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Report: Close Corporate Tax Loopholes
Offshore Shell Games 2015
U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to the tax code. Rather than paying their full share, many multinational corporations use accounting tricks to pretend for tax purposes that a substantial portion of their profits are generated in offshore tax havens, countries with minimal or no taxes where a company’s presence may be as little as a mailbox. Multinational corporations’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.
Congress, by failing to take action to end to this tax avoidance, forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.
This study examines the use of tax havens by Fortune 500 companies in 2014. It reveals that tax haven use is ubiquitous among America’s largest companies and that a narrow set of companies benefits disproportionately.
Most of America’s largest corporations maintain subsidiaries in offshore tax havens. At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014.
- All told, these 358 companies maintain at least 7,622 tax haven subsidiaries.
- The 30 companies with the most money officially booked offshore for tax purposes collectively operate 1,225 tax haven subsidiaries.
Approximately 60 percent of companies with tax haven subsidiaries have set up at least one in Bermuda or the Cayman Islands — two particularly notorious tax havens. Furthermore, the profits that all American multinationals — not just Fortune 500 companies — collectively claimed they earned in these two island nations in 2010 totaled 1,643 percent and 1,956 percent of each country’s entire yearly economic output, respectively.
Fortune 500 companies are holding more than $2.1 trillion in accumulated profits offshore for tax purposes. Just 30 Fortune 500 companies account for 65 percent of these offshore profits. These 30 companies with the most money offshore have booked $1.4 trillion overseas for tax purposes.
Only 57 Fortune 500 companies disclose what they would expect to pay in U.S. taxes if these profits were not officially booked offshore. In total, these 57 companies would owe $184.4 billion in additional federal taxes. Based on these 57 corporations’ public disclosures, the average tax rate that they have collectively paid to foreign countries on these profits is a mere 6.0 percent, indicating that a large portion of this offshore money has been booked in tax havens. If we apply that average tax rate of 6.0 percent to the entirety of Fortune 500 companies, they would collectively owe $620 billion in additional federal taxes. Some of the worst offenders include:
- Apple: Apple has booked $181.1 billion offshore — more than any other company. It would owe $59.2 billion in U.S. taxes if these profits were not officially held offshore for tax purposes. A 2013 Senate investigation found that Apple has structured two Irish subsidiaries to be tax residents of neither the United States, where they are managed and controlled, nor Ireland, where they are incorporated. This arrangement ensures that they pay no tax to any government on the lion’s share of their offshore profits.
- American Express: The credit card company officially reports $9.7 billion offshore for tax purposes on which it would owe $3 billion in U.S. taxes. That implies that American Express currently has paid only a 4 percent tax rate on its offshore profits to foreign governments, indicating that most of the money is booked in tax havens levying little to no tax. American Express maintains 23 subsidiaries in offshore tax havens.
- Nike: The sneaker giant officially holds $8.3 billion offshore for tax purposes on which it would owe $2.7 billion in U.S. taxes. This implies Nike pays a mere 2.5 percent tax rate to foreign governments on those offshore profits, indicating that nearly all of the money is officially held by subsidiaries in tax havens. Nike does this in part by licensing the trademarks for some of its products to three subsidiaries in Bermuda to which it then pays royalties (essentially to itself).
Some companies that report a significant amount of money offshore maintain hundreds of subsidiaries in tax havens, including the following:
- PepsiCo maintains 132 subsidiaries in offshore tax havens. The soft drink maker reports holding $37.8 billion offshore for tax purposes, though it does not disclose what its estimated tax bill would be if it didn’t book those profits offshore.
- Pfizer, the world’s largest drug maker, operates 151 subsidiaries in tax havens and officially holds $74 billion in profits offshore for tax purposes, the fourth highest among the Fortune 500. Pfizer recently attempted the acquisition of a smaller foreign competitor so it could reincorporate on paper as a “foreign company.” Pulling this off would have allowed the company a tax-free way to use its supposedly offshore profits in the U.S.
- Morgan Stanley reports having 210 subsidiaries in offshore tax havens. The bank officially holds $7.4 billion offshore. It has also been infamously implicated in facilitating individual tax evasion through its Swiss banking division.
Corporations that disclose fewer tax haven subsidiaries do not necessarily dodge taxes less. Many companies have disclosed fewer tax haven subsidiaries in recent years, all while increasing the amount of cash they keep offshore. Some companies may simply be failing to disclose substantial numbers of tax haven subsidiaries. Others may be booking larger amounts of income to fewer tax haven subsidiaries.
- Citigroup reported operating 427 tax haven subsidiaries in 2008 but disclosed only 41 in 2014. Over that time period, Citigroup nearly doubled the amount of cash it reported holding offshore. The company currently pays only an 8.5 percent tax rate offshore, implying that most of those profits have been booked to low- or no-tax jurisdictions.
- Walmart reported operating zero tax haven subsidiaries in 2014 and for the past decade. Despite this, a recent report released by Americans for Tax Fairness revealed that the company operates as many as 75 tax haven subsidiaries (using this report’s list of tax haven countries) that were not included in its SEC filings. Over the past decade, Walmart’s offshore income has grown from $6.8 billion in 2005 to $23.3 billion in 2014.
- Bank of America reported operating 264 tax haven subsidiaries in 2013 but disclosed only 22 in 2014. At the same time, Bank of America’s offshore holdings have increased modestly from $17 billion to $17.2 billion.
- Google reported operating 25 subsidiaries in tax havens in 2009, but since 2010 only discloses two, both in Ireland. During that period, it increased the amount of cash it reported offshore from $7.7 billion to $47.4 billion. An academic analysis found that as of 2012, the 23 no-longer-disclosed tax haven subsidiaries were still operating.
- Microsoft, which reported operating 10 subsidiaries in tax havens in 2007, disclosed only five in 2014. During this same time period, the amount of money that Microsoft reported holding offshore jumped by a factor of 14. Microsoft has paid a tax rate of only 3 percent to foreign governments on those profits, suggesting that most of the cash is booked in tax havens.
Congress can and should take strong action to prevent corporations from using offshore tax havens, which in turn would restore basic fairness to the tax system, reduce the deficit and improve the functioning of markets.
There are clear policy solutions that lawmakers can enact to crack down on tax haven abuse. They should end the incentives for companies to shift profits offshore, close the most egregious offshore loopholes and increase transparency.
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