The issue of offshore tax havens appears likely to play a central role at the annual multinational G8 summit, set to begin June 17.
On this side of the Atlantic, Apple’s recent high profile testimony before Congress brought media attention to the issue. The hearing called attention to strategies of “tax avoidance” that saved Apple more than $8 billion in taxes in 2009, 2010, and 2011.
Offshore tax abuses include both legal tax avoidance and illegal offshore tax evasion, in which money or profits is hidden from the IRS by keeping it offshore. While tax evasion is illegal in the United States, “tax avoidance” describes the legal tactics utilized by Apple and other multinational corporations to shift profits so that they owe less in taxes.
Under U.S. tax laws, multinational corporations may indefinitely shelter most of their international profits without paying U.S. taxes. They pay the American tax rate only when they repatriate them back to the United States. Corporations like Apple, which benefit from the tax treatment of foreign profits, are not required to repatriate these profits. Many corporations will never repatriate these earnings.
Cumulatively, the U.S. loses at least $100 billion in tax revenues each year due to “offshore tax abuses”, according to the Senate Permanent Subcommittee on Investigations. One study by US PIRG found that number could be as high as $150 billion annually, with 83 of the 100 largest publicly traded U.S. corporations maintaining revenues in offshore tax haven countries.
The U.S. made more progress on the issue of offshore tax evasion in 2010 with the enactment of the Foreign Account Tax Compliance Act (FATCA), which required foreign financial institutions to report information about financial accounts held by U.S. taxpayers. But attempts to crack down on offshore tax avoidance by corporations has been unsuccessful, despite the public’s approval of reform. In an April 2013 survey of 515 small business owners, 64 percent supported ending “deferral” for multinational corporations, the practice of corporations keeping profits outside of the U.S. to indefinitely delay taxes.
Proposals to change the tax structure for U.S. multinationals are varied. Proposals include:
- Allowing a “tax holiday” for repatriation: By creating a “tax holiday” for repatriation, multinational corporations would be allowed a grace period during which they could repatriate profits back into the U.S. while paying practically no taxes on them. Advocates for a repatriation tax holiday argue that bringing capital back into the U.S. could also bring back jobs, so long as the right stipulations are included. Still, the last repatriation holiday allowed by the U.S. in 2004 has been viewed largely as a failure. U.S. corporations were permitted to return capital to the U.S. at an effective tax rate of 5.25 percent instead of the top corporate tax rate of 35 percent. Corporations returned a total of $312 billion to the United States, saving $3.3 billion in tax payments, but the money returned to the country was spent on “stock repurchases and executive compensation”. The 15 multinational corporations that returned the most money to the United States cut 20,931 U.S. jobs. Jane Gravelle of the Congressional Research Service suggests that enacting a new repatriation holiday would be a similar failure. The Joint Committee on Taxation has said that a repeat of the 2004 repatriation holiday would drive investments offshore, because multinational corporations would assume that Congress would enact more tax repatriation holidays into the future. The Joint Committee on Finance estimated repeating the 2004 would, partially as a result of profit shifting, cost $79 billion over ten years.
- Closing “overseas tax loopholes”: President Obama has been a proponent of closing “overseas tax loopholes”. On his website, the president endorses “making companies pay a minimum tax for profits and jobs overseas”. Obama’s plan for incentivizing job creation in the U.S. includes a measure to reform deferral rules, to reduce the benefits of moving profits overseas.
- Establishing a “territorial” tax: Congressional Republicans, including Republican House Speaker John Boehner, have encouraged Congress to look “seriously at a territorial tax code”, which would completely exempt U.S. corporations from taxes on offshore profits. This strategy would likely lead to the permanent shift of jobs and profits to no-tax and low-tax jurisdictions. Boehner is among those Republicans who advocate the U.S. itself should lower corporate tax rates to compete with other low-tax countries.
At the upcoming summit, G8 leaders will have the opportunity to collaborate on trade policy to set a standard for taxation on multinational profits across the EU and Europe. If they do, the U.K. could play a unique role in addressing the issue of tax havens, because a number of tax havens fall within the U.K.’s jurisdiction as territories.
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