Corporations Schemes of Tax Non Compliance ‘The United States loses approximately $100 billion in tax revenues every year due to corporations and individuals sending their money to offshore tax havens… that’s just the tip of the tax avoidance scheming…”
Tax-noncompliance (Wikipedia) describes a range of activities that are unfavorable to the tax system. These include tax avoidance, which refers to reducing taxes by legal means, and tax evasion which refers to the criminal non-payment of tax liabilities. The use of the terms ‘tax avoidance’ and ‘tax evasion’ can vary depending on the jurisdiction.
In general, the term ‘evasion’ applies to illegal actions and ‘avoidance’ to actions within the law. In the United States ‘tax evasion’ is evading the assessment or payment of a tax that is already legally owed at the time of the criminal conduct. ‘Tax evasion’ is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties.
By contrast, the term ‘tax avoidance’ describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place. Whereas an evaded tax remains a tax legally owed, an avoided tax is a tax liability that has never existed. For example, consider two businesses, each of which have a particular asset, in this case, a piece of real estate that is worth far more than its purchase price.
- Business #1 sells the property and under-reports its gain. In this instance, tax is legally due. Business #1 has engaged in tax evasion, which is criminal.
- Business #2 consults with a tax advisor and discovers that it can structure the sale as a ‘like kind exchange’ for other real estate that it can use. In this instance, no tax is due because no sale took place. Business #2 has engaged in tax avoidance (or tax mitigation), which is completely within the law.
In 2010, U.S. corporations avoided approximately $60 billion in U.S. corporate income taxes by using a variety of devices and gimmicks to shift profits to foreign subsidiaries, while the Fortune 100 companies received some $89.6 billion in federal contracts. Since the Government Accountability Office (GAO) reviewed this issue in 2008, top companies have added 44 new subsidiaries in countries identified by the GAO as ‘tax havens’.
The lost revenue would be more than enough to fund the entire budgets of the Environmental Protection Agency (EPA) and the Departments of Energy (DOE) and Labor (DOL) combined. One recent study found that eight of the top 12 companies effectively paid no federal income taxes from 2008 through 2010. The official U.S. corporate tax rate of 35% largely exists in name only. The U.S. collects less in corporate taxes as a share of GDP than 24 out of 26 industrialized countries.
The share of the federal budget funded by corporate income taxes has dropped dramatically since the 1940s, from 28.8% of the budget to 10.3%. Of the 77 Fortune 100 companies with subsidiaries in ‘tax haven’ countries, 69 had federal contracts. The pharmaceutical and tech sectors loom particularly large, including; Merck, Pfizer, General Electric, Dell, Google. General Electric is paying essentially no federal tax, and had over $3 billion in federal contracts. Google’s ‘Double Irish-Dutch Sandwich’ illustrates the convoluted mechanisms used to hide profits overseas…
Then there is the ‘Reverse Morris Trust’, a tax-avoidance technique that is increasingly deployed by corporations seeking to sell off unwanted assets without paying taxes on their gains. The ‘Reverse Morris Trust’ starts with a parent company looking to sell assets to a smaller external company. The parent company then creates a subsidiary, and that subsidiary and a smaller external company merge and create an unrelated company.
The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right and economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company. The Reverse Morris Trust originated from the Morris Trust: In 1966, the legal case ‘Commissioner v. Mary Archer W. Morris Trust’ went to court, and Morris Trust received a favorable ruling. Due to this ruling, a loophole was created for companies to avoid taxes when looking to sell unwanted assets.
Two examples of Reverse Morris Trust-driven transactions were a $2.7 billion spin-off of Verizon Communications’ and a $2.4 billion spin-off of the Walt Disney Company’s ABC Radio business. Verizon received $1.7 billion in cash and securities, and Disney retained $1.35 billion in cash from the proceeds…
In the article “Procter & Gamble and the Dark Art of Tax Avoidance” by Allan Sloan writes: The tax-avoidance spotlight has been shining brightly, via the media, on companies like General Electric, Exxon Mobil, Verizon, and big multinational banks. But some of the most clever and innovative tax avoiding is being done by a company not usually associated with financial wheeling and dealing: ‘Procter & Gamble’ (P&G).
In three deals spread over almost a decade, P&G–the owner of Tide detergent, Bounty towels, Gillette shaving products, and many other household names– has managed to reopen a loophole that Congress closed in 1997. By my estimate, P&G’s profits on the deals, which involve selling brands it no longer wants, total about $6 billion and are tax-free to the company, and are tax-deferred to its shareholders, possibly forever.
A straight-up sale would have triggered a $2 billion federal tax bill and a hefty state tax bill. All three involve so-called ‘Reverse Morris Trust’ transactions. “P&G is the most active practitioner of this technique,” says tax expert Robert Willens. These deals are perfectly legal, and under current market mores, P&G’s obligation to maximize its owners’ returns trumps its obligation to pay taxes to support our society.
“P&G’s goal in these transactions is to achieve the best value for company shareholders, while also seeking a good fit for the business being sold,” says company spokesman Jennifer Chelune. Fair enough. If there’s no abuse, why am I discussing these sales? To show that the system needs reforming. To demonstrate how even a company like P&G practices the dark tax-avoiding arts. And to show how big the stakes are…
In the article “The Social Irresponsibility of Corporate Tax Avoidance” by John Christensen and Richard Murphy write: Tax revenues are the lifeblood of democratic government and the social contract, but the majority of multinational businesses have been structured so as to enable ‘tax avoidance’ in every jurisdiction in which they operate.
They argue that policy measures are required to redress the distortions that have arisen as global companies have left nationally based tax regimes floundering. The scale of ‘tax avoidance’ activity has become so enormous that it can fairly be described as a ‘shadow economy’ operating in the majority of global sectors…
Owing to the secretive nature of this type of activity, it is not possible to quantify accurately scale of this shadow economy, but recent estimates give some idea of possible scale: At least half of all world trade appears to pass through ‘tax havens’, even though these jurisdictions account for only about 3% of global GDP.
The UK government estimates that 60% of international trade consists of intra-company transactions, that is, firms trading with themselves and much of this is passed through tax havens that charge low or zero rates of tax on profits. The value of assets held offshore, either tax-free or subject to minimal tax, is estimated at US$11 trillion, which is over one-third of global GDP…
Multinational companies make use of aggressive tax-planning strategies because they are able to operate in the legal vacuum that exists between nation states…
In the article “The Top 10 Worst Tax Avoidance Corporations” by Robert Oak writes: Everybody knows multinational corporations are not paying U.S. taxes. Yet instead of making corporations cough up, our government is busy planning more screw jobs on the U.S. middle class and labor force, all under the guise of reducing spending.
Senator Bernie Sanders is trying to draw attention to the insanity with a top-ten list of the worst corporate tax avoiders. Here is the list from Sander’s floor speech:
- Exxon Mobil made $19 billion in profits in 2009. Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.
- Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion.
- Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS.
- Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.
- Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS.
- Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction.
- Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.
- Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 billion bailout from the Federal Reserve and U.S. Treasury.
- ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.
- Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1%.
The evidence is clear that major U.S. corporations are avoiding tens of billions of dollars in U.S. corporate income taxes through a variety of schemes and gimmicks which allow them to hide profits and avoid paying corporate income tax. The U.S. corporate tax system debuted more than 100 years ago and has evolved little to meet the challenges of today’s economies.
The U.S. corporate tax system must be reformed to keep pace with the new realities of multinational corporations and global economies. A simplified tax system that provides corporations with incentives to locate, invest, and produce in the U.S., while offering citizens the prospect of more and better job opportunities and higher wages.
The U.S. Congress and Administration must begin the process of reforming/reinventing the corporate tax systems, now: First, address and correct the corporate tax loopholes & gimmicks that allow large-scale ‘tax avoidance’; second, fundamentally rethink the corporate tax system and align it with the realities of the new multinational corporations and global economies of the 21st Century…
“The Capitalism System can exist without tax loopholes & shady practices: Corporations must shoulder their fair share of tax burden- it has in the past- it can do so again.”