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Deferral and Tax Havens: What They Are and How It Hurts America

by Patriotic Millionaires | 3.27.18

From the experts at Public Citizen:

What is “deferral”? American corporations are reporting record profits yet they are dodging taxes at outrageous levels. The percentage of our nation’s taxes that come from corporations is half what it was during the 1950s, an extremely strong time for the nation’s economy. Though our statutory rate is 35 percent, the amount that corporations actually pay is much lower, with many profitable companies like General Electric, PG&E and Netflix paying no taxes at all in recent years, or even worse getting rebates from the government.

Take action to contact your elected officials and tell them to insist on the FULL repatriation of overseas profits!

One of the most obvious loopholes in need of closure that keeps corporate effective tax rates so low is so-called “deferral,” which allows multinational companies to indefinitely avoid paying taxes on the profits that are characterized as made by foreign subsidiaries, until the point that they are “repatriated” to the U.S. and reinvested or paid out as dividends to shareholders.

What is “profit shifting”? Profit-shifting is where multinational corporations use accounting gimmicks to make profits appear to be earned by foreign subsidiaries. An example of this would be if a corporation created a shell company in the Cayman Islands (even it is nothing more than a post office box) and sold a valuable asset, say a patent or trademark, to that subsidiary and then paid fees from the U.S. company to the foreign company to use that trademark or patent, artificially reducing U.S. profits and subsequently lowering the amount of tax that is due on the U.S.-booked profits. Right now, there is an estimated $2.6 trillion in profits booked offshore by American corporations, meaning corporations are avoiding an estimated $767 billion in taxes.

Some lawmakers have proposed a “repatriation holiday” — what is that? Some lawmakers have proposed to allow voluntary repatriation of these deferred foreign profits at a much lower tax rate than the 35 percent (less any taxes paid to foreign countries) that should be due, a so-called “repatriation holiday.” But, this would reward companies who have been shirking their tax duty and would provide a huge incentive to continue to use profit shifting, knowing that a similar holiday is likely to come along in the future. When this approach was tried in 2004, it did not work and it was shown that instead of creating jobs, firms paid shareholders dividends or bought back stock and majority of the top repatriating firms actually cut jobs after utilizing the holiday.

How does the GOP proposal to switch to a territorial tax system affect repatriation and deferral? If the U.S. were to unwisely move to a “territorial system” of taxation rather than keeping the hybrid global system we are currently under, it would mean multinational corporations would permanently pay zero taxes on the profits that they book to their offshore subsidiaries. This would create a huge incentive to offshore jobs and investments, eating away at our remaining tax base, leaving the rest of us taxpayers to pick up the pieces.

Take action to contact your elected officials and tell them to insist on the FULL repatriation of overseas profits!

Patriotic Millionaires

Written by Patriotic Millionaires

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