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Wednesday, February 13, 2013

Silicon Valley Firms Shelter Assets Overseas, Slash U.S. Tax Bill

The Bay Citizen, Silicon Valley Firms Shelter Assets Overseas, Slash U.S. Tax Bill:

The largest tech companies in the Bay Area have avoided paying federal taxes on more than $225 billion they have accumulated through foreign subsidiaries, documents filed with the Securities and Exchange Commission show.

By sheltering their assets overseas, Silicon Valley companies such as Apple, Google, eBay and Hewlett-Packard are able to reduce their annual taxes in some cases by billions of dollars, according to a Center for Investigative Reporting and Bay Citizen analysis of the 50 largest firms’ financial statements filed in 2012.

Widespread tax avoidance by some of California’s most prominent companies has contributed to federal revenue shortfalls as President Barack Obama and Congress consider whether to cut government programs. Some lawmakers say the tax code disproportionately favors powerful companies at the expense of other taxpayers.

“What it demonstrates is that tech firms in particular have very low worldwide rates, and their demands for a more competitive U.S. tax system ring hollow,” said Edward Kleinbard, a tax law professor at the University of Southern California and former chief of staff for the congressional Joint Committee on Taxation. “In fact, the U.S. tax system subsidizes them, and a more neutral tax system would require tech firms to pay substantially more taxes.” ...

BayFive companies – Cisco Systems, Apple, Hewlett-Packard, Google and Oracle – accounted for more than two-thirds of the $225 billion in accumulated foreign earnings as of Dec. 31, 2012. Tech companies that relied on foreign income to reduce their taxes include:

  • Apple, which reported $40.4 billion in holdings overseas and had an effective global tax rate of 12.6 percent over the past three years
  • eBay, which reported $10 billion overseas and had an effective tax rate of 15.3 percent over the past three years
  • Google, which reported $24.8 billion overseas and had an effective tax rate of 17.6 percent over the past three years
  • Yahoo, which reported $3.2 billion overseas and had an effective tax rate of 17.9 percent over the past three years
  • Cisco, which reported $41.3 billion overseas and had an effective tax rate of 20.9 percent over the past three years

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"“In fact, the U.S. tax system subsidizes them, and a more neutral tax system would require tech firms to pay substantially more taxes.” ...

If a coporation earns active business income abroad but does not pay taxes on it currently, in what sense is the U.S. "subsidizing" it? I do not see how the U.S. "subsidizes" a company's operation of a factory abroad simply by failing to tax it.

I guess we are all being subsidized by the government, seeing that the tax rate is not 100%.

Posted by: IBM | Feb 13, 2013 12:16:30 PM

It would be good if the people who wrote these articles had some understanding of tax or accounting.

Let's say I earn $100 million in Ireland and pay 12.5% tax. If I bring this money back to the US, I have to pay an additional $27.5 million in tax. (Yes, the average federal & state rates are 40%.)

Even if I didn’t bring the cash back to the US, for book purposes, I would have to book a $27.5 million tax liability, UNLESS the amounts are "permanently reinvested" under APB 23. This means I promise to fund non-US operations with my Irish profits.

Stock analysts look to see how a company's effective tax rate (ETR) compares to an industry average as a gage of free cash flow. Assuming my planning was legal (albeit aggressive), why on God's earth would the CEO, CFO, and head of tax do any differently? Because I want to lower my company's share price?

Lowering the US corporate rate from the highest in the world most likely would have an effect, based on the Reagan/Bradley 1986 tax reform. The drop in rates absolutely killed the tax-shelter industry, and taxpayers sought out more normal investments.

Posted by: air65cav | Feb 13, 2013 12:20:21 PM

"why on God's earth would the CEO, CFO, and head of tax do any differently?"

doesn't apple book full repatriation tax costs on a current basis?

Posted by: lv | Feb 13, 2013 1:39:53 PM

The CIR analysis significantly OVERSTATES the effective rate of tax on software companies. Real effective rates of tax are probably negative.

Cary Brown tells us that allowing current deduction of a capital expenditure is the equivalent of taxing income from that expenditure at an effective rate of zero. (For a demonstration that this is so, see the exercises in my textbook, Seto, Federal Income Taxation 244-249 (2012). The math is simple. All of my basic tax students learn how to do it.) Under Rev Proc 2000-50, all software development costs are treated as research and development costs currently deductible under Code Section 174. It follows that income from software is taxed at an effective rate of zero.

What's confusing about Cary Brown is that software companies nevertheless pay and book reserves for "taxes." The reason their effective rate of tax is zero is that part of their initial investment is paid for by the government. What appear to be "taxes" are, under Cary Brown, simply the government's return on its investment. The return on the company's investment is effectively not taxed at all.

The CIR's analysis, by contrast, treats all reserves booked for taxes as taxes which -- under Cary Brown -- they are not. It then computes such reserves as a percentage of book income, producing the reported effective rates of tax. In consequence, CIR's analysis dramatically overstates software companies' effective rates of tax. The low effective rates of tax reported by CIR result from the fact that software companies offshore substantial amounts of their income. When combined with Cary Brown, the true effective rates of tax are probably negative -- significantly so.

Code Section 174, which makes this possible, is an intentional subsidy -- characterized as such in the US Budget. Rev Proc 2000-50, which seems to have flown under almost everyone's radar, is simply poorly thought through. The costs of writing Grand Auto Theft V are no more "research and development" costs than the costs of writing Harry Potter.

Posted by: Theodore Seto | Feb 13, 2013 2:01:07 PM

I agree with air65cav but the whole idea is to defer paying taxes.. Books are not payment of cash to the various treasuries....Any tax man worth his salt wants to delay payment of taxes in real dollars....why do you think corporations have deferred comp plans? I can use that money overseas which has not been diluted by US taxes to invest in other overseas activities and make more money....their certainly is an incentive from a cash flow point of view.

Posted by: Sid | Feb 13, 2013 6:32:10 PM

> all software development costs are treated as research and development costs currently deductible under Code Section 174. It follows that income from software is taxed at an effective rate of zero.

Not so fast.

Suppose that I spend $100 to develop some software that I then sell for $120. I deduct the $100 from the $120, leaving $20.

How does that deduction lead to the conclusion that "income from software is taxed at an effective rate of 0"?

Posted by: Andy Freeman | Feb 14, 2013 1:19:03 PM

The Tax Department's objective is to legally conserve cash through the reduction of tax payments and increase EPS through the reduction of the effective tax rate. If the result is displeasing to some then the tax laws should be changed after consideration of why these laws were enacted in the first place.

Posted by: Tom | Feb 14, 2013 2:08:54 PM