Bach Seat

A recent report by the Center for Tax Justice (CTJ) on the use of tax havens in 2014, identified the 500 largest American companies hold more than $2.1 trillion in accumulated profits overseas to avoid U.S. taxes. The report found that one-quarter of that amount (549.7 billion) is hoarded abroad by ten tech companies alone, as the chart from Statista illustrates.

Among the tech titans hoarding cash, Apple (AAPL) has parked the largest amount of cash outside the United States. The article notes that the iPhone maker has stashed a whopping $181 billion overseas. That is almost twice as much as second-ranked Microsoft (MSFT) ($108.3b) and roughly three times the total of IBM (IBM), which ranks third in the tech-list with foreign cash holdings of $61.4 billion. Cisco (CSCO), ranked fourth, stands out with as many as 59 tax haven subsidiaries.

The top twenty tech firms in the order of the amount of money hoarded overseas in 2014 to cheat the taxman in 2014:

1. Apple
2. Microsoft
3. IBM
4. Cisco
5. Google (GOOG) $47,400 millions
6. HP (HPQ) $42,900 millions
7. Oracle (ORCL) $38,000 millions
8. Qualcomm (QCOM) $25,700 millions
9. Intel (INTC) $23,300 millions
10. EMC (EMC) $11,800 millions
11. Western Digital (WDC) $9,400 millions
12. Xerox (XRX) $8,500 millions
13. Ebay  (EBAY) $7,900 millions
14. Cognizant Technology (CTSH) $6,121 millions
15. Agilent Technologies (A) $5,700 millions
16. Micron Technology (MU) $4,910 millions
17. Broadcom (BRCM) $4,850 millions
18. Symantec (SYMC) $3,600 millions
19. Computer Sciences (CSC) $2,552
20. Amazon (AMZN) $2,500 millions

Statista notes that the study found the number of tax haven subsidiaries is not directly connected to the amount of taxes dodged by a company. On the contrary, some companies now report fewer subsidiaries in tax haven countries than they did in 2008 while reporting significant increases in the amount of cash they hold abroad.

The study offers two possible explanations for this occurrence: First of all, some companies may choose not to report all of their subsidiaries because the SEC’s penalties for failing to do so are pretty lax and secondly companies could simply consolidate more income in fewer offshore subsidiaries, often in structures dubbed “Double Irish”.

This chart shows how much money U.S. tech companies hold in offshore subsidiaries to avoid U.S. taxes.

You will find more statistics at Statista

The CTJ claims U.S.-based multinational corporations are allowed to play by a different set of rules than small and domestic businesses or individuals when it comes to the tax code. Rather than paying their fair share, many multinational corporations like Apple, Cisco, Google, and Intel use accounting tricks to pretend for tax purposes that a substantial part of their profits are generated in offshore tax havens, countries with minimal or no taxes where a company’s presence may be as little as a mailbox. Multinational corporations’ use of tax havens allows them to avoid an estimated $90 billion in federal income taxes each year.

Congress, by failing to take action to end to this tax avoidance, forces ordinary Americans to make up the difference. Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt.

The CTJ recommends the following steps to stop the abuse of offshore tax havens by the tech titans and restore fairness to the US tax system and reduce pressure on America’s budget deficit and improve the functioning of markets.

End incentives to shift profits and jobs offshore. The most comprehensive solution to ending tax haven abuse would be to stop permitting U.S. multinational corporations to indefinitely defer paying U.S. taxes on profits they attribute to their foreign subsidiaries. Ending “deferral” could raise nearly $900 billion over ten years, according to the report.

Reject the Creation of New Loopholes. Reject a “territorial” tax system. The CTJ estimates that switching to a territorial tax system could add almost $300 billion to the deficit over ten years.

Close the most egregious offshore loopholes. Policymakers can take some basic common-sense steps to curtail some of the most obvious and brazen ways that some companies abuse offshore tax-havens. Close the inversion loophole by treating an entity that results from a U.S.-foreign merger as an American corporation if the majority (as opposed to 80 percent) of voting stock is held by shareholders of the former American corporation. These companies should be treated as U.S. companies if they are managed and controlled in the U.S. and have significant business activities in the U.S.

Stop companies from shifting intellectual property (e.g. patents, trademarks, licenses) to shell companies in tax haven countries and then paying inflated fees to use them. This common practice allows companies to legally book profits that were earned in the U.S. to the tax haven subsidiary owning the patent. Limited reforms proposed by President Obama could save taxpayers $21.3 billion over ten years.

Stop companies from deducting interest expenses paid to their own offshore affiliates, which put off paying taxes on that income. This reform would save $51.4 billion over ten years, according to the CTJ.

Increase transparency. Require full and honest reporting to expose tax haven abuses. Multinational corporations should report their profits on a country-by-country basis so they can’t mislead each nation about the share of their income that was taxed in the other countries.

Michigan-based companies dodging the taxman in 2014 have hoarded almost $55 Billion according to the CTJ. With just a 1% tax on the withheld income, we could probably get the roads fixed. On the list ranked by millions held off-shore by Michigan based firms according to the CTJ are:

1. Dow Chemical $18,037 millions
2. General Motors $7,100 millions
3. Stryker $5,878 millions
4. Whirlpool $4,900 millions
5. Ford $4,300 millions
6. Autoliv $4,000 millions
7. TRW Automotive $3,400 millions
8. BorgWarner $2,700 millions
9. Kellogg $2,200 millions
10. Lear $1,200 millions
11. Penske $711 millions
12. Visteon $245 millions
13. Kelley Services $111 millions
14. Conway $32 millions
15. Masco $12 millions

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Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.