Tax avoidance, and corporate responsibility

uncle-sam-pay-your-taxes1Would you consider Apple, Coca-Cola, General Electric, Google, Microsoft, Nike and PepsiCo good corporate citizens? Certainly they position themselves that way, and they deserve credit for their leadership around human rights (Apple, Nike), climate change (GE), water (Coca-Cola), renewable energy (Google, Microsoft) and sustainable agriculture (PepsiCo).

But when it comes to paying corporate income taxes, they have some explaining to do.

That, at least, is the conclusion that I came to after reading an excellent report on tax avoidance titled Offshore Shell Games, and published last month by Citizens for Tax Justice and US PIRG.

Corporate taxation is all over the news these days as US firms move their headquarters overseas for tax reasons, in a process known as inversion. But aggressive maneuvering to avoid taxes is nothing new, as I wrote today in a story for Guardian Sustainable Business.

Here’s how the story begins:

America’s a great country. That’s why people from all over the world — including, lately and tragically, thousands of poor children from Central America — clamor to get in. So why are some of America’s wealthiest companies trying to get out?

It’s simple, really — they don’t want to pay US taxes.

You’ve probably heard about Walgreen’s, your neighborhood pharmacy that is contemplating moving its headquarters to Switzerland to reduce its tax bill. Medtronic, the big medical device company based in Minneapolis, Minnesota, has plans to move to Ireland, for tax-avoidance purposes. Then there’s Mylan, a maker of generic drugs based near Pittsburgh, Pennsylavia, which intends to incorporate in the Netherlands, where the tax rate is lower. Mylan’s CEO, as it happens, is Heather Bresch — the daughter of US Senator Joe Manchin, a West Virginia Democrat — and she says she has no choice but to go.

Other companies aren’t going so far as to relocate their headquarters, a process known as inversion that often requires them to acquire a company based elsewhere. Instead, to avoid US taxes, they are parking their earnings offshore, often in tax havens like Bermuda and the Cayman Islands that levy no corporate income taxes. That tactic, which like the inversions is legal, is being employed by companies that position themselves as good corporate citizens — among them Apple, Coca-Cola, General Electric, Google, Microsoft, Nike and PepsiCo.

Exploiting loopholes in the tax laws may or may not be legal–the IRS is hopelessly outgunned by big corporate tax departments–but it’s unethical.

The report from Citizens for Tax Justice and US PIRG, which makes for surprisingly compelling reading, details a number of questionable tax avoidance strategies that allow companies to shift earnings, purely for tax purposes, from high-tax jurisdictions like the US to tax havens. Here are my favorite fun facts from the report:

The report found that subsidiaries of US companies reported earning $94bn in Bermuda, which has a gross domestic product of just $6bn. That doesn’t compute. US firms reported earning another $51bn in the Cayman Islands, where GDP is about $3bn.

This is outrageous, and please don’t tell me that the way to fix the problem is to reduce the admittedly high US corporate income tax rate. The US cannot compete with places where the tax rate is zero.

All of these companies, of course, benefit enormously from government services–public education, police, the rule of law, highways, etc. Those companies that don’t pay their fair share shift the burden to others–small businesses that can’t afford high-priced accountants, companies that don’t have overseas operations and therefore can’t take advantage of the opportunity engage in tax-avoiding shenanigans and, of course, the rest of us.

You can read the rest of my story here.

Comments

  1. Ed Reid says:

    Marc,

    I would argue that there is no such thing as a “tax loophole”, though there are certainly carefully designed tax preferences embedded in the monstrosity which is the US Tax Code.

    When I was growing up, my father frequently reminded me that “ignorance of the law is no excuse”. However, as the law has evolved over my lifetime, with special courts and specialized lawyers and accountants, ignorance of the law is almost unavoidable.

    The move toward inversion is largely driven by avoidance of US taxes on non-US income, rather than avoidance of taxes on income earned in the US.

    There is a cogent argument for the elimination of corporate income taxes, based on the reality that corporations actually collect taxes from their customers and remit them to the government.

    I would argue that the vast number and variety of taxes levied in the US by government at all levels are intended largely to disguise the absolute magnitude of the taxes imposed on US taxpayers, as is the continuation of the WWII income tax withholding.

    I am actually moderately impressed that US PIRG used the term tax avoidance, rather that accusing these corporations of tax evasion, as would have been its tendency in days past.

  2. Marc,
    I can solve this problem. Eliminate the corporate tax entirely. There is no Mr. Exxon. Tax the investors and employees who reap the rewards of corporations’ profits.

    Corporate tax receipts only represent 10% of government revenues. The loss of corporate tax receipts could easily be replaced by adjustments to the capital gains rate and limits on tax deductions that benefit the wealthy (e.g. mortgage interest and charitable contributions)

    Problem solved.

    Stuart

    • Marc Gunther says:

      I agree. That would be simpler. It might stimulate job growth, albeit not among accountants.

      But if there is no Mr. Exxon (or Ms. Hobby Lobby), how is it that corporations enjoy the right to participate in political campaigns by donating money and the right to operate their business according to their religious beliefs?

      • Ed Reid says:

        Right now, from a tax perspective, there is a Mr. Exxon and a Ms. Hobby Lobby. Mr. Exxon and Ms. Hobby Lobby are affected by many laws and implementing regulations issued at the federal level, including the tax code and laws such as PPACA. It seems perfectly reasonable that they should be able to participate in the selections of those who would write the laws which affect them.

        Closely held corporations are merely exempt from requirements of implementing regulation under law which would infringe the rights of the owners under the Constitution and RFRA. No law trumps constitutional rights, Mr. Obama and Ms. Sebelius notwithstanding, nor does any administrative implementing regulation issued under such law. Hobby Lobby has been operating for more than 40 years according to their religious beliefs; and, complying with all applicable laws. There was and is no compelling federal need to insist that they abandon their beliefs in favor of free availability of abortifacients under PPACA.

        The Little Sisters of the Poor have been operating for even longer, according to their religious beliefs. They will have their day in court in due course.

        One wonders how you would respond if the federal government decided that Jewish butchers were required to sell pork and Jewish restaurants were required to serve it; or, Muslim butchers and restaurants. How about if the feds banned circumcision?

        Sometimes, our reactions to these issues are largely a function of whose ox is being gored.

  3. Hi Marc, rather than isolate tax, I have contemplated whether what we need is an all encompassing view of the value companies bring to society. A comparison of contribution to society in terms of salary, tax, philanthropic donations and shareholder dividends would be a place to start. Would also need to consider the extent to which supplier spend as a way of sharing the value, plays into the equation too.

Speak Your Mind

*