 9, 2013). With the cache of information each country has gleaned from the recent efforts, coordination will allow them all to benefit from each one's effort. That should accelerate the effort to catch the tax cheats.
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 .
It seems that billionaires think they are entitled to it all and think they should be able to run their speculative games without paying much of anything at all in taxes to the government they depend on. And none of this is good for the economy or good for the taxpayers not in "the 1%".
Case in point--John Paulson, the notorious hedge fund manager who got a CDO built to his desires with a bunch of iffy subprime mortgages and then took the short side of the bet, making a fortune off the bet against subprimes in the mortgage crashes underlying the 2007-8 Great Recession. See, e.g., Zuckerman, Trader Made Billions on Subprime, Wall St. J. (Jan. 15, 2008).
What has Paulson done? He established a new "reinsurance company" in Bermuda in April, that turned around in June and put the money invested in it back into Paulson's hedge funds in New York, as a portfolio of insurance "reserves" to be held to pay off insurance risks that go bad. The result is tax deferment for Paulson and other executives of his hedge fund along with recharacterization of ordinary compensation income as preferentially taxed capital gains.
For a discussion of the hedge fund reinsurer gambit, see , e.g., any of the following. The story at Bloomberg has reinvigorated media attention to this issue.
Barile notes that these hedge funds are using reinsurance premiums and investing in a very aggressive way, compared to traditional reinsurers". This aggressive position produces a downside if there are low investment returns, especially if there are catastrophes for which they have to pay claims when their investment strategies have produced losses. He says that "it remains to be seen" whether hedge-fund reinsurers are in it for the long haul, since they have a shorter time frame on making greater returns on their money.
Looking at this as a global concern, Baker ultimately suggests that the Basle Capital Accord rules should be extended to hedge fund reinsurer operations, "Another area in which the BIS should take a leadership position," he says, "is the role in which reinsurance firms play in hedge fund operations. The tax implications of hedge funds using reinsurance firms in their funds for tax advantages points to the need for more government regulation of this activity."
He describes the basic problem as follows: "wealthy individuals invest in private placement offerings of offshore reinsurance companies. These companies, many headquartered in Bermuda, buy insurance policies written by name-brand insurers...and "may then invest its stock issue returns in a hedge fund. ...[That reinsurer] pays no taxes on the trading profits until it sells the fund shares and then the reinsurer is taxed at a lower capital gains tax. The tax savings are passed on to the individual investor.
He goes on to say that "The problem ... is that insurers are exempt from registering as investment companies....These reinsurers do not have to make annual distribution of profits as mutual funds do and they are not taxed by the Internal Revenue Service as investment vehicles. ...In short, the activity ... is a method for wealthy investors to reduce their tax burden as a result of a tax loophole. Since these insurance companies are mixing insurance business with investment business, they need more supervision.
This is especially true when hedge funds are involved. "[H]edge funds work with reinsurers to reduce tax liabilities for their wealthy clients. ...U.S. hedge fund managers and investors form a tax-advantaged reinsurance company offshore in...Bermuda, which has no corporate income tax. The Bermuda-based reinsurer sends investment assets to the hedge fund to invest. Investors return to the United States with shares of the reinsurer and pay no taxes until the company goes public. At that time, investors [and managers] sell their shares in the reinsurer company and are taxed at a lower capital gains rate.
These schemes are worrisome from both tax and insurer regulatory perspectives. "Aside from the tax loophole problem, the real issue in these cases is the added underwriting risk incurred in the process. ... [Hedge funds acting as reinsurance companies] have insufficient insurance expertise.... Much of this activity has stemmed from financial engineering and deal making of the 1990s. ... [W]ithout the bailout of LTCM [Long-term Capital Management hedge fund] by national bank regulatory authorities, many banks and reinsurers might have collapsed as well."
So why do it and how does the hedge fund reinsurer gambit work? Remember that these hedge fund execs get a ridiculous amount in compensation in the form of a "fee" (usually 2% of assets under management) and a "carry" (usually 20% of the profits). (The fee and carry are often represented as 2 and 20, but can be much higher for some firms with status, rising to as much as 5 and 50.) Without more, hedge fund managers don't get as much benefit from the claimed treatment of a "profits" partner as private equity fund managers do. Though the managers claim classification as "profits" partners whose taxation is based on their share of the partnership's gains and ordinary income and not as payments of (ordinary) compensation, hedges mainly yield ordinary income so don't act directly as "converter" entities. Private equity fund managers also claim they are "profits" partners whose income should not be classed as compensation but as pass-through shares of the partnership items: in their case, most of the private equity fund's gains will be deferred anyway (for several years at least until the partnership sells the leveraged company) and they claim those deferred gains should be characterized as pass-throughs characterized by the partnership rather than being characterized as ordinary compensation income to them.
So for hedge fund managers, gaining deferment (of what is clearly in substance their compensation as managers) can achieve minimal current tax. If the money is cycled through an offshore corporation that pays no taxes, that's even better because it gets preferential rates as well. The deferrment is achieved by waiting to sell the stock, and the sale of the stock is reported as a capital gain. Thus what is really current compensation income is recharacterized, through the reinsurer "conduit" scam, as a deferred capital gain. So hedge fund and private equity managers ultimately both claim to get the best of all possible worlds--their wages from work are not currently taxed as wages at ordinary income rates, they pay no payroll taxes on their compensation, and their compensation is deferred and taxed at preferential capital gains rates.
This is so obviously unfair to the vast majority of ordinary taxpayers who pay taxes on their compensation income even before the end of the tax year through the withholding mechanism that Congress should step in with legislation. It seems hard to justify a "profits" interest in a partnership at all: it has been created by the "Wall Street Rule" that gains credence because big-money people claim it is correct. As usual, tax administration eventually mostly went along with it (Rev. Proc. 93-27) and a few court cases (Diamond, Hale) mostly treat the notion of a profits partner who pays no taxes on his compensation as reasonable. Congress could easily legislate away the profits interest and define partner in a partnership for tax purposes as someone who has made a genuine at-risk equity contribution of cash or property to the partnership. There really should be no such thing as a services partner with a "profits" interest who hasn't contributed up front for a capital interest. And all compensation shares to what are currently treated as profits partners could be treated as ordinary income --i.e., compensation currently subject to the income tax and to payroll (Social Security/Medicare) taxation.
This use of reinsurers by hedge funds is itself a tax dodge that has been around a decade or so. In 2007, the Senate Finance Committee held a hearing on Offshore Tax Issues: Reinsurance and Hedge Funds (S. Hrg. 110-875, Sept. 26, 2007) (179 pages). In his introduction, Baucus described insurance tax avoidance schemes as follows:
Insurance companies make a living by doing two things: they assess premiums based on the prediction of the likelihood of events against which they insure—that is called underwriting—and they also make money by investing the premiums that they collect until they have to pay out claims. If they are good at those two jobs, they make a profit.
Customers buy insurance from insurance companies to guard against the risk of fire, disaster, or some other calamity. In exchange for paying premiums, the customers shift some of their risk to the insurance companies. Insurance companies also buy insurance. Property and casualty insurance companies pay premiums to reinsurance companies in exchange for shifting some of their risk to the reinsurance company. Sometimes the reinsurance company is also the parent company of the property and casualty insurance company. In that case, the property and casualty insurance company shifts risk to their parent reinsurance company at something less than an arm’s length transaction.
Here is where the tax avoidance comes in. Some parent insurance companies set their headquarters in low-tax jurisdictions, like Bermuda. Subsidiary property and casualty insurance companies shift risk to the Bermuda parent. Because of Bermuda’s low tax burden, the Bermuda parent can get a greater after-tax return on their investment activities. As a result, subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.
The second setting that we will examine today involves hedge funds. Foundations and other nonprofits are some of the largest investors in the world. The law requires a nonprofit investor that invests directly in hedge fund partnerships to pay the unrealized business income tax, otherwise known as UBIT. The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing. To avoid UBIT, nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in lowor no-tax jurisdictions, such as the Cayman Islands or Bermuda. These offshore entities are called blockers.
The third setting we will examine today is the compensation of hedge fund managers. Hedge fund managers receive fees from offshore blocker corporations used by nonprofits and foreign investors.Some hedge fund managers elect to defer their income, and deferring income means you pay taxes later, which is the same as a significanttax savings.
The IRS has already noted that offshore arrangements using reinsurers for hedge fund managers may be shams that are subject to challenge on audit. See Notice 2003-34 (indicating that "Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain. The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest.") Although the notice says that these purported insurers may be challenged as not insurers because they are not using their capital and efforts "primarily in earning income from the issuance of insurance", and although it states that such arrangements will be subject to close scrutiny that could result in the application of the PFIC rules (leading to current taxation), it has apparently not bothered to challenge any of the big hedge funds' reinsurer companies.
Again, why would they be subject to challenge? On the basis that they are not real reinsurers, since the low amount of reinsurance that many provide is the less risky part of the business and provides a buffer to the very high reserves that they retain, sometimes invested solely in a single promoter's hedge funds. And if they are not insurers, they are at the least "passive foreign investment companies" (PFICs) on which shareholders are subject to current taxation on profits. (Or perhaps the IRS might go further and recharacterize the arrangement as a sham , causing the hedge fund executive to have current ordinary compensation income.) In other words, there is good cause to think that for many of these, the tax haven corporation is acting as an offshore tax-avoidance pocketbook for the hedge fund executive, and not really as an insurer.
By the way, if you think these hedge fund managers who are making multi-millions and billions from managing other people's assets and hardly paying any U.S. taxes on those huge compensation payments are incredibly smart people who add to the economy's well-being and therefore merit that kind of out-sized pay or because of the returns they bring to people that then invest them in needed projects in the good ole US of A, you need to rethink that. Hedge funds typically pay out very poor returns, when all the expenses and profits to managers are taken into account.
Roughly speaking, if the typical fund manager worked for free, and if the investment firms didn’t charge, these masters of the universe would still have underperformed a balanced index since 2003, by roughly 2.5 per cent per year. Andrew Hallam, Think you're smarter than a hedge fund manager?, The Globe and Mail (Feb. 19, 2013) (emphasis added).
Bloomberg dug into Google's annual SEC 10-k filing to discover that the company plans to litigate an issue from the 2003 and/or 2004 tax years. No suit has yet been filed, and there is no information regarding the substance of the dispute or the amount at stake. See Googloe Plans Litigation Against U.S. Tax Authorities over Audit, Bloomberg.com (Feb. 6, 2013).
Google has been in the news lately because of its ability to offshore profits to low-tax countries like Bermuda using treaty countries like Ireland and the Netherlands. Because most of Google's assets are intangibles, it is relatively costless to claim "sales" through intracompany transactions that offshore the intangible and then attribute the profits to other countries. Valuation of such sales of intangibles is inherently manipulative--no company would actually sell such invaluable essential business property to a third party, and there are strong arguments that our laws should not permit companies to make such "paper-only" transfers of intangible properties to offshore affiliates that have the primary result of creating complex structures that achieve lower US taxes, like the "Double Irish" and "Dutch Sandwich".
As the report notes, Google's 10k reports an overall (state and federal) effective tax rate of only 19.4% in 2012, down from the 21.2 reported in 2010, even though the federal statutory rate on profits is 35%. In 2012, at least $9.8 billion in profits shifted to a Bermuda subsidiary. These tax-haven subsidiaries are often just token offices with some paper-pushing and no real business reason for existing. The difficulty for the government here is action taken by the Bush administration--"In 2006, the IRS signed off on a 2003 intracompany transaction that moved foreign rights to Google's search technology outside the U.S."
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.
***
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.
As Europe, the US, and other countries continue to face sluggish economies in the midst of extraordianarily high corporate profits, substantial accumulation of new wealth in the hands of even fewer people, and inordinate influence of corporatist approaches on democratic governance, a public backlash is growing and legislatures are beginning to notice.
Here in the US, President Obama's second inauguration speech acknowledged the necessity of cooperative approaches to the dire problems we face today. Those problems-- poverty, limited opportunity due to lowerclass status, lack of educational access, climate change and infrastructure needs--all relate to the increasing inequality among our people, the ability of the wealthy to buy secure and safe lifestyles for themselves while the majority are left to struggle with potential loss of jobs, homes and health. People are starting to notice the inordinate power of huge multinational corporations and their owners due to the influence of wealth and the way the wealthy have been able to capture almost all of the gains of the last few decades for themselves. Perhaps we are on the cusp of a new populism that will reclaim the American economy and the American system for ordinary people.
In the Netherlands, the backlash against unfair tax policies may be happening even more clearly than here. The Netherlands has become an infamous tax haven for corporate giants (renowned for using the "Dutch sandwich" structure to avoid taxation). Yahoo's arrangement, described by Jesse Drucker in a Bloomberg story today, illustrates the problem perfectly.
Inside Reindert Dooves’ home, a 17th century, three-story converted warehouse along the Zaan canal in suburban Amsterdam, a 21st-century Internet giant is avoiding taxes. The bookkeeper’s home office doubles as the headquarters for a Yahoo! Inc. (YHOO) offshore unit. Through this sun-filled, white walled room, Yahoo has taken advantage of the law to quietly funnel hundreds of millions of dollars in global profits to island subsidiaries, cutting its worldwide tax bill.
The Yahoo arrangement illustrates that the Netherlands, in the heart of a continent better known for social welfare than corporate welfare, has emerged as one of the most important tax havens for multinational companies.
Jesse Drucker, Yahoo, Dell Swell Netherlands $13 Trillion Tax Haven, Bloomberg.com (Jan. 23, 2013). Many of the Dutch companies created by MNEs like Yahoo, Google, Merck, and Dell are sham companies that "only exist on paper". $10.2 trillion dollars went through 14,300 of those sham companies in 2010. Id. Merck has 54 subsidiaries in the Netherlands and routed more than 7 billion euros in royalties between 2002 and 2010 through an Amsterdam subsidiary that has no employees. Id.
The Labour Party and People's Party for Freedom and Democracy took power in November and are "fed up with these so-called PO Box companies", according to a parliamentarian from Labour. Id. Another parliamentarian (from the Dutch Socialist Party) noted that while governments are cutting their budgets, multinationals are avoiding taxes, and the Netherlands is functioning as a connecter to the tax havens.
The anti-tax avoidance concern is growing across advanced nations. As the article notes, the European Commission, has also noted the problems with tax avoidance and evasion and has advised its member states to adopt anti-abuse rules. Similarly, the OECD is discussing a proposal to make it harder for companies to use shams like the Dutch sandwich structure to shuffle profits into tax haven islands and avoid taxes in OECD countries. And the UK has scheduled a second parliamentary hearing this month on the issue. Id.
Tax treaties are supposed to protect companies from double taxation on the same income by two different jursidictions, but tax lawyers have developed sophisticated structures that allow companies to enjoy double non-taxation. The article describes Dell's use of a Netherlands subsidiary (with no Netherlands employees) to claim credit for about three-fourth's of Dell's worldwide income and achieve substantial tax savings--about $4 billion since 2004. Id. The US Is challenging Dell's claim that it is appropriately using the Netherlands and Singapore arrangement to avoid US taxes.
And of course these same MNE giants are the ones that are accumulating billions overseas on which they are seeking special legislation to allow them to repatriate cash to the US at low (or negative) taxes. See earlier ataxingmatter posts on this issue.
Hopefully, even the Republicans in Congress will realize that this corporate game of tax avoidance using international subsidiaries that have no employees is a sham and will take action to eliminate loopholes that permit hugely profitable companies to pay minimal corporate taxes.
As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout. LBOs, of course, use the company's own assets as collateral for debt to purchase the company--one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies.
Michael Dell has a particularly interesting "problem". Like most high-technology companies, Dell has avoided a lot of US tax by offshoring and claiming its profits in offshore tax havens rather than in the US. So it has more than $14 billion of highly liquid assets in offshore affiliates and not here. See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, Bloomberg.com (Jan. 18, 2013).
We shouldn't allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like "lowering tax rates" and "simplifying the tax code", both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any "simplification" as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.
Congress of course hasn't had the gumption to take on Big IT for years. And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been "bad" tax citizens--the 2004 misnamed "American Jobs Creation Act" that allowed the bad companies that had offshored their profits to avoid tax the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates--the so-called "repatriation holiday" provision. As usual, the right-wing claimed that these corporate tax breaks would create jobs. They didn't (as shown by Bush's dismal job creation record, even before the onset of the great Recession). Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets. So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments.
So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful "repatriation holiday." The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs. But that's bunk. The evidence is in from the last repatriation holidy--it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.
Obama and the Democrats in Congress should resist. Ordinary Americans should not bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates. And ordinary Americans surely shouldn't be called upon yet again to subsidize profit-making corporation's low-tax regimes through the cuts ordinary Americans will suffer to needed services.
If you are a company that depends on IP for a lot of your revenue, you may be able to avoid considerable taxes by funnelling profits from subsidiaries in high-tax countries into a Bermuda shell company. Google avoided about $2 billion in worldwide income taxes in 2011 by shifting about 80% of its total pretax profits-- $9.8 billion -- into Bermuda. See Jesse Drucker, Google Royalties Sheltered in No-Tax Bermuda Soar to Nearly $10 Billion, Bloomberg.com (Dec. 10, 2012).
Meanwhile, the US decided not to take action against HSBC for its fraudulent behavior because it was considered so big that it could damage the financial system (again) to interfere with its continuing corporate existence. See Glenn Greenwald, HSBC, too big to jail, is the new poster child for US two-tiered justice system, guaradian.co.uk (Dec. 12, 2012) (noting that "one of the world's largest banks, HSBC, spent years committing serious crimes, involving money laundering for terrorists; 'facilitating money laundering by Mexican drug cartels'; and 'moving tainted money for Saudi banks tied to terrorist groups' " but US officials decided "not to prosecute HSBC for accepting the tainted money of rogue states and drug lorgds on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the 'collateral consequences' of taking the baqnk to court").
Maybe this kind of information will finally incense governments against corporate tax dodging. What we need are laws that refuse to recognize shell companies set up in tax-haven countries to siphon profits from the countries where they originate. What we need are fewer possibilities for companies to expand through tax-free mergers and acquisitions that allow them to get so big that they become immune to ruin when they commit major crimes.
The US and other countries like Germany have been pressing the Swiss on their bank secrecy, which allows U.S. and other foreign citizens to establish bank accounts without the knowledge of the home country and thus hide assets and income from home-country taxation. The US passed laws (called by the acronym "FATCA") that require foreign banks to actively report information on US accountholders. The hope is that every country will recognize the harm done to tax systems by banking secrecy and join in imposing similar information-reporting requirements.
The Swiss, meanwhile, have been trying to circumvent universal adoption of such laws. See, e.g., Nicholas Shaxson, A scheme designed to net trillions from tax haves is being scuppered, Guardian.com (Nov. 22, 2012). Britain, Luxemburg and Austria are cited as being in the forefront of the scuttling movement: Britain, for example, has entered into a "Rubrik Agreement" with the Swiss.
The Swiss thought they had a deal with Germany. This would be a bilateral deal in which the Swiss agree to an upfront payment in lieu of any back taxes on the accounts and then agree to act as tax collector for the foreign government on the accounts, thus maintaining secret the identity of the foreign taxpayers.
Such an agreement is problematic for two reasons: (i) it requires the foreign government to trust the Swiss banks to pay the right amount over in taxes and (ii) it undermines the drive to eliminate offshore banking secrecy as a cover for tax evasion.
Transparency in international banking and taxation matters would require that banks provide information on accounts held by foreigners to the foreigners' home jurisdictions, without any account-specific or accountholder-specific request required. The reason for a more transparent rule is that otherwise the home jurisdiction has to have information it does not have (who has an account at a Swiss bank) before it can ask for the information it needs to ferret out who has such an account and may be engaging in tax evasion. The biggest cracks in banking secrecy have thus come from whistleblowers and opportunists who sell account-holder information to purchasing jurisdictions.
Friday, the Germans rejected--for now at least--a German-Swiss deal supported by Chancellor Merkel that had been two years in the making. France is apparently also considering rethinking a similar deal.
The Swiss leverage was clearly stated by Swiss banking official Mario Tuor, who "noted that without a deal, the status quo would remain: German officials can seek specific information from the Swiss government on people suspected of tax evasion, or go back to buying data stolen from Swiss banks. 'With an agreement, every German taxpayer in Switzerland would be taxed,' Mr. Tuor said." German Lawmakers Reject Swiss Tax Deal
This is an oldie but goodie, one worth reminding you of (or calling to your attention for the first time).
[The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?
Representative Steve King (R-IA) on the floor of the House of Representatives last year:
"Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."
***
Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this: “You cannot weigh the human soul in the same scales with a piece of pork.”
Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act: “The labor of a human being is not a commodity or article of commerce.”
Citizens for Tax Justice has focused on Apple's ability to lower its US effective tax rate by offshoring its profits to tax havens. See, e.g., Robert McIntyre, What Apple Pays in Taxes and Doesn't, NY Times Letters to the Editor, CTJ, How to end Apple's offshore shenanigans, May 4, 2012; [hat tip Paul Caron at Tax Prof]. Here's the key idea in both the letter and the report.
Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.
If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.) CTJ report.
How does CTJ know that Apple parks its profits offshore in tax havens where they are subject to minimal taxes?
Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government. Id.
This is a genuine problem for the US in the age of digitized information. Companies easily "sell" their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious--that no price would actually be sufficient to purchase the company's valuable intellectual property away from it, since the IP is in fact the basis for the company's business. So companies offshore their profits to post-office boxes in tax haven countries and claim that the US Is no longer the source of their profits, even though the IP was invented in the US, is still used in the US and still results in most of the sales actually in the US.
There are at least two possible solutions. One would be to deny companies the ability to treat the IP they use to create their products as sold for tax purposes, and to permit only licensing for royalties to actual factories in countries that are not tax havens. Another would be to end the deferral on "active business" profits offshore. It makes no sense because it incentivizes companies to offshore as much of their business as possible.
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