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.

More Accounting Tricks to Avoid Paying Tax by U.S. Multinational Corporations

As noted in this blog, the difference between tax evasion and tax avoidance is a fine line.  To assist in drawing the line properly and legally, corporations and individuals employ tax attorneys and accountants to minimize their tax liabilities.

As previously discussed in this blog, the triumvirate of "legal" tax dodging by U.S. Multinational Corporations ("USMNCs") is Inversions, Transfer Pricing and Earnings Stripping.  Another less publicized tool used by accountants of USMNCs is the "stock option loophole".  As the Citizens for Tax Justice ("CTJ") reports, USMNCs have utilized the "stock option loophole" to reduce their taxable income in the amount of $64.6 billion over the past 5 years.

Notable (Top 5) USMNCs which have utilized the stock option loophole include:

USMNC	Stock Option Tax Benefits from 2011-2015
Facebook	$5,665,000
Apple	$4,673,000
Google	$1,951,000
Goldman Sachs Group	$1,775,000
J.P. Morgan Chase & Co.	$1,666,000

The CTJ list documents 310 other companies that have reduced their federal and state corporate income taxes by a combined $64.6 billion dollars over the last 5 years.

What is the "stock option loophole"?  Simply put, it is an accounting mechanism to "track" stock options and to deduct the expense of stock options.  Why is this a loophole? The simple answer is that there is a disparity between the price the employee pays for the stock option and the price the stock options are worth.  For a more technical explanation see this PricewaterhouseCoopers (Accounting Firm) explanation.  Based on the PWC article, the USMNCs deduct this difference between the exercised price and the price their employees paid for the stock on the corporate taxes in the year that the options are exercised.

CTJ questions why the USMNCs are allowed a deduction fro giving their employees a benefit but in reality does not cost the USMNCs anything.  CTJ also states that reversing this may help to minimize the Tax Gap.

If you have specific and credible information about a company failing to pay its tax liabilities, contact our firm about filing an IRS Whistleblower claim to assist the IRS in holding the company liable for the taxes they should be paying.

Tax Fraud or Tax Avoidance?

Lionel Messi

There is a joke among tax practitioners, namely: What's the difference between tax evasion and tax avoidance?  Answer: About $100,000 and a competent tax attorney.  While this may be a party joke, there are real world examples of this joke playing out.

Case 1: Lionel Messi and Tax Fraud Trial.

In the sports/tax news, Lionel Messi, a world renowned soccer player, testified in his tax fraud case before Spanish authorities. See SI article. 

Messi stated that he didn't know he wasn't paying his taxes, and that he would sign anything his father put in front of him, because he trusted his father.  With respect to tax issues, this blind dependence/trust in a person with the power of preparing your tax returns is known as willful neglect, and unfortunately it will not relieve you of your obligations to file and pay your tax liabilities.

In the United States, Internal Revenue Code Section (I.R.C. §) 6651 imposes an additional penalty for failure to file your tax return, and failure to pay your tax liability as shown on your tax return.  I.R.C. §  6651 contains a reasonable cause exception, but that must be raised by the taxpayer based on the facts and circumstances.  Noteworthy to this discussion, is that Lionel Messi's dependence on his father would not rise to the level of reasonable cause for exempting Lionel Messi from this additional penalties, because merely trusting or depending on someone does not relieve a person from their tax return filing and tax paying obligations.

Willful Neglect is defined by the United States Supreme Court as "a conscious intentional failure or reckless indifference to the filing requirement."  United States v. Boyle, 469 U.S. 241, n.3 (1985)  Ignorance of the filing requirements is not an excuse for failing to file a tax return. 

While Spanish tax laws may be different than the IRS rules and regulations, Messi's case reflects that blind trust in your advisors and/or family members does not eliminate your obligations to file tax returns and to properly structure your business affairs.  Note, the SI article states that Messi and his father are facing three counts of tax fraud and could be sentenced to nearly two years in prison if found guilty of defrauding Spain's tax authority of 4.1 million euros ($4.5 million) from 2007-09. The SI article points out that Messi and his father are not likely to face any jail time but could be fined and made to forfeit possible future tax benefits, and that both deny wrongdoing, and the money owed was already paid back.

Case 2: Donald Trump Tax Avoidance through the use of Delaware entities.

Contrasting Lionel Messi's situation is Donald Trump, the presumptive Republican nomine for President of the United States.  In recent news, Donald Trump has pooled 110 registered or pending trademarks and placed them into a new Delaware based (DTTM Operations LLC).  This Bloomberg article points out that this maneuver would permit Donald Trump to escape other states' income taxes on royalties paid for their use, which would be an income stream worth tens of millions.

Additionally, the article highlights ways that Donald Trump may have reduced his tax rates by utilizing foreign entities by shifting some of the trademarks to Ireland.  The Bloomberg article also provided possible other reasons for the consolidation, including debt financing and estate planning.

The significance of this second case when compared with the first case is that with proper tax planning, what appears to be tax fraud with the Messi case, is likely just proper prudent tax planning in the Donald Trump case.

Not all tax planning is proper, if you have specific and credible evidence of improper tax planning or fraud, contact us to discuss your case.  The IRS pays an award between 15-30% of the collected tax, penalties and interest for substantial and credible information provided by a whistleblower.