Companies of the United States with untaxed profits

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Companies of the United States with untaxed profits deals with those U.S. companies whose offshore subsidiaries earn profits which are retained in foreign countries to defer paying U.S. corporate tax. The profits of United States corporations are subject to a federal corporate tax rate of 21%. In principle, the tax is payable on all profits of corporations, whether earned domestically or abroad. However, overseas subsidiaries of U.S. corporations are entitled to a tax deferral of profits on active income until repatriated to the U.S., and are regarded as untaxed. [1] When repatriated, the corporations are entitled to a foreign tax credit for taxes (if any) paid in foreign countries.

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Retaining such profits offshore may be regarded as a tax strategy. Many corporations have accumulated substantial untaxed profits offshore, especially in countries with low corporate tax rates. In recent years it has been estimated that untaxed profits range from US$1.6 to $2.1 trillion. The Wall Street Journal noted that the "[u]ntaxed foreign earnings are part of a contentious debate over U.S. fiscal policy and tax code." [2] The profits earned abroad and retained there are subject to a foreign exchange risk, besides other financial risks.

The downside of a strategy of retaining profits offshore is that corporations may want or need to pay dividends to shareholders, or to make investments in the United States, besides other reasons. The alternative may be to borrow funds in the U.S., [3] or access the funds retained offshore in the form of inter-company loans.

The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a one time tax on these offshore profits at 8% (non-cash) and 15.5% (cash) respectively. The Act also includes a provision that taxes all foreign profits in the US in the year they are earned ending the ability of US companies to defer paying US tax on unrepatriated earnings.

Magnitude

A number of studies have estimated the untaxed overseas profits to be from US$1.6 to $2.1 trillion. A 2011 study by JPMorgan Chase & Co. identified $1.375 trillion in undistributed foreign earnings. [3] A Wall Street Journal analysis in 2012 found that the amounts for 60 large firms grew by $166 billion in the preceding year, shielding 40% of their earnings. [2] In 2012, a Bloomberg study found $1 trillion held overseas for 70 U.S.-based multi-national companies, using public annual reports for years ending in 2010 and 2011, and it estimated an overall total of $1.6 trillion. [3] In 2013, a private research firm study asserted there were more than $2.1 trillion of U.S. corporate profits untaxed in 2013. [4] In 2016, the Institute on Taxation and Economic Policy, estimates $2.6 trillion held offshore and two-thirds of that is held by 30 U.S. companies, with Apple, Pfizer, and Microsoft being the top three (see chart). [5]

Foreign profits were up 93% from 2008 to 2013.[ citation needed ]

Politics and tax policy issues

It has been suggested that companies hold profits overseas hoping for a tax holiday. In 2012 Northwestern University law professor Thomas Brennan asserted that "companies are holding money outside the U.S. in part because they are waiting for Congress to repeat a 2004 tax holiday law that set a maximum tax rate for repatriation profits of 5.25%. 'Why not do it?' he said. 'It’s pure upside. In the worst-case scenario, you’re going to be taxed as you would have been in any event.'" [3] The 2004 tax holiday, under President George W. Bush, yielded a lot of repatriation but not much economic benefit, according to one view. [4] A number of the large U.S.-based companies that would benefit, including Google, Cisco Systems Inc., Qualcomm Inc. and Oracle Corp., were lobbying during 2011-2012 to obtain a repatriation holiday. At the time, however, President Obama was believed to oppose a one-time tax holiday, as it would be a giveaway to big corporations. [3]

President Obama's February 2015 budget proposal called for a 14% tax to be applied on untaxed overseas profits, indicating that the proposal would yield $238 billion, [6] implying a $1.7 trillion estimate of untaxed profits. It was proposed as a one-time tax to be imposed whether or not funds are repatriated. [6] The proposal has not been heard about since.

In 2015, the topic of U.S. taxation of companies' operations abroad was addressed by several potential U.S. presidential candidates. For example, Republican senators Marco Rubio and Mike Lee have called for elimination of U.S. taxes on companies' operations abroad, within a broader proposal for corporate and individual tax rate changes. [7]

Comparative tax rates

Corporate tax rates vary between tax jurisdictions. The national rates of Organisation for Economic Co-operation and Development (OECD) countries vary from a low of 8.5% in Switzerland to a high of 35% in the United States, with an average of 22%. [8] In addition to the federal tax rates, provincial, state and local taxes may also apply in most jurisdictions. For example, the 2015 provincial corporate tax rates in Canada range from 11.5% to 16% in addition to the federal tax rate of 15%, unless taxable profits of small corporations are low enough to qualify for a lower tax rate. [9]

In comparing national corporate tax rates one should also take into account the taxes on dividends paid to shareholders. For example, the overall U.S. tax on corporate profits of 35% is less than or similar to that of European countries such as Germany, Ireland, Switzerland and the United Kingdom, which have lower corporate tax rates but higher taxes on dividends paid to shareholders. [10]

Many large multinational companies retain untaxed profits in tax haven jurisdictions which offer no or very low corporate taxes, as well as other tax benefits.

List of companies with untaxed profits

Large U.S. multinational companies which are known to have significant untaxed profits include:

See also

Related Research Articles

Corporate haven, corporate tax haven, or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes, and/or favourable secrecy laws, and/or favourable regulatory regimes.

A dividend tax is a tax imposed by a jurisdiction on dividends paid by a corporation to its shareholders (stockholders). The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the form of a withholding tax. In some cases the withholding tax may be the extent of the tax liability in relation to the dividend. A dividend tax is in addition to any tax imposed directly on the corporation on its profits. Some jurisdictions do not tax dividends.

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal. Both tax evasion and tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system.

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses or accumulated deficit, or similar terminology.

A corporate tax, also called corporation tax or company tax, is a type of direct tax levied on the income or capital of corporations and other similar legal entities. The tax is usually imposed at the national level, but it may also be imposed at state or local levels in some countries. Corporate taxes may be referred to as income tax or capital tax, depending on the nature of the tax.

<span class="mw-page-title-main">Corporation tax in the Republic of Ireland</span> Irish corporate tax regime

Ireland's Corporate Tax System is a central component of Ireland's economy. In 2016–17, foreign firms paid 80% of Irish corporate tax, employed 25% of the Irish labour force, and created 57% of Irish OECD non-farm value-add. As of 2017, 25 of the top 50 Irish firms were U.S.–controlled businesses, representing 70% of the revenue of the top 50 Irish firms. By 2018, Ireland had received the most U.S. § Corporate tax inversions in history, and Apple was over one–fifth of Irish GDP. Academics rank Ireland as the largest tax haven; larger than the Caribbean tax haven system.

Tax consolidation, or combined reporting, is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities as a single entity for tax purposes. This generally means that the head entity of the group is responsible for all or most of the group's tax obligations. Consolidation is usually an all-or-nothing event: once the decision to consolidate has been made, companies are irrevocably bound. Only by having less than a 100% interest in a subsidiary can that subsidiary be left out of the consolidation.

<span class="mw-page-title-main">Corporate tax in the United States</span>

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% following the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

A tax haven is a term, sometimes used negatively and for political reasons, to describe a place with very low tax rates for non-domiciled investors, even if the official rates may be higher.

<span class="mw-page-title-main">Tax inversion</span> Corporate relocation to a lower tax location

A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the original parent company becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country. Executives and operational headquarters can stay in the original country. The US definition requires that the original shareholders remain a majority control of the post-inverted company. In US federal legislation a company which has been restructured in this manner is referred to as an "inverted domestic corporation", and the term "corporate expatriate" is also used.

<span class="mw-page-title-main">Double Irish arrangement</span> Irish corporate tax avoidance tool

The Double Irish arrangement was a base erosion and profit shifting (BEPS) corporate tax avoidance tool used mostly by United States multinationals since the late 1980s to avoid corporate taxation on non-U.S. profits. It was the largest tax avoidance tool in history and by 2010 was shielding US$100 billion annually in US multinational foreign profits from taxation, and was the main tool by which US multinationals built up untaxed offshore reserves of US$1 trillion from 2004 to 2018. Traditionally, it was also used with the Dutch Sandwich BEPS tool; however, 2010 changes to tax laws in Ireland dispensed with this requirement.

A repatriation tax holiday is a tax holiday specifically directed towards individuals and businesses in one country who repatriate to that country income earned in other countries. The theory supporting such an action is that multinational companies headquartered in one country, but which earn income in a second country will be unlikely to bring income from the second country back to their home country if high taxes will be assessed on this income when it is brought back. By allowing those companies to bring income back to the home country at a reduced tax rate, money will be injected into the economy of the home country that otherwise would remain in the second country.

<span class="mw-page-title-main">Base erosion and profit shifting</span> Multinational tax avoidance tools

Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties. For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to another country or tax haven, the tax base is eroded and the company does not pay taxes to the country that is generating the income. As a result, tax revenues are reduced and the government is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules". While some of the tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects the righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS.

Allergan plc is an American, Irish-domiciled pharmaceutical company that acquires, develops, manufactures and markets brand name drugs and medical devices in the areas of medical aesthetics, eye care, central nervous system, and gastroenterology. The company is the maker of Botox.

<span class="mw-page-title-main">Dutch Sandwich</span> Dutch withholding tax avoidance tool

Dutch Sandwich is a base erosion and profit shifting (BEPS) corporate tax tool, used mostly by U.S. multinationals to avoid incurring European Union withholding taxes on untaxed profits as they were being moved to non-EU tax havens. These untaxed profits could have originated from within the EU, or from outside the EU, but in most cases were routed to major EU corporate-focused tax havens, such as Ireland and Luxembourg, by the use of other BEPS tools. The Dutch Sandwich was often used with Irish BEPS tools such as the Double Irish, the Single Malt and the Capital Allowances for Intangible Assets ("CAIA") tools. In 2010, Ireland changed its tax-code to enable Irish BEPS tools to avoid such withholding taxes without needing a Dutch Sandwich.

<span class="mw-page-title-main">Bermuda Black Hole</span> Corporate tax avoidance strategy

Bermuda black hole refers to base erosion and profit shifting (BEPS) tax avoidance schemes in which untaxed global profits end up in Bermuda, which is considered a tax haven. The term was most associated with US technology multinationals such as Apple and Google who used Bermuda as the "terminus" for their Double Irish arrangement tax structure.

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<span class="mw-page-title-main">Modified gross national income</span> Metric to measure the Irish economy by excluding globalisation effects

Modified gross national income is a metric used by the Central Statistics Office (Ireland) to measure the Irish economy rather than GNI or GDP. GNI* is GNI minus the depreciation on Intellectual Property, depreciation on leased aircraft and the net factor income of redomiciled PLCs.

<span class="mw-page-title-main">Ireland as a tax haven</span> Allegation that Ireland facilitates tax base erosion and profit shifting

Ireland has been labelled as a tax haven or corporate tax haven in multiple financial reports, an allegation which the state has rejected in response. Ireland is on all academic "tax haven lists", including the § Leaders in tax haven research, and tax NGOs. Ireland does not meet the 1998 OECD definition of a tax haven, but no OECD member, including Switzerland, ever met this definition; only Trinidad & Tobago met it in 2017. Similarly, no EU–28 country is amongst the 64 listed in the 2017 EU tax haven blacklist and greylist. In September 2016, Brazil became the first G20 country to "blacklist" Ireland as a tax haven.

Repatriation tax avoidance is the legal use of a tax regime within a country in order to repatriate income earned by foreign subsidiaries to a parent corporation while avoiding taxes ordinarily owed to the parent's country on the repatriation of foreign income. Prior to the passage of the Tax Cuts and Jobs Act of 2017, multinational firms based in the United States owed the U.S. government taxes on worldwide income. Companies avoided taxes on the repatriation of income earned abroad through a variety of strategies involving the use of mergers and acquisitions. Three main types of strategies emerged and were given names—the "Killer B", "Deadly D", and "Outbound F"—each of which took advantage of a different area of the Internal Revenue Code to conduct tax-exempt corporate reorganizations.

References

  1. ↑ Jeff Mason and Kevin Drawbaugh (February 1, 2015). "Obama targets foreign profits with tax proposal, Republicans skeptical". Reuters.
  2. 1 2 3 4 Scott Thurm and Kate Linebaugh (March 10, 2013). "More U.S. Profits Parked Abroad, Saving on Taxes". The Wall Street Journal .
  3. 1 2 3 4 5 Richard Rubin (March 2, 2012). "Cash Hoard Grows by $187 Billion in Untaxed Overseas Profits". Bloomberg.
  4. 1 2 3 4 5 6 Kevin Drawbaugh and Patrick Temple-West (April 8, 2014). "Untaxed U.S. corporate profits held overseas top $2.1 trillion: study".
  5. ↑ Cohen, Patricia (2017-11-02). "A Tax Cut That Lifts the Economy? Opinions Are Split". The New York Times. ISSN   0362-4331 . Retrieved 2017-11-03.
  6. 1 2 3 4 5 6 7 Paul Lewis (February 1, 2015). "Obama will propose mandatory tax on US companies' earnings held overseas". The Guardian.
  7. ↑ "Senators Rubio, Lee push U.S. tax plan to cut corporate rates". Reuters. March 4, 2015.
  8. ↑ "Table II.1. Corporate income tax rate".
  9. ↑ Directorate, Government of Canada, Canada Revenue Agency, Taxpayer Services and Debt Management Branch, Taxpayer Services. "Corporation tax rates". www.cra-arc.gc.ca. Retrieved 2016-02-07.{{cite web}}: CS1 maint: multiple names: authors list (link)
  10. ↑ "www.oecd-ilibrary.org" (PDF).[ permanent dead link ]
  11. ↑ Levin, Carl (20 September 2012). "PSI Memo on Offshore Profit Shifting and the U.S. Tax Code". United States Senate Subcommittee on Investigations. p. 6. Archived from the original on 24 September 2012. Retrieved 22 September 2012.
  12. ↑ "Pfizer seals $160bn Allergan deal to create drugs giant". BBC News. November 23, 2015.
  13. ↑ WAKABAYASHI, DAISUKE; CHEN, BRIAN X. (2018-01-17). "Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to U.S." The New York Times.
  14. ↑ "Medtronic-Covidien Merger Approved by Irish High Court". Archived from the original on 2016-03-06. Retrieved 2015-09-01.
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