This is a continuing problem in our tax code; corporations are using loopholes in our tax code to pay little to no taxes. Except – they’re not really loopholes at all; these tax preferences and “loopholes” were written BY lobbying groups like the very powerful Business Roundtable or simply by paying off an important Congressman or one of the many aides in Congress that go in and out of the revolving door between business and D.C. It wasn’t unintentional is what I’m saying and while companies like Facebook make a killing by manipulating the tax code – the American working class is the joke. Going down this wormhole is frightening.
Here’s how they do it. Companies like Facebook have subsidiaries on paper based in the Cayman Islands or similar tax havens. On paper – they charge all their revenues to their foreign subsidiaries like in this case – Ireland. So – when someone pays Facebook in America for their advertising … they’re paying Facebook Ireland which was legally formed in the Caymans. Now – the employees who make Facebook what it is … most of them work in the U.S. and on paper – Facebook shows a loss in income because they’re paying all of their employees out of their American business which apparently doesn’t make much money. No – the Irish Facebook is really the one making over $1 billion a year.
Yeah – that’s how it works. And unlike so many other issues where there is a gap between Republicans and Democrats – this is something that both major parties are complicit in. There is very little difference between the two parties on this issue; the true believers in the Republican and Democratic party are against this but the vast majority of politicians on both sides want campaign cash. The constant race for cash for their next election is the driving force behind politicians plopping on their knees so quickly.
Business Insider explains what’s going on HERE:
If you are as cynical as I am, I know you are not surprised that Facebook paid Irish taxes (via Tax Justice Network) of about $4.64 million on its entire non-US profits of $1.344 billion for 2011.* This 0.3% tax rate is a bit below the normal, already low, Irish corporate income tax of 12.5%.
As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:
Facebook is structured so that companies buying advertisements on the website in the UK, or anywhere outside of the US, have to pay Facebook Ireland. As a result, Facebook manages to slash its taxes in other countries, paying, for example, $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.
As we shared HERE - the corporate tax code is a total clusterfuck. This should completely offend your sensibilities. Remember – every single multinational does this. From Google to GE to Caterpillar.
The Center for Tax Justice writes:
According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.
The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.
When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.
The NY Times writes:
But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.
If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.
Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.
And that’s why I am a big believer in corporations paying taxes on foreign earnings but being able to deduct their foreign taxes. That’s the only closed loop that I can think of that eliminates how corporations game the system. If a corporation pays 5% in taxes in Ireland – then they should still have to pay us 5% if the set minimum rate is 10%. Some of these companies are getting tax REFUNDS because they game the system so well; in other words – American taxpayers are subsidizing big salaries for the CEO’s and wealthy shareholders. It’s insane.
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