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Category: Digital Media, Taxes and Policy

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12 Responses to “How Corporations Avoid Paying Taxes”

  1. Sechel says:

    Something’s missing. If IBM funds a factory in Ireland that intends to sell computers in Computers in Germany then the profits are not paid till repatriated. And if Merck funds a pharmaceutical factor in Mexico the U.S. company must pay fair value for the product they resell in the states or they run afoul of the IRS.

    I’m not suggesting that corporations are not very skilled in tax avoidance, or that they have a black box outfit that directs the company on how to optimize tax avoidance, but this article doesn’t really spell it out.

  2. Orange14 says:

    BR, you have to at least give MSFT credit for stepping up to the plate and paying US taxes!!! I wonder what APPL’s effective tax rate is given that almost all their manufacturing is abroad.

  3. cthwaites says:

    Management of these companies are almost obliged to do this….they would be derelict in their duties if they did not work for shareholders to reduce tax liabilities. The problem is in the arcane and insane rules that govern US taxation.

  4. wally says:

    Recovering the $1.2 trillion that is sitting abroad would be quite a stimulus for the US economy.

    Would corporations be derelict in their duty if they did not squirrel the money away? The answer depends on whether you believe there is any such thing as national loyalty and duty to your country. Attitudes have partially changed about this… corporations would say ‘no’… yet they expect there is a US duty toward them. That’s why I say ‘partially’.

  5. Sechel says:

    The situation does create an unfair playing field. The biggest companies have the resources to play the game, the smaller u.s. companies do not. This is why we should lower the tax rate and remove the deductions and loop-holes.

    Ditto for personal tax rates where we should move to a flat tax system. Institute a flat tax and the stories of rich people paying no taxes goes away tomorrow and additionally the gov’t loses the ability to distort the economy by encouraging over-investment in housing or ethanol.

  6. RandyClayton says:

    $1.2 T is enough to cover Defense and Health Care costs? Really!?

    DoD for this year is about $700B and I believe Total US HealthCare is more than $2T. Maybe they meant Dod and VA together?

  7. philipat says:

    This is incomplete. To take advantage of lower tax rates in havens, US Corporations must be able to accrue profits there. This can be done either by shifting jobs from the US to the haven to manufacture there and take advantage of negotiated tax holidays and/or through transfer pricing.

    If a healthcare Company manufactures raw materials in country X, which has granted it a 30 year tax holiday for creating Y,000 jobs, it “Transfer prices” those materials to wholly owned affiliates around the world, including the US, at grossly inflated prices. This has the effect of keeping all the profit in the haven AND reducing local profit in other countries, including the US, which reduces tax payments. Unlike Sechel notes above, the IRS can do nothing because for a patented raw material, there is only ONE source of supply, so there is no base for comparison. A Healthcare Company would not import finished products into the US from a haven country, just the raw materials, which is where all the money is.

    For example, Healthcare Company Z manufactures raw material K in Ireland. Tax rates are lower in Ireland but Z pays NO tax in Ireland because it has negotiated a Tax holiday with the Government in return for shifting Y,000 jobs from the US. Z builds a factory and produces K at an actual cost of $1 per Kg in Ireland. It then ships K to wholly-owned subsidiaries around the world for $1,000 per Kg. The profit, $999 per Kg remains tax free in Ireland. In other countries, including the US, profits on the sale of finished formulations of K that very small, if any, profits are made, so tax liabilities are minimal or nil.

    If the IRS and Congress wanted to stop this, they would allow re-importation of medicines from Canada as a starting point (In Canada, a more sensible approach of negotiated prices by the largest buyer, the Government, applies). This can create further losses in the US, and therefore tax CREDITS, because the price in Canada is “Beyond control”.

    But, of course, that’s where the Lobbyists enter the scene.

    IMHO, there should be a flat tax on Corporations based on REVENUES not declared profits.

  8. Andy T says:

    Money flows to where it’s treated the best.


    BR: Don’t be so literal. That expression has always referenced inflows going to the best performing sectors and stocks, not tax policy.

  9. machinehead says:

    C-corp income is taxed when it is distributed as dividends, salaries, or payments to vendors. Corporate income tax amounts to double taxation, which of course is avoided if possible.

    Actually trying to enforce a 35% U.S. corporate tax would provoke a mass migration to passthrough vehicles such as partnerships, S-corps and LLCs, and even more damaging, a corporate exodus to overseas headquarters.

    Corporate tax at rack rates can’t be enforced, now or ever, because there’s a highly competitive menu of options to avoid double taxation.

  10. bmz says:

    I am a liberal Democrat; but, I favor eliminating the corporate income tax, so long as we also tax dividends and capital gains (inflation indexed) at standard income tax rates. This would increase overall income tax revenues and only the wealthy would pay significantly higher income taxes (but that should be offset by the overall gains to the economy).

  11. Andy T says:

    “BR: Don’t be so literal. That expression has always referenced inflows going to the best performing sectors and stocks, not tax policy.”

    I know the phrase and I know how it’s normally applied.

    Why wouldn’t it apply on a more macro-national level? We’re clearly telling our Corporations: “Don’t bring the money back home. We will tax you at TWICE the rate as other countries. Please just keep the profits overseas and reinvest there.”

  12. willid3 says:

    you know i keep hearing some claim that taxing corporations and employees is double taxation and that we should avoid that, if so, then its equally true that we should only tax the corporations and not the employees. after all, the corporations can exercise all kinds of options to avoid taxes. like the credits for mortgages and electricity etc. things employees can’t do. and so far we have given so many tax breaks to corporations in the last decade that were to increase employment. only it never happened. we even let them bring home profits from over seas, supposedly because they would increase employment. only it didn’t happen then either. now if we want to give them another tax break, we must require they increase employment. in this country to get them. otherwise they get to keep the original rates. maybe plus 5% too. after all we have lots of examples of corporations, who make billions, who end up paying no US taxes. and who actually aren’t contributing any thing to our economy. they are just feeding off it. and we even have a lot of folks who earn billions almost every year. and they still pay 0 in taxes. which the rest of us have to make up for.