Create A New Economy
The G-20, the world's premier forum of Leaders representing economies creating more than 80 percent of global GDP, issued a recent declaration at the G-20 Summit to crack down on cross-border tax evasion provides the opportunity to influence the right equity balance for everyday Americans in eliminating the wealth gap. Recognizing that one-third of all wealth resides in cross-border tax havens and all global trade passes through offshore tax havens, we propose to partner with corporations to address building a United States based tax haven, located in a specified American location. The ultimate aim of this endeavor is to generate a new economy to eliminate the wealth gap.
In a G-20 issued statement the leaders expressed:
"Cross-border tax evasion and avoidance undermine our public finances and our people's trust in the fairness of the tax system," said the declaration. "Today, we endorsed plans to address these problems and committed to steps to change our rules to tackle tax avoidance, harmful practices and aggressive tax planning."
In fact, the present-day tax system has allowed multi-national corporations to exploit the global tax laws arrogantly, empowering them to change the name of their tax departments to "profit centers." Global Financial Integrity, whose mission is to curtail the cross-border flow of illegal money, highlights the link between illicit financial flows and tax issues. It states in addition to the imbalance of corporate tax rates and tax avoidance, there are several important gaps in the overall effort to curtail illicit financial flows with an estimated costs to developing countries of $5.86 trillion from 2001 - 2010.
In 2008, the Congressional Research Service found in its' study of profits of multi-national firms based in five tax havens (Bermuda, Luxembourg, the Netherlands, Ireland and Switzerland) that U. S. corporations reported 43% of their $940 billion in overseas profits were earned in those tax havens. Yet, multinational corporations' profits in five traditional economies (Canada, Germany, the United Kingdom, Australia and Mexico) averaged 1% - 2% of those countries' total output as they reported 33% profits in the five tax haven countries.
A July 2012 report from the Tax Justice Network
estimated that $21 - $32 trillion of unreported financial wealth is held offshore by high-net-worth individuals in tax havens worldwide. In contrast, the International Monetary Fund (IMF) estimates the sum offshore is approximately $5 trillion. Regardless, this only represents financial assets and excludes real estate, yachts and other non-financial assets owned in offshore structures. Taxing these offshore assets at a mere 10% rate would provide sufficient revenue to substantially begin toward the elimination of the painful wealth gap.
Recently, a number of multi-national corporations, such as Apple, have elevated their tax status further, now calling themselves "stateless income" corporations with no discernible tax home or "residence." This shielding of profits, exclusively for tax benefits to shift profits to tax havens has been clearly elevated to generate revenues whereby countries vie against each other in a tex competition.
Despite widespread groans about the recent disclosure that Apple is finding ways to cut its federal tax bill, an analysis shows the computer giant is one of scores of corporations largely dodging the taxman.
A surprising number of companies in the Standard & Poor's 500, 57, have found ways to pay effective tax rates of zero, according to a USA TODAY analysis of data from S&P Capital IQ.
The effective tax rate is a popular measure used by investors to compare how much companies pay in tax relative to profit.
The news comes months after after the Government Accountability Office released a report showing that companies in 2010 reported an average effective tax rate of 12.6%, well below the 35% federal corporate tax rate.
Corporate giants such as telecom firm Verizon, drugmaker Bristol-Myers Squibb and power management firm Eaton, all reported effective tax rates of 0% during the past 12 months. The findings underscore that while many companies bellyache about the top federal income tax rate of 35%, in reality, many pay much less than that, says Nick Yee of Gradient Analytics. "Investors hope company management is doing everything they can to generate profit, legally," he says. "But the tax code is gray, and there's often no set guidance.
Some ways companies are driving their effective tax rates to zero include:
• Offshore transfer payments. One of the favorite ways for companies to slash their tax bills is by setting up foreign subsidiaries to make raw materials and components in countries with low tax rates. The companies' U.S. operations then purchase these parts from the foreign units at well above cost. By doing this, the overseas unit makes a large profit, which then escapes U.S. taxes, as long as it stays in the foreign country, Yee says. Transfer payments are used at Bristol, Forest Labs, Agilent Technologies, Eaton and Lam Research, he says. Many companies are likely waiting for a U.S. tax-holiday, giving them a chance to bring the cash to the U.S. tax-free, Yee says. Agilent and Bristol declined to comment. The other companies didn't respond.
• Harvesting losses. Most of the companies with effective tax rates of zero, or even negative, are money losers. While Hewlett-Packard, J.C. Penney and E-Trade pay taxes, since they lose money, they have negative effective tax rates due to the way the number is calculated. Yet, some big companies that have lost money in the past accumulate credits that can be used to offset tax bills in future years. These reserves can be very lucrative and give profit a boost by lowering the effective tax rate, Yee says. Companies with these tax loss reserves include General Motors and Crown Castle, he says. GM, for instance, released credit from its reserve, taking it down from $45 billion to $11 billion. Investors must be aware, though, that once that $11 billion reserve is used up, the company's tax rate returns to the statutory rate. All this follows tax rules, but investors need to be aware. "This isn't anything illegal, but the reserve will run out," Yee says. GM declined to comment. The other companies didn't respond.
• Accounting rules. A big reason that Verizon's effective tax rate is so low, coming in at a negative 4.8%, is largely due to accounting. The company's sped-up depreciation, severance and pension costs are large credits that contribute to pushing the company's taxes down, says Jonathan Schildkraut of Evercore. But there's also a distortion caused by the company's 55% interest in Verizon Wireless. Vodafone, which owns 45% of Verizon Wireless, pays taxes on its share, but the entire profit is reported on income. Adjusting for this, Verizon's effective tax rate is closer to 30%, the company says. Verizon is buying Vodafone's stake, which will eliminate the issue in the future. Similarly, real estate investment trusts have low effective tax rates because they pass profit to shareholders, who then pay the taxes.
The question for investors is whether or not companies paying low effective tax rates might, eventually, attract the attention to regulators. "They are slow at getting at these issues," Yee says.
S&P 500 members citing effective tax rates of 0% in past twelve months, ranked by market value (in billions):
Regeneron Pharmaceuticals: $29.6
Public Storage: $29.5
Avalonbay Communities: $17.4
Agilent Technologies: $16.9
Vornado Realty Trust: $16.8
Boston Properites: $16.7
Seagate Technology: $15.9
News Corp.: $9.8
Lam Research: $8.8
Kimco Realty: $8.6
Plum Creek Timber: $8.4
Apartment Investment & Management: $4.3
Perkin Elmer: $4.2
Source: S&P Capital IQ
Large companies find ways to a zero tax rate
Matt Krantz, USA TODAY October 24, 2013
Studies begin to quantify economic benefits - comments from Altarum Institute funded by W. K. Kellogg Foundation
Lead Author: Ani Turner
The Alatrum Institute found that:
If the average incomes of minorities were raised to the average incomes of whites, total U.S. earnings would increase by 12%, representing nearly $1 trillion today. By closing the earnings gap through higher productivity, gross domestic product (GDP) would increase by a comparable percentage, for an increase of $1.9 trillion today. The earnings gain would translate into $180 billion in additional corporate profits, $290 billion in additional federal tax revenues, and a potential reduction in the federal deficit of $350 billion, or 2.3% of GDP.
Altarum Institute studied the effect of closing the minority earnings gap in the U.S., and the corresponding impact on a number of broad economic measures.1 Age/sex-adjusted earnings per person for people of color are currently 30% below those of non-Hispanic whites. The full set of causes for these earnings differentials is unknown,but it clearly includes inequities in health,education,incarceration rates, and employment opportunities – all areas that can be influenced by targeted policies and programs.