Offshore Tax Dodgers Jeopardize Long-Term Financial Health of American Small Businesses

Every small business would need to pay $3,244 in additional taxes to offset the $110 billion in federal and state revenue lost every year to offshore tax avoidance by multinational corporations, according to a new report from U.S. PIRG.

The report is an excellent reminder that corporate tax avoidance is not victimless. Offshore tax avoidance hurts communities by robbing the government of revenue to make public investments – in schools, infrastructure, first responders, and other public goods. Local small businesses and individuals are then left to pay for needed public investments. Additionally,  since many of these loopholes are out of the reach of American small businesses, offshore tax loopholes benefit large corporations at the expense of  Main Street small businesses. A map from the report shows how much revenue is lost per small business in each state when corporations exploit tax havens.  

Source: U.S. PIRG, Picking Up the Tab 2015

In recent years, the amount corporations have stashed offshore has increased. Well known American companies are among those that actively avoid paying U.S. taxes, including Google, Citigroup, Caterpillar, Microsoft, and Bank of America. In the long term, these multinationals will leave others to pay for investments in public goods and services that they too enjoy – like our nation’s highway system and rules that even the playing field for businesses to compete. When these corporations get a free ride, it reduces investments in America’s public structures and jeopardizes the long-term financial health of their own business as they are forced to compete in the global marketplace with outdated infrastructure and inadequate schools.

Several pieces of pending legislation could reverse this trend and put an end to these tax avoidance schemes by removing the incentives for corporations to move profits offshore. The report outlines the following principles for reform:

  • End tax deferrals: Corporations are currently able to indefinitely defer paying taxes on some profits. This practice rewards corporations for keeping profits overseas and should be discontinued, as recently introduced legislation in the House and Senate would do.
  • Reject a “territorial” tax system: Some advocates for tax code reform insist that only taxing income that corporations declare within the United States would improve the corporate tax system. In reality, this change could encourage corporations to move more operations, jobs and profits offshore.
  • End “Check-the-Box”: A small checkbox on corporate tax forms allows multinationals to reduce their tax bills by using offshore subsidiaries. This format allows corporations to avoid approximately $10 billion in taxes every year.
  • Prevent “earnings stripping”: Using an accounting mechanism, U.S.-based companies are able to avoid taxes by becoming indebted to their foreign subsidiaries. Under current law, they can deduct the interest payments as a business expense, and they can put off paying taxes on their profits as long as they remain offshore.
  • Stop inversions: The playing field should be leveled so that corporations are no longer rewarded for merging with foreign entities, then adopting the foreign registration of their merger partners in order to avoid paying U.S. taxes.  
  • Reduce incentives for corporations to shift intellectual property rights: By licensing patents and intellectual property to offshore entities, corporations can avoid substantial amounts of taxes.
  • Increase corporate transparency: With more public information about where in the world companies are reporting their profits, paying their taxes, and hiring employees, regulators and the public would be better equipped to hold corporations accountable for their actions.

Read U.S. PIRG’s full report, Picking Up the Tab 2015, here.


For Further Reading:

General Electric Restructuring Surprise: Company to Pay 20 Times More in Taxes Than It Paid in the Last DecadeThe Fine Print, 4/14/2015

Progressives Present Alternative Budget: A Raise for AmericaThe Fine Print, 3/19/2015

Think Corporate Tax Cuts Create Jobs? Think Again.The Fine Print, 2/25/2015

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