Should the US Lower Tax Rates on US Multi-National Corporations?

Should the US lower its tax rates to allow US multi-national corporations (USMNCs) to repatriate earnings allegedly re-invested offshore?

In the news, several USMNCs are lobbying the President and Congress to further lower the tax rate on repatriation of earnings allegedly re-invested in offshore operations that was proposed by the White House to be taxed at 15%.  This Reuter's Article, suggests that the USMNCs are seeking to lower the current 35% tax rate on repatriation of earnings to 3.5% tax rate on earnings already invested abroad in illiquid assets, such as factories, and 8.75% tax rate on earnings cash and liquid assets.

The Reuter's article speculates that the repatriated earnings/cash and taxes raised from the repatriated earnings/cash could raise tax revenues and funds the expansion of the US economy:  "If the $2.6 trillion overseas were repatriated at once, two things would happen.  First, Washington would get a big jolt of tax revenue.  Second, repatriated profits not collected by the Internal Revenue Service could be put to use in the economy."

The last time the US had a "tax repatriation holiday" was in 2004-2005, and the results of the tax repatriation holiday show that the alleged reinvestment into the US economy by the USMNCs that took advantage of the 5.25% lowered rate on the repatriation of earnings did not occur.  In 2001, as noted in the Reuter's article, the Senate held a hearing into the effects of the 2004 repatriation holiday and determined that the repatriation cost the US treasury at least $3.3 billion in net revenue over 10 years and produced no appreciable increase in U.S. jobs or domestic investment.  Instead, the repatriated funds were used to buy back shares and to pay executive bonuses.

Finally, the Reuter's article notes that this may be an effort of lobbyists for the USMNCs to signal the log fight ahead to achieve the new repatriation tax holiday by initially setting the percentages low, and therefore reaching a "compromise" at a slightly higher percentage.

The Reuter's article raises a fundamental question, namely: Should Congress and the President be considering passing tax reform implementing a reduced tax rate for the repatriation of earnings, or should we be looking at other ways to reform the current corporate tax "imbalance" problems, when there are no benefits (as reflected in the most recent tax repatriation holiday)?

This Bloomberg article suggests that the benefits of a tax repatriation holiday touted by USMNCs are just myths as follows:

1. The article stats by quoting Trump's economic advisor touting that the repatriation of earnings will cause a boost to the U.S. economy.  Contrast this statement with the Senate PSI findings of fact in its 2001 study on the 2004 tax repatriation holiday, where the Senate PSI determined that after repatriation over $150 billion dollars, the top 15 USMNCs actually reduced its workforce by 20,931 jobs.  Also there was no new R&D expenditure by the top 15 USMNCs that took advantage of the tax repatriation.
2. The article then states that companies have been borrowing funds in the US at historic rates and that any perceived additional tax revenues would have to be low enough to incentivize the companies to forego borrowing the money and repatriating the offshore earnings/funds.  Contrast this point with the Senate PSI findings that the repatriation holiday actually reduced tax collection by $3.3 billion over 10 years, and leads to the conclusion that a tax repatriation holiday would not generate tax revenue because the tax rate would have to be so low, and historically speaking there would be a net loss over 10 years of taxable revenue attributable to the tax holiday.
3. The article points out that the borrowed funds by USMNCs have been used for stock buy backs and executive bonuses.  Compare the use of the repatriated funds from the 2004 tax holiday which were almost exclusively used to fund stock buy backs and executive compensation with the current use of borrowed funds by the top USMNCs and this suggests that any repatriation holiday will continue this trend.
4. Finally, the article points out that clearing a supposed hurdle to the repatriation of offshore earnings (lowering the tax rate) may not incentivize USMNCs to repatriate the funds because they have operations overseas, or may continue to benefit from the sequestering of offshore earnings in lower tax jurisdiction.  Compare this myth with the Senate PSI findings that post 2004, more USMNCs increased, not decreased, their offshore earnings accumulation rate.

Both articles suggest that repatriation of offshore earnings at a lower rate for USMNCs, when coupled with the Senate PSI findings, reflect unsound US tax policy.  However, it appears as if Congress and the White House continue to buy into the myth that the USMNCs are perpetuating that a repatriation tax holiday is the remedy that will increase the US economy, generate more US tax dollars and spur economic growth.  Despite the message the USMNCs are sending, Congress and the President should look at historical data to see that the myth of a one quick fix solution (repatriation tax holiday) is a failure.

If you know of any company or individual that has sheltered funds offshore, and would like assistance in assessing and filing your IRS whistleblower claim, please CONTACT US.  The IRS Whistleblower Program pays between 15-30% if collected proceeds when the IRS proceeds based on a whistleblower's substantial and credible information.

Corporate Taxes: Are US Multinational Corporations really paying their fair share?

There has been extensive coverage in this blog about how US Multinational Corporations are not paying their fair share by utilizing Transfer Pricing, Inversions and Earnings Stripping to reduce their effective tax rates below the statutory 35%.

Some examples are: Pfizer tried to invert a couple of times to avoid paying the US tax rate, Apple and its Irish transfer pricing, Google with its double Dutch Irish sandwich transfer pricing, Caterpillar with its Swiss structure, and on and on.

Some of these USMNCs have argued that despite utilizing these accounting maneuvers, they still pay their fair share of taxes (See Apple CEO Tim Cook's comments on 60 Minutes).  Others question whether the USMNCs are actually paying their fair share and whether they are contributing to the overall tax gap.

In contrast to USMNCs trying to shift profits offshore to avoid US Tax, there is one USMNC that is paying its fair share.  Disney, yes that Disney, and despite negative criticism (NY Times article re Disney outsourcing tech jobs to India, and Disney caught in the LuxLeaks scandal), it appears as if Disney is actually paying its true tax liability without utilizing the accounting tricks that other USMNCs utilize to reduce their effective tax rates.

According to this Investopedia article, Disney is paying at or near the US corporate tax rate (35%) of income taxes.  For example, the author states that for 2015, Disney had pre-tax income of $13.9 billion and paid corporate income taxes of $4.4 billion.  The author, David Cay Johnston, also states that Disney earned only 1% of its profits in the U.S. and paid about "1.3% if all the corporate income taxes".

Johnston also states that one reason Disney is paying a higher rate of taxes is that Disney is keeping its Intellectual Property in the U.S. and not transferring the IP to low tax haven subsidiaries.  Johnston also criticizes Disney for not spending its profits in reinvesting in U.S. businesses but in conducting stock buy-backs.

Johnston's main point is that Congress should close the transfer pricing incentive/loophole that has permitted companies (Apple, Google, Pfizer to name only a few) to utilize transfer pricing, earnings stripping and inversions to erode the US tax base and pay less taxes.  Johnston also challenges whether the corporate tax is achieving the goals it was designed to achieve.

Maybe Johnston is correct in having Congress re-visit the utility of the corporate tax structure (a similar criticism of Bob Iger's, the Chairman of Disney).  Or maybe the IRS should be doing a better job at enforcing transfer pricing, inversions, and/or earnings stripping to prevent the USMNCs from shifting taxable income it its foreign base subsidiaries, despite its recent loss in the Medtronic case.

If you have specific and credible information about a company utilizing transfer pricing, inversions and/or earnings stripping to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking the various abusive transfer pricing applications by USMNCs.

Apple and its European Commission Troubles: hype or real transfer pricing liability for Apple

Since June 2014, The European Commission (“EC”) (European Union's politically independent executive arm, made up of 1 commissioner from each EU country) has investigated Apple, and more specifically the tax authorities in Ireland, to determine if the Irish tax authorities followed the EU rules on state aid in issuing favorable tax rulings to Apple.

As explained in the Permanent Subcommittee on Investigations (PSI) report on Apple, Apple utilizes “key offshore subsidiaries incorporated in Ireland.”  The reason Apple has utilized the Irish subsidiaries is that “Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12 percent,” generally negotiated with the Irish government to be at rates at 2% or less. See pg. 20.

Apple CEO Tim Cook, in his 60 minutes interview, has called the investigation “political crap” and has stated that “there is no truth behind it.”  Mr. Cook has also stated in the same interview that “Apple pays every tax dollar we owe.” 

Some news outlets (Bloomberg, Guardian) have stated that Apple could “be on hook for $8 billion in taxes”.  Bloomberg calculated this figure by stating that if the EC terminates the Irish rulings for Apple, and requires Ireland to seek recourse tax payments from 2004-2012 on profits of $64.1 billion at a 12.5% rate, that would generate $8 billion in taxes owed by Apple to Ireland.

While other news outlets (Forbes and in a recent opinion piece in Forbes) has stated that Apple isn’t on the hook for $8 billion, but that the Irish government is being investigated and that the true amounts Ireland may request from Apple, assuming the EC rules against Ireland’s rulings favoring Apple, would be more in the $200 million range, and not the $8 billion figure used by Bloomberg.  Mr. Worstall in the Forbes opinion piece states explains that the reason behind the lower figure is due to the structure employed by Apple, the Double Irish structure.  He states that some profits can be taxable in Ireland and some profits are not taxable in Ireland, so the Bloomberg calculation, which treats the entire amount of profits ($64 billion) as taxable in Ireland is incorrect.  Mr. Worstall explains that Bloomberg’s figure is wrong because it fails to account for transfer pricing even between Apple’s Irish entities, which might shield the non-Irish resident income from being taxed in Ireland.

Two noteworthy observations regarding Apple’s EC investigation are:

1. If as Mr. Worstall states, the game is transfer pricing and the prices allocable between the various Irish entities, then what about the transfer price between Apple Inc. (the U.S. entity) and AOI (Apple’s primary Irish entity identified in the PSI hearings)?  If the EC is examining whether the proper transfer pricing and applicable tax rates are at play, why isn’t the IRS examining Apple to determine if Apple used the proper transfer prices to shift the U.S. developed technologies and intellectual property to its offshore operations to pool an estimated $181 billion dollars offshore through the Irish entities instead of being taxed in the United States.
2. Panama Papers part 2.  Previously I blogged about the Panama Papers and whether U.S. corporations and individuals would be exposed.  Give the exposure Apple has gotten over its use of Irish entities, and the knowledge that other companies and individuals have utilized offshore entities to grow their wealth, why hasn’t there been more disclosures of companies and individuals in the U.S. that have taken advantage of offshore entities.  If PSI can expose Apple’s offshore structure, why couldn’t the IRS expose other companies’ offshore transfer pricing structure?

If you have specific and credible evidence of a corporation’s use of transfer pricing to avoid paying its tax liabilities you should consider filing a tax whistleblower claim.  Contact us to see if your information would permit you to receive a 15-30% award of the amount of taxes, penalties and interest collected by the IRS on your transfer pricing tax whistleblower claim.