Fortune 500 companies store billions in offshore tax havens, says report

The majority of Fortune 500 companies stash their cash away from the reach of United States authorities in tax havens around the world, keeping $90 billion out of the country’s coffers and placing an extra burden on American citizens, according to a new report released on Thursday.

In 2013, Apple, GE, Microsoft, Pfizer and Merck rounded out the top five in the amount of profit held offshore in subsidiary shell companies, often just post office boxes, located in countries with corporate tax rates far lower than those in the United States, according to the study, conducted by the U.S. Public Interest Research Group and the Center for Tax Justice.

Under current U.S. tax code, these companies can defer paying taxes on the offshore money indefinitely since corporations do not have to pay income tax on their overseas profits until that money is brought into the U.S.

Experts say the tax rules that allow this were put in place due to lobbying by the companies that reap the benefits.

“Congress has left loopholes in our tax code that allow this tax avoidance,” the report said.

“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.”

The companies sometimes spread their profits across hundreds of tax haven subsidiaries. All told, the report identified 7,827 tax havens, and the “30 companies with the most money officially booked offshore for tax purposes collectively operate 1,357 tax haven subsid­iaries.”

The Netherlands, Singapore, Hong Kong, Luxembourg and the Cayman Islands are the top five most common places to store profits, the report found. Ireland, in seventh place, is a popular place for subsidiaries of Apple Inc. and Google.

According to the report, Apple, with $111.3 billion offshore, is holding the most money in tax havens, and would owe $36.4 billion in U.S. taxes if the money were taxable.

For at least part of 2013, two of Apple’s subsidiaries in Ireland didn’t pay taxes to any government, according to a Senate investigation cited by the study.

In a 2013 testimony before Congress, Apple Chief Executive Tim Cook said the company does not use tax gimmicks, Reuters reported. The company declined media requests for comment on the new report.

Sen. Carl Levin, D-Mich., called it the “holy grail of tax avoidance,” Reuters reported. Sen. Ron Wyden, the Senate finance committee chairman, has called for repeal of the deferral laws, which he last month called "a rotten carcass that the special interests feast on."

Bank of America maintains the highest number of tax havens, at 264, while investment firm Morgan Stanley has 226, tied for second place with AES, an energy firm. Coming in third is KKR, a private equity firm, with 157.

These four top a long list of 362 corporations, many of them manufacturers of staples of American life like Coca-Cola and Pepsi Co. or big time technology players, like Google and Cisco systems, which sells networking machines key to Internet infrastructure.

“It’s likely that many more have such subsidiaries and simply don’t disclose them,” said Matt Gardner, executive director of the Institute on Tax and Economic Policy, which provided data for the study.

"The simplest and best solution would be to end deferrals, to stop letting U.S. multinationals defer tax indefinitely on the profits allegedly earned by their foreign subsidiaries,” Gardner added.

But not everyone agrees that ending deferrals will compel companies to bring their profits to the United States. Some say corporate taxes themselves are at the root of tax avoidance. 

Kyle E. Pomerleau, an economist with the Tax Foundation, a more fiscally conservative think tank than the Center for Tax Justice or consumer advocate US PIRG, said the tax rates companies would pay in the U.S. are too high for corporations to keep their cash in the U.S.

Pomerleau contends that U.S. tax rates discourage companies from keeping their profits in the country.

“Corporations only have the incentive to reduce their tax bill because the U.S. taxes them at a rate of 35 percent, a rate 10 percentage points higher than what corporations in other industrialized nations face,” he said.

Pomerleau suggested reducing the corporate income tax or moving to a “territorial system,” which would eliminate domestic taxes on foreign profits entirely, to discourage companies from holding money offshore.

In this case, deferrals wouldn't be an issue, since business friendly tax policies would give U.S. corporations an incentive to hold their profits at home. 

Doing away with deferrals, Pomerlaeu said, would make the problem worse, pushing taxable corporate income even farther away from the U.S.

"Ending deferral would create the incentive for corporations to completely relocate overseas, rather than just reduce tax burdens using tax planning," Pomerleau said. 

And Julian Block, a tax attorney in Larchmont, N.Y., says that publicaly traded companies have a responsibility to their shareholders to keep costs low and profits high. 

“If these companies failed to take advantage of the tax breaks that are available to them, these companies would be faulted by their shareholders,” Block told Al Jazeera. 

Block said political donations and lobbying money from the same companies that benefit from tax loopholes are keeping that status quo in place.  

“The government has shown itself willing to do that which will not displease groups that make significant political contributions,” Block told Al Jazeera.

Apple, Inc. spent more than $3.3 million lobbying in 2013, according to the Center for Responsive Politics. 

Block said that eliminating loopholes is within the power of politicians.

“It’s not an impossible task for Congress to do so,” he added. “It’s a matter of the willingness of Congress to do so.”