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Most big firms use offshore tax havens

By Kay Bell · Bankrate.com
Thursday, June 5, 2014
Posted: 3 pm ET

Individuals aren't alone in using offshore tax havens.

A new report by two public advocacy groups says that as of 2013, more than 70 percent of Fortune 500 companies maintained subsidiaries in tax haven countries simply to lessen the checks they must write to the U.S. Treasury.

© Denis Burdin/Shutterstock.com

The Cayman Islands, above, as well as Bermuda are prime foreign corporate tax haven locales.

But while federal investigators have actively pursued individual taxpayers who hide their money abroad as a way to avoid paying taxes, the business tax haven moves are legal, thanks to loopholes in the U.S. tax code.

"Offshore Shell Games," the analysis released by the U.S. PIRG Education Fund and Citizens for Tax Justice, found that the U.S. multinational companies used their foreign operations to avoid paying about $90 billion a year in federal income tax.

"Our tax code is broken, and it's hurting the public," said Dan Smith, tax and budget advocate for the U.S. PIRG Education Fund, in a statement announcing the report, of which he is a co-author. "We've made it too easy for American multinationals to dodge taxes by setting up shell companies in tax havens."

Thousands of offshore operations, trillions in taxes

The report found at least 362 Fortune 500 companies that, as of 2013, operated subsidiaries in tax haven jurisdictions such as the Cayman Islands and Bermuda. The total number of offshore subsidiaries is 7,827.

Thirty companies, however, are the most aggressive in utilizing foreign operations, according to the report. This smaller group accounts for 1,357 tax haven subsidiaries. In dollar terms, the report says the 30 companies with the most money booked offshore for tax purposes collectively hold nearly $1.2 trillion overseas. That's 62 percent of the nearly $2 trillion total reported by all Fortune 500 companies as offshore holdings.

Among the U.S. companies that U.S. PIRG and Citizens for Tax Justice say are getting "a free ride at the expense of the rest of us" are shoe manufacturer Nike, pharmaceutical giant Pfizer, and online and high-tech giants Google, Microsoft and Apple.

Tax manipulation, good business or both?

"The loopholes in America's corporate tax have grown so outrageous that our policymakers should be embarrassed," said Steve Wamhoff, Citizens for Tax Justice legislative director. "The data in this report demonstrate that a huge portion of the supposedly 'offshore' profits are likely to be U.S. profits that are manipulated so that they appear to be earned in countries like Bermuda or the Cayman Islands where they won't be taxed."

Companies defend the use of U.S. laws that allow them to operate and be taxed in foreign countries with lower rates as simply complying with their fiduciary duties. Shareholders, they note, want the maximum return on their investments and achieving that means paying as little tax as legally possible.

The tax avoidance perception, however, has prompted lawmakers to look more closely at provisions that allow U.S. companies to shift profits to other countries. Congressional hearings have been conducted, albeit with no action taken. Also look for this area to get plenty of attention if and when corporate tax reform is seriously considered.

Do you think companies are justified in using foreign operations to lower their U.S. taxes? Or do you think the tax code should be changed to get more taxes from U.S.-based firms?

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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."

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5 Comments
Donald Martin
June 06, 2014 at 10:00 am

There are simple solutions to this 'problem'. There never is.
The writer has written a very good article. But the writer is focused to much on details and I think misses the 'big picture'
The companies should not be condemned for doing what they have aright to do under existing regulations.
But trying to look at this problem from a narrow standpoint I believe we should perhaps consider the following steps:
First step:
1. Initially, drastically reduce the corporate tax rate, which currently is about the highest on the Planet; and simultaneously,
2. Eliminate the the tax reporting and taxes imposed on all US taxpayers who are legitimate permanent residents in other countries, which is the British or majority rule.

Why reduce the percentage of taxes on earned corporate income? Bring the profits back into circulation in the USA and help our economy.

Why continue the repressive taxing of non resident US taxpayers?
Because, due to the existence of Tax Treaties and Tax Information Treaties forced upon almost every country by an arrogant and all too powerful USA, and the granting of tax credits for foreign taxes paid, the US taxing authorities realize only a negligible amount of revenue that does not justify the work effort by employees of the IRS, irritates the heck out of non resident US Persons who in most countries pay a higher tax rate than would be the case if they lived in the USA, causing some of our citizens, in their utter frustration, to give up their citizenship in record numbers. What a sorry state of affairs indeed. Even if they do not give up their citizenship, they nevertheless have a difficult time maintaining banking relationships because of being cursed and tainted with being US citizens, all because of the arrogant US Goverment's unfair overreach.

Second Step,
After the idiots in Washington gradually begin to understand that it will help the US to adopt these simple measures, then

ABOLISH THE PRESENT SYSTEM OF INCOME TAXATION, and enact the Fair Tax Act which has been languishing for at least the last 5 years in both Houses.

But of course, simplicity is not in the vocabulary of our legislators. There may never be a senssible solution. In addition, it is obvious to almost all of we the individual and medium and small business taxpayers possessed of a grain of common sense that it is the Lobby Groups that for the most part determine our legislation, with the flagrantly huge political contributions made to our legislators holding important positions. This bribery is scandalous and disgusting and an affront to our democracy. Many of us have a difficult time understanding how we can allow the US Government on the one hand to punish our businessmen for violating the Foreign Corrupt Practices Act, or even have this as American Law in the first place,and on the other hand, our own politicians are riddled with corruption themselves.
It does not seem to matter whether the Republican or the Democratic politicians are in power. It is not a liberal/conservative issue at all.
It may well be that our system is so disfunctionally corrupt at all levels and in every field and to such an extent that it is simply not repairable, especially when we have come to realize that our politicians, and their supporting lobby groups benefit enormously from the status quo. In many countries throughout history, this problem eventually boils over into a violent revolution, which rarely, if ever solves the problem.
There may never be a solution.

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