TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, June 28, 2011

Biggest Tax Avoiders Would Win With Repatriation Tax Holiday

Cisco Bloomberg, Biggest Tax Avoiders Would Win on U.S. Tax Break, by Jesse Drucker:

Cisco has cut its income taxes by $7 billion since 2005 by booking roughly half its worldwide profits at a subsidiary at the foot of the Swiss Alps that employs about 100 people. Now Cisco, the largest maker of networking equipment, wants to save even more -- by asking Congress to waive most federal taxes due when multinationals bring such offshore earnings home. Chief Executive Officer John T. Chambers has led the charge for the tax holiday, which would be the second since 2004. He says it would encourage companies to “repatriate” as much as $1 trillion held abroad, spur domestic investment and create jobs.

Cisco’s techniques cut the effective tax rate on its reported international income to about 5% since 2008 by moving profits from roughly $20 billion in annual global sales through the Netherlands, Switzerland and Bermuda, according to its records in four countries. The maneuvers, permitted by tax law, show how companies that use such strategies most aggressively would get the biggest benefit from the holiday, said Edward D. Kleinbard, a law professor at USC. “Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues?” said Kleinbard, a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP. “Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies -- where their customers and key employees are in reality located -- to tax havens.” ...

Companies including Google, Apple, and Pfizer are also pushing the proposed tax holiday, which would allow profits to return to the U.S. at a discounted 5.25% rate. Under current law, American companies can defer federal income taxes on most overseas earnings indefinitely. When they do return to the U.S., they’re taxed at the corporate rate of 35% -- with credits for foreign income taxes paid. Thus, companies paying little overseas face higher U.S. tax bills upon repatriation, and would get more benefit from the discount. ... One way multinationals avoid taxes is through “transfer pricing,” transactions among subsidiaries that allow for allocating expenses to high-tax countries and profits to tax havens. ...

All told, Cisco has accumulated $31.6 billion in overseas earnings on which it has paid no U.S. income taxes yet, records show -- part of more than $1 trillion in U.S. companies’ offshore profits, according to data compiled by Bloomberg. In total, almost 90% of Cisco’s cash sits overseas.

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"The maneuvers, permitted by tax law,..."

“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”
Gregory v. Helvering, 1935

If you don't like the consequences of a stupid law, change the law.

Posted by: ColoComment | Jun 28, 2011 10:58:57 AM

"Biggest Tax Avoiders Would Win With Repatriation Tax Holiday"

...and, a trillion dollars of capital could flood into this country to help the economy. It's a win-win situation.

Posted by: Woody | Jun 28, 2011 12:03:11 PM

OTOH, will the funds lave the country again for better investments? Or, if it stays, and it sits in banks due to a lack of opportunity in US, will there be (additional) inflation?

Posted by: Mike | Jun 29, 2011 6:17:02 AM