Senator Carl Levin (D-MI) put out a memo exposing how corporations are abusing American tax law to avoid paying taxes.  Corporations have been abusing tax loopholes and engaging in tax avoidance schemes to pay the lowest possible tax bills possible.  The way they are doing it is pretty simple – these multinational corporations are claiming that all their expenses are in the U.S. and all their profits are overseas … so their money ends up offshore which they then borrow from themselves in order not to have to pay the tax on actual profits.  The end result of all of this of course is that the average middle class American ends up with an ever larger tax burden than they have historically had leaving either larger deficits or higher taxes for Americans.

Conservatives like to talk about how we spend too much but they never want to talk about the revenue factor.  It isn’t complicated.  Conservatives like to talk about running government like running a business; well guess what – corporations have to raise prices sometimes.  In this case – the government isn’t taxing corporations or the wealthiest Americans at rates we have historically.  You’ll often hear this nonsense that America has the highest corporate tax rate, but that’s not true when you see what corporations actually pay in taxes after their deductions.  I have thoroughly documented these artificially low tax rates for corporations many times; last year 26 corporations paid their CEO’s more money than they paid in taxes to the U.S. Treasury (source).

And that’s why you keep hearing conservatives talking about allowing tax amnesty which they call “repatriation” for these corporations who have been abusing the system and avoiding taxes.  Corporations are lobbying for a trillion dollar tax giveaway i.e. “tax holiday” and the only reason it hasn’t happened is because Obama won’t sign it (many Democrats are for it) (source).  We already tried it in 2004 and it didn’t work and corporations are counting on Congress doing it again.

Bloomberg gives you a nice summary of a hearing Senator Levin’s committee had on the findings HERE:

“The high-tech industry is probably the number-one user of these offshore entities to transfer intellectual property,” Levin said.

In questioning Sample, Levin outlined how Microsoft uses transactions within the company, all with its own money, to assign about 47 percent of its income from U.S. sales to a Puerto Rico subsidiary, and how it shifts some income from around the world to a Bermuda subsidiary that has no employees.

Levin emphasized HP’s use of loans to tap its offshore cash. The loans, the report said, are structured to comply with the letter of tax rules that allow short-term loans from subsidiaries in Belgium and the Cayman Islands to the parent company.

Although long-term loans would trigger tax consequences, the alternating-loan program provided a potential continuous stream of money for HP.

Senator Levin uses Microsoft and Hewlett-Packard to highlight how the abuses take place HERE:

Here is a chart depicting Microsoft’s transfer pricing agreements with two of its main offshore groups. As we can see from the chart, in 2011 these two offshore groups paid Microsoft $4 billion for certain intellectual property rights; Microsoft Singapore paid $1.2 billion, and Microsoft Ireland $2.8 billion. But look what those offshore subsidiaries received in revenue for those same rights: Microsoft Singapore group received $3 billion; and Microsoft Ireland, $9 billion. So Microsoft USA sold the rights for $4 billion and these offshore subsidiaries collected $12 billion. This means Microsoft shifted $8 billion in income offshore. Yet, over 85% of Microsoft’s research and development is conducted in the United States.

Then there is this example that Microsoft used to avoid paying $4.5 billion in taxes over the past 3 years:

Another maneuver by Microsoft deserves attention: its transfer pricing agreement with a subsidiary in Puerto Rico. Generally, transfer pricing agreements involve the rights of offshore subsidiaries to sell the assets in foreign countries. The U.S. parent generally continues to own the economic rights for the United States, sell the related products here, collect the income here, and pay taxes here. However, in the case of Microsoft, it has devised a way to avoid U.S. taxes even on a large portion of the profit it makes from sales here in the United States. Microsoft sells the rights to market its intellectual property in the Americas (which includes the U.S.) to Microsoft Puerto Rico. Microsoft in the U.S. then buys back from Microsoft Puerto Rico the distribution rights for the United States. The U.S. parent buys back a portion of the rights it just sold.

The memo explains how the U.S. Treasury has lost $80 billion in tax revenues just from Microsoft, Apple and Google for the past three years:

On January 1, 1997, the Treasury Department implemented the so-called “check-the-box” regulations, which allow a business enterprise to declare what type of legal entity it wanted to be considered for federal tax purposes by simply checking a box. This opened the floodgates for the U.S. multinational corporations trying to get around the taxation of passive income under Subpart F. They could set up their offshore operations so that an offshore subsidiary which holds the company’s valuable assets could receive passive income such as royalty payments and dividends from other subsidiaries and still defer the U.S. taxes owed on them.

Part three of the process – corporations then exploit a loophole where they borrow money from their offshore subsidiaries basically every day in order to keep funding things like payroll and other operations:

Take a look at Hewlett-Packard. It has used a loan program to return offshore profits back to the United States since as early as 2003-2004. In 2008, Hewlett-Packard started a new loan program called the “staggered” or “alternating” loan program. Funding for the loans came mainly from two H-P sources, or pools: the Belgian Coordination Center (“BCC”) and the Compaq Cayman Holding Corp (“CCHC”). The loans from these two offshore entities helped fund HP’s general operations in the U.S, including payroll and repurchases of HP stock. HP documents indicate that the lending by these two entities was essential for funding U.S. operations, because HP did not have adequate cash in the U.S. to run its operations. In 2009, HP held $12.5 billion in foreign cash and only $0.8 billion in U.S. cash and projected that in the following year that it would hold $17.4 billion in foreign cash and only $0.4 billion in U.S. cash.

When you ask “conservatives” like Paul Ryan whether or not they would close these tax loopholes for corporations – they say “no” (source) even if it means students paying more for their tuition.

My solution to this problem is pretty easy.  We tax corporations 15% of their total profits including foreign profits; if a company has to pay 5% in taxes to the Cayman Islands – we’ll let that be deducted but the corporation would then have to pay us 10% on all profits including foreign profits.  That’s it.  If you want to play in American markets – those are the rules that I would set up.  If you’re not set up as an American company (which many companies do for tax purposes) then we would tax foreign companies even more to make it worth their while to incorporate in the U.S.  I haven’t heard a better solution and that’s my answer for the moment.

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