Paul L. Caron

Sunday, May 26, 2013

NY Times on Corporate Tax Planning/Tax Avoidance

New York Times:  Who Will Crack the Code?, by David Leonhardt:

Ireland and Singapore have no natural resources that make them obvious places to manufacture the concentrate used in soda, nor have they developed innovative new soda-making techniques. Yet they have nonetheless become global capitals for making soft-drink concentrate.

In Singapore, Coca-Cola recently opened a plant with the capacity to produce the underlying ingredient for 18 billion cans of soda a year. In Cork, Ireland, PepsiCo has located its “worldwide concentrate headquarters,” which until 2007 had been in New York. More than half of all PepsiCo soda sold around the world starts, as concentrate, in Ireland.

What Ireland and Singapore share is a low corporate tax rate. And because soda is such a simple product, with so much of its financial value stemming from the concentrate, Coke and Pepsi can reduce their overall tax rates by manufacturing it in low-tax countries.

Partly as a result, the industry paid a combined corporate income tax rate — spanning federal, state, local and foreign taxes — of only 19.2% over the past six years, according to an analysis for The New York Times by the financial research group S&P Capital IQ. The average rate for the companies in the Standard & Poor 500 was 29.1%.

The soda industry’s success at legally avoiding taxes shows why so many economists and tax experts believe the United States corporate-tax code is terribly flawed. It includes a notoriously high statutory rate that causes companies to devote resources to avoiding taxes. But it has so many loopholes that the effective corporate tax rate in the United States is slightly lower than the average for rich countries.

The decline in corporate-tax collection in recent decades has contributed to budget deficits. It has also aggravated income inequality: a company’s shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who tend to be much more affluent than the average American, see their wealth increase.  

“It’s clearly a broken system,” said Michelle Hanlon, an accounting professor at M.I.T.

Corporate taxes burst into the spotlight last week, with the release of a Senate committee report on Apple's tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert and former Democratic Congressional aide, said he had been impressed so far by the seriousness of the committee’s work.

The effort has a long way to go, but if it succeeds, both liberal and conservative tax experts hope it will reduce the statutory rate while also eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.

New York Times:  Across U.S. Companies, Tax Rates Vary Greatly:

Last week, in a Congressional hearing, Apple got grilled for its low-tax strategy. But not every business can copy that approach. Here is a look at what S&P 500 companies paid in corporate income taxes — federal, state, local and foreign — from 2007 to 2012 [chart here].

New York Times editorial:  ‘A’ Is for Avoidance:

Even before last week’s Senate hearing on Apple, it was clear that the aggressive use of tax havens and other tax avoidance tactics had become standard operating procedure for global American companies.

Microsoft and Hewlett-Packard were the focus of a similar Senate hearing last September, while Google, Amazon and Starbucks have drawn recent scrutiny in Europe. And, of course, there is General Electric, which achieved a perfect zero on its United States tax bill in 2010. In fact, G.E. was reputed to have the world’s best tax avoidance department until Apple came along with tactics to stash some $100 billion in Ireland without paying taxes on much of it anywhere in the world and, apparently, without breaking any law.

And that is the problem. Rampant corporate tax avoidance may not be illegal, but that doesn’t make it right or fair. ...

[I]t is not clear that lawmakers are committed to stopping widespread tax avoidance. Instead, they may further entrench the system, or even make it worse. The most immediate issue involves a tax repatriation holiday. Under the law, American corporations can defer paying tax on their profits as long as the money is held abroad. Apple is one of nearly two dozen major corporations pushing for a tax holiday, which would permit corporations to bring their foreign-held profits to the United States over the course of a year at a discounted tax rate. ...

Global corporations present difficult issues for which there are no easy answers, but it is clear what we should not do. And there are steps that can be taken in the short run to curb abusive tax avoidance. Corporations should be barred from deducting expenses against foreign-held profits on which taxes are deferred, as is currently allowed. Congress also needs to end a practice known as “check the box,” which allows companies to easily create the requisite corporate structures to shift profits offshore. Tax rules and enforcement must be tightened to ensure that profits attributable to patents, design, marketing and other intangibles developed in the United States are indeed taxed in the United States. A more permanent fix would end tax deferral of foreign-held profits, imposing American taxes on profits when they are made.

The revelations in the hearings on Apple and other companies have given Congress all the evidence it needs to justify new corporate taxes. But there are no signs yet that it has the courage to impose them.

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I think some people implicitly believe that every person and every corporation in every country should pay full rate US tax. If every US corporation pays full rate without foreign deferral, and pass throughs and DREs are restricted, then you just benefit foreign companies. So I assume they also want to make foreign 10% shareholders of US ATBs subject to tax on their foreign income, maybe with a sec. 7874 style treatment (treat them as US corporations).

Maybe it's just rhetoric but they don't seem to brook any avoidance of US tax, which requires the IRS to tax foreign cubed transactions (foreign buyer, foreign seller, foreign soil). And obviously that won't be possible in most cases.

Posted by: NL7 | May 26, 2013 4:22:15 PM