How Corporate America Parks Profits Overseas, Avoiding Billions in Taxes

By Amy Goodman, Democracy Now!

29 August 14

s Burger King heads north for Canada’s lower corporate tax rate, we speak to Rolling Stone contributing editor Tim Dickinson about his new article, "The Biggest Tax Scam Ever." Dickinson reports on how top U.S. companies are avoiding hundreds of billions of dollars by parking their profits abroad — and still receiving more congressionally approved incentives. Dickinson writes: "Top offenders include giants from high-tech (Microsoft, $76 billion); Big Pharma (Pfizer, $69 billion); Big Oil (Exxon­Mobil, $47 billion); investment banks (Goldman Sachs, $22 billion); Big Tobacco (Philip Morris, $20 billion); discount retailers (Wal-Mart, $19 billion); fast-food chains (McDonald’s, $16 billion) – even heavy machinery (Caterpillar, $17 billion). General Electric has $110 billion stashed offshore, and enjoys an effective tax rate of 4 percent – 31 points lower than its statutory obligation to the IRS."

Transcript

This is a rush transcript. Copy may not be in its final form.

AMY GOODMAN: Well, some are calling for a boycott of Burger King because of the merger. Democratic Senator Sherrod Brown of Ohio issued a statement that, quote, "Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders. ... Burger King has always said 'Have it Your Way.' Well, my way is to support two Ohio companies that haven’t abandoned their country or customers," the senator said. Both Wendy’s and White Castle are based in Ohio. Brown also called for the creation of a global minimum tax to eliminate incentives for companies to move. And I would like Tim Dickinson to comment on this. Tim Dickinson has written extensively about these kinds of deals and others for Rolling Stone, where he’s a contributing editor. Talk about this and then what you call the "biggest tax scam ever," Tim.

TIM DICKINSON: Well, so the inversion trend is just the tip of a very destructive iceberg that’s seen the hollowing out of our corporate tax base. And so, the inversions, you know, is just basically a legal scam that lets a company technically offshore itself for a lower tax rate. And it goes sort of hat in hand with companies shipping massive quantities of corporate profits overseas through sort of elaborate accounting schemes. And while it’s overseas, it sits there tax-free, accumulates tax-free kind of like a 401(k) does. And so, right now there’s about $2 trillion in corporate profits that are stockpiled overseas, on which the U.S. government is technically owed something like half a trillion dollars. So, at the same time that we’re cutting food stamps, that we’re cutting home heating aid to the elderly, you know, there’s literally a jackpot of half a trillion dollars that politicians on both sides of the aisle just won’t go after, because there’s just an imbalance of power there. The corporate power has grown much greater than state power in this case.

JUAN GONZÁLEZ: And, Tim Dickinson, one thing that many of these companies that are parking their profits overseas keep quietly lobbying for is amnesty, right? They want a tax amnesty, where the government would lower their taxes temporarily, so they could bring this money back. Could you talk about that and who in Congress champions that?

TIM DICKINSON: Well, I mean, it’s like a bailout, basically. It’s a bailout on the tax bill. And this was done in the Bush administration in 2004. The nominal U.S. tax rate, nobody really pays it, but the nominal rate is 35 percent. And in the Bush era, corporations were allowed to bring their money home at a rate of five-and-a-quarter percent, 5.25 percent, so basically 30 points shaved off of the tax rate. And so, politicians in both parties really kind of are attracted to this idea. There are few folks who have raised enough of a stink about it that it hasn’t happened. But both really—literally, both sides of the aisle—most recently, Harry Reid and Rand Paul were shopping a bill that would allow corporations to bring cash home at a low rate of 9.5 percent; Dave Camp, the chief tax writer in the House, Republican side, as low as 3.25 percent, I believe; and then on the Senate side, Ron Wyden’s bill would again allow a 5.25 percent tax holiday, is what the jargon is.

AMY GOODMAN: So, James?

JAMES HENRY: I was just going to say, the 2004 experiment with this idea is illustrative. I mean, about a third of the benefits from that went to one company, Pfizer, and they proceeded to lay off their employees. It produced no jobs. Essentially, management got rich, because they used the money for management buyouts and for shareholder share repurchases. So it’s a good example of how bad this idea is.

AMY GOODMAN: Tim Dickinson, you write about Google. You write about the company that makes Viagra. You write about Apple. Tell us about what they take advantage of.

TIM DICKINSON: Well, so, there are a myriad tax schemes by which U.S. profits are funneled out of the country in ways that make them look like costs. So, to take Pfizer, for example, on Viagra, they had transferred at a very early stage of drug development the economic rights to the intellectual property behind Viagra to a shell company in Liechtenstein, which is a tax haven in Europe. And so, on every sale of the drug here, the Liechtenstein company would charge a very steep royalty. And so, the American company would appear to not only not make any profit on those sales, but actually be creating a business loss here in America, because they had to pay this business expense to its own subsidiary. And so, you’re lowering the tax bill on the American side, even as you’re increasing the profits on the Liechtenstein side. So, it’s this incredible racket, basically.

And it appears to be legal. This is not, you know, something that has been cracked down on by Congress. But the white-shoe accountants have figured out a way to sort of disappear this money and put it overseas. And I should mention that the U.S. has a global system of taxation, so that corporate profits around the world from an American-based multinational are supposed to be taxed. And that reflects the idea that the U.S. Navy secures shipping lanes, that our courts protect intellectual property across the world. And this has been practiced for more than a century, Supreme Court-approved since 1924. So this is not a new idea. But there’s sort of an incredible amount of accounting innovation that has gone into figuring out how to make profits disappear and in fact appear as losses in the United States, as the cash piles up in foreign subsidiaries, which in turn bank their money right back here in the United States. And then, when the CEOs need to use that money here in the United States, there’s something called "synthetic cash repatriation," where they’re able to use the same sort of accounting tricks either through short-term revolving loans or through bond offerings here in the United States, as Apple has done. And so, the cash can sort of—the power of the cash can reappear here in the United States. And the only one cut out of the loop is Uncle Sam, who’s supposed to get, you know, 35 percent the moment the money returns to the country.

JUAN GONZÁLEZ: Well, James Henry, I’m curious why there isn’t a greater public outcry over this. You essentially have American companies who take advantage of the protections that the American government provides—the patent laws, the intellectual property laws, as you say, the military that assures international commerce goes on—they take advantage of all the benefits of the government, but then they shift their money overseas where they don’t have to pay taxes to finance the very government that provides them that protection.

JAMES HENRY: Well, that’s exactly right. And small business is not benefiting from all these tax games that multinationals are able to play, and they’re having to compete with these companies here. You know, it really has been a growing movement, I think, in the tax justice movement. We made a film called We’re Not Broke, which is on Netflix and is about this very issue of corporate tax dodging, you know, the outrageous behavior of these companies offshoring their intellectual property, that was paid for by U.S. R&D subsidies here, to places like Ireland and Bermuda, where they have no research labs, and then paying themselves royalties tax-free. You know, the outrages are clear. The issue is, these are very powerful lobbies. The corporate tax lobby employs 1,800 tax lobbyists full-time in Washington working on these issues, night and day. I mean, I assume they take time off for Burger King once in a while. But the issue is, you know, we’re just outgunned on the level of the substance and the—you know, the—

AMY GOODMAN: So it’s three per every legislator in Washington, Congress and senators.

JAMES HENRY: Absolutely. And, you know, they—

AMY GOODMAN: And, of course, much more.

JAMES HENRY: I mean, this lobby has actually grown in power as the tax rates have actually fallen since the 1980s. I mean, we now have cut corporate tax rates in the United States roughly in half. There’s a race to the bottom worldwide. And this just has to be seen as part of that global phenomenon. So, if the United States persists in cutting its tax rates, it’s going to have terrible impact on other countries, developing countries in particular. If there’s no corporate income tax in the United States, there’s no tax credit for the taxes that American companies pay abroad, and so those countries will be forced to reduce their tax rates, as well. So, you know, this is not just about inversions. It’s part of a growing, I think, very radical movement on the right to essentially get rid of the corporate income tax.

AMY GOODMAN: Well, last point. I asked you about Google and Apple, Tim Dickinson. If you could just explain what they do, as we wrap up?

TIM DICKINSON: So, Apple has this amazing deal, where they’ve got essentially a shadow company in Ireland. And it’s incorporated in Ireland, but for Irish purposes, it’s an American company, and for American purposes, it’s an Irish company. And so you end up with this black hole of taxation where in fact this Apple subsidiary files a tax return to no government in the world. And so, it can use all kinds of accounting tricks to funnel money to this company, and they sit there essentially absolutely untaxed. Just there’s no tax return. And so you have billions of dollars sitting there. And again, when Apple needs billions of dollars to fund its American operations, it has bond offerings, and its cost of borrowing here in the United States is incredibly low. Just investors are virtually paying Apple to raise this money, because it’s secured by these massive piles of cash, technically abroad, although they’re actually banked reportedly in Manhattan. And so, you know, I believe that this is a phenomenon—really, I mean, we talk about it as a right-wing phenomenon, but it has infected both parties, that there is no meaningful party out there that is trying to address this. In fact, both parties now agree that there should be a—we should shave 10 percentage points off the tax rate, get the American corporate tax rate down to 25 percent. That’s a race to the bottom that America can’t win. There’s no way to run a global superpower and compete with low-tax nations like Ireland. But I just need to emphasize that this is truly a bipartisan scenario. Both parties are pushing corporate tax holidays. Both parties are pushing to lower the corporate rate, even though the rate that—effective rate that companies pay here on their profits is actually, in many cases, lower than the efective rate they pay in other countries.

AMY GOODMAN: Tim Dickinson, we want to thank you for being with us, covering national affairs for Rolling Stone, where he’s contributing editor. We’ll link to your latest piece, which is called "The Biggest Tax Scam Ever," speaking to us from Portland, Oregon. And thanks so much to James Henry, the former chief economist for McKinsey & Company, lawyer and senior adviser with the Tax Justice Network.