New York Times: U.S. multinationals shift their tax burden

U.S. multinationals shift their tax burden

David Cay Johnston

NYT Monday, September 13, 2004

Profit taken in offshore havens rose 68% over 3 years, report finds

From 1999 to 2002, U.S. multinational corporations increased profits taken in no-or low-tax countries by 68 percent, while sharply reducing profits taken in Britain, Germany and other countries where they engage in substantial business activity, according to a report scheduled to be published Monday in the journal Tax Notes.

In 2002, U.S. companies took $149 billion of profits in 18 tax haven countries, up from $88 billion in 1999, according to Tax Notes, which analyzed the most recent data available from the U.S. Commerce Department. This was triple the 23 percent increase in total offshore profits earned by American multinationals during the same period.According to Commerce Department data not cited in the study, U.S. companies took 17 cents of each dollar of worldwide profits in tax havens in 2002, up from 10 cents in 1999. Analysis of the data in Tax Notes shows that for each dollar of profit taken in Luxembourg in 1999, Americans corporations took $4.56 of profit in 2002. The figure for Bermuda was $2.96; for Ireland, $2.01, and for Singapore, $1.72. For Britain and Germany, each dollar of profit taken in 1999 fell by 2002 to 67 cents and 46 cents respectively.

The study was conducted by Martin Sullivan, a former international tax specialist at the Treasury Department. Tax Notes is a nonprofit journal that reports on tax systems worldwide. Sullivan wrote in his Tax Notes report that the dramatic rise in profits taken in tax havens like Bermuda had no relationship to economic activity there. U.S. firms took $25.2 billion in profits in Bermuda in 2002, yet total revenues there were only $34.3 billion, according to Commerce Department data. That 58 percent of offshore profits are now taken in tax havens marks “a seismic shift in international taxation,” Sullivan said, because “subsidiaries of U.S. corporations now generate profits mainly in tax havens rather than in locations in which they conduct most of their business." Sullivan noted in an interview that in 1991, when he first seriously examined the issue, only a small portion of profit was taken in tax havens. While he has written previously that concern about job creation shifting outside the United States is overblown, he said that the torrent of profits now taken in tax havens may indicate that future job growth by U.S. companies will shift offshore. “There is no question but that the use of tax havens to lower tax rates makes investing offshore more lucrative” than investing in the United States, he said, and “tilts investment offshore.” The figures also show how Congress, by eroding the capacity of the Internal Revenue Service to enforce the tax laws, and by approving laws and treaties that favor the use of tax havens, is shifting the burden of taxes from multinational companies on to individuals and purely domestic companies. Some members of Congress, Sullivan said, will take comfort in his findings because “they believe in tax sabotage, the idea that we don't care if the IRS can't enforce the laws because it means less taxes.”

Bruce Bartlett, a Republican critic of the tax system whose writings are closely followed in Washington, said the data raise questions about fairness between domestic and multinational companies.

“It's an obvious violation of the principle of horizontal equity for two businesses or individuals with similar economic circumstances to pay significantly different tax rates,” he said. However, he said, while techniques that shift profits to tax havens “involve pushing the law to its limit” they are currently legal, and corporate officials are obligated by law to pay as little tax as possible. Taking profits in tax havens “is a consequence of the increasing mobility of capital and the existence of sovereign nations with different tax systems,” Bartlett said. "There isn't much of anything that can be done about this,” he said, saying the country should debate scrapping the corporate income tax and adopting a European-style value added tax. While corporations often complain that they are doubly taxed on foreign profits, Congress gives companies a dollar-for-dollar credit for taxes paid in foreign countries, which in practice is a subsidy for offshore investment. If this foreign tax credit were replaced with a tax only on profits earned in the United States corporate income taxes would rise by $7 billion annually, studies have shown. Congress also allows perpetual deferral of taxes on profits earned offshore - but only if they are not returned to the United States, a practice that critics say encourages job creation overseas to the detriment of American workers.

The New York Times