Table of Contents
Corporate tax avoidance with U.S. companies decreases government revenues by billions every year. What does that mean for the everyday American? That’s billions that could have gone to funding countless improvements (higher salaries for teachers, higher quality public works projects, and so on). Not to mention the trillions of national debt the country continues to accumulate.
Key Question
If corporations are avoiding paying taxes through unethical (not necessarily illicit) means, is the American public getting ripped off?
In the first part of this exploration into corporate tax avoidance, we provided insight into the basics of tax laws and the amount big businesses are depositing in offshore accounts. In this second and final part, we will cover alleged instances where high-profile corporations have dodged or circumvented tax laws.
Megacorporations and their lobbyists could be heavily influencing legislation and regulation. Do your part and protect the U.S. economy by joining the Zero Theft Movement!
Apple Taxes
The New York Times published an article claiming that Apple had “settl[ed] on the small island of Jersey, which typically does not tax corporate income…accumulat[ing] more than $128 billion in profits offshore, and probably much more, that is untaxed by the United States and hardly touched by any other country. Nearly all of that was made over the past decade.”
Background
The saga began in May 2013 when a U.S. Senate investigative subcommittee summoned Apple CEO, Tim Cook, to a hearing. According to the press release, “Apple Inc. has used a complex web of offshore entities–including three foreign subsidiaries the company claims are not tax resident in any nation–to avoid paying billions of dollars in U.S. income taxes.”
Allegedly in tandem with a plethora of tax evasion tactics, Apple, according to the subcommittee, “negotiat[ed] a tax rate of less than 2 percent with the government of Ireland – significantly lower than that nation’s 12% statutory rate – and using Ireland as the base for its extensive network of offshore subsidiaries.”
“Apple has sought the holy grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident anywhere in any nation.”
Then-Senator Carl Levin, at the 2013 hearing
European Commission Investigation
Five months following Cook’s testimony, the European Commission decided to step in, announcing that it would be “investigat[ing] transfer pricing arrangements on corporate taxation of Apple (Ireland)…”
The investigation took two years to complete and yielded significant results.
“…only a small percentage of Apple Sales International’s profits were taxed in Ireland, and the rest was taxed nowhere. In 2011, for example (according to figures released at US Senate public hearings), Apple Sales International recorded profits of US$ 22 billion (c.a. €16 billion) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland, leaving €15.95 billion of profits untaxed. As a result, Apple Sales International paid less than €10 million of corporate tax in Ireland in 2011 – an effective tax rate of about 0.05% on its overall annual profits. In subsequent years, Apple Sales International’s recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax ruling did not. Thus this effective tax rate decreased further to only 0.005% in 2014.”
2016 press release from the European Commission
Ruling
The European Commission, after presenting its findings, ruled that: “Ireland must therefore recover from Apple the unpaid tax for the period since 2003, which amounts to up to €13 billion, plus interest…The recovery period stops in 2014, as Apple changed its structure in Ireland as of 2015 and the ruling of 2007 no longer applies.”
The Irish government, however, formally appealed the ruling, arguing that no violation of Irish tax law had occurred. It went as far as to state that the European Commission’s investigation was an “intrusion into Irish sovereignty.”
Most recently, in July 2020, the Luxembourg-based General Court sided with the Irish government. The BBC reported on the Court’s ruling: “there was not enough evidence to show Apple had received illegal state aid or minimised its tax bill.”
Double Irish with a Dutch Sandwich
Before 2020, Google used a subsidiary in the Netherlands to transfer revenue generated overseas to its Bermuda-based affiliate (Google Ireland Holdings) where companies pay no income tax. This was known as the “Double Irish with a Dutch Sandwich,” and was completely legal prior to 2020.According to a Reuters article, “Google moved 19.9 billion euros ($22.7 billion) through a Dutch shell company to Bermuda in 2017, as part of an arrangement that allows it to reduce its foreign tax bill, according to documents filed at the Dutch Chamber of Commerce.”
While not necessarily applicable to the Google case, legality does not always match up with ethics. One of the major issues the public faces is the regulatory capture of Congress. Big corporations can essentially pay to influence legislation and regulation in order to unethically profit off of us, the public.
Don’t believe us? Join the Zero Theft Movement and see what your fellow citizens think…
Subpart F & Microsoft Tax
The earnings of foreign corporations generally do not get taxed in the U.S. until said corporations ‘repatriates’ its income through the distribution of dividends, otherwise known as deferral. 26 U.S. Code Subpart F—Controlled Foreign Corporations or Subpart F is one expectation to the deferral and applies only to Controlled Foreign Corporations (CFCs).
Turns out, the Senate discovered that major corporations had found loopholes in Subpart F that was allowing them to avoid taxation on their passive income.
A Senate investigation found that “Under the Internal Revenue Code, passive income, such as royalty income, earned by foreign affiliates of U.S. companies is subject to immediate taxation in the United States and is ineligible for deferral. However, when royalty income is paid by or between two entities that are disregarded for U.S. tax purposes under the check-the-box and CFC look-through rules, the taxation envisioned under Subpart F is not triggered. Through its network of disregarded offshore entities, Microsoft was able to reduce its 2011 U.S. tax bill by $2.43 billion.”
The Senate alleged that Apple, Google, and HP were saving billions using similar methods to Microsoft’s.
The Paradise Papers
1.5 terabytes of data in the form of 13.4 million confidential electronic documents, the ‘Paradise Papers’ were leaked to the German newspaper Süddeutsche Zeitung. The news outlet partnered with the International Consortium of Investigative Journalists, along with 380 journalists, to investigate and release “financial documents that throw light on the top end of the world of offshore finance,” per a BBC report.
The New York Times reported on the matter, writing: “Bermudan law firm Appleby, a 119-year old company that caters to blue chip corporations and very wealthy people…helps clients reduce their tax burden; obscure their ownership of assets like companies, private aircraft, real estate and yachts; and set up huge offshore trusts that in some cases hold billions of dollars.”
The newspaper also lists some of the high-profile individuals who have, according to the Paradise Papers, allegedly avoided taxes through offshore accounts: “Queen Elizabeth II, Madonna, and Bono have all taken advantage of such companies…hedge fund billionaire James H. Simons and his family were beneficiaries of a massive trust in Bermuda. And Warren A. Stephens, who aggressively grew a family investment bank in Arkansas, used an opaque company for his stake in a payday loan business accused of exploiting the poor.”
See a full list of those potentially involved, with their accompanying stories, in this BBC article.
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GE Taxes and the Fortune 500
The Institute on Taxation and Economic Policy (ITEP) conducted a study into potential corporate tax avoidance by Fortune 500 companies (2008-2015). During the period of study, the Tax Cuts and Jobs Act of 2017 had yet to be enacted, so the corporate tax rate was, theoretically, 35%. Their research, however, proved otherwise:
- “Eighteen of the corporations, including General Electric, International Paper, Priceline.com and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period.”
- “One hundred of the 258 companies (39 percent of them) paid zero or less in federal income taxes in at least one year from 2008 to 2015.”
- “Of those corporations in our sample with significant offshore profits, more than half paid higher corporate tax rates to foreign governments where they operate than they paid in the United States on their U.S. profits.”
From the ITEP report
When it comes to General Electric (GE), again, the loopholes of Subpart F allegedly rear their ugly head. The ITEP claims the “ ‘active financing exception’…allows financial companies (GE has a major financial branch) to pay no taxes on foreign (or ostensibly foreing) lending and leasing, apparently while deducting the interest expenses of engaging in such activities from their U.S. taxable income.”
We strongly urge you to glance through the ITEP’s report to learn the numerous ways major corporations reduce their taxes—ethically, unethically, or otherwise.
The Case is Yours…
Corporate tax avoidance reduces the amount of government funds, in turn limiting the quality of and/or access to services that benefit the public. As it stands, individuals are paying around 89% of all taxes paid (calculated from figures provided by USA Facts). Not only are we, the American public, paying for a significant portion of taxes, big corporations in particular seem to be still trying to avoid taxes.
But we now leave the case to you, citizen investigators. What we have provided in these two articles only scratches the surface of how corporations might be ripping us off. Alternatively, you might discover there are compelling reasons arguing against tax avoidance as theft. Either way, citizens want the truth, and you have the power to get us there.
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Standard Disclaimer
The ZeroTheft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. ZeroTheft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.