Large U.S. tech companies should pay income taxes of about 35 percent on the profits they make (above $18.3 million) from business done in the United States. So says the tax code.
It rarely works out that way. Instead, many U.S. companies routinely park large chunks of their income overseas to avoid paying federal income taxes on it. And the SEC apparently looks the other way when companies obscure the true mix of their domestic-versus-overseas profit in their regulatory filings.
Ultimately, only the IRS knows how much these companies actually pay, and its not sharing the information with people like you and me.
Tech-sector companies have been especially adept at moving cash assets around the globe, and at muddying the waters as to precisely where their profits came from.
Under federal law, U.S. companies may permanently defer paying taxes on income transferred to foreign subsidiaries. Those monies may be subject to taxation by the country where theyve been parked, but tax rates in popular tax haven countries like Bermuda are extremely low or even nonexistent.
Bloomberg reported in December that Google avoided paying $2 billion in global income taxes by moving $10 billion in revenue to Bermuda, which has no corporate income tax.
The fact that the tax rate on tech companies global income is less than the statutory rate of 35 percent in the United States suggests that shifting income overseas can reduce companies overall tax burden considerably, and often dramatically. (See the main chart below.)
How much do they pay?
But it soon became clear from the companies annual reports to the SEC that the portrayal in the companies filings of their mix of domestic-versus-overseas income didnt add up. In many instances, the U.S. tax rates that the filings cited failed to jibe with numbers from other sections of the same annual report.
The SEC filings do seem to report accurately the amount of tax that the companies paid in income taxes worldwide. And in all cases those tax rates are below the 35 percent statutory income tax rate established in the United States.
The Congressional Research Service recently released a report that seems to prove that U.S. companies are fudging the numbers on the geographic origin of their foreign profits. It found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in five very small tax-haven countries (Bermuda, Ireland, Luxembourg, Netherlands, and Switzerland), even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.
In contrast, five traditional economies (Australia, Canada, Germany, Mexico, and the United Kingdom), where American multinational companies employed 40 percent of their foreign workers and placed 34 percent of their foreign investments, accounted for only 14 percent of those companies reported overseas profits.
Tax breaks for options?
Offshore holdings arent the only way for a big company to avoid paying income tax. Facebook didnt pay any federal or state income tax for 2012, despite earning $1.1 billion in profits. In fact, the company will receive $429 million in refunds. How? It exploited a tax break for compensating its executives with stock options, many of which were cashed out after the social networking giants IPO last year. Other young companies may duplicate this method of compensation to achieve the same end.
Tax Haven Mavens
The Center for Investigative Reporting and The Bay Citizen published a report last month that studied the offshore holdings and tax savings of 50 of the largest publicly traded tech companies in Silicon Valley. The study found that most of the companies in the study keep massive amounts of their cash parked oversees, and that they often use exemptions to avoid reporting the detailsand the tax-savings implicationsin their SEC filings.
This chart shows the amounts of cash that eight tech companies have permanently reinvested overseas, rendering those funds permanently safe from U.S. taxation. Comparisons can be drawn between the cash amounts reinvested offshore and the total cash held by the companies.
You can see a full interactive presentation of this data from 50 Silicon Valley companies developed by Matt Drange and Shane Shifflett at the Center for Investigative Reporting.
Few companies in that list of 50 actually report how much tax theyre avoiding by permanently investing it overseas, but a few are frank about it. Apple, for example, reports that it would owe the government an additional $13.8 billion if were taxed on its foreign earnings. Adobe would owe an additional $700 million.
This is a very serious issue at a time when the United States struggles to fund basic entitlement programs and looks for ways to pay down its staggering debt. Executives at the tech companies defend their tax-avoidance strategies by pointing at that they are simply abiding by existing laws and looking out for the interests of their investors. Is it time for U.S. lawmakers to close the loopholes in the tax code that allow tech companies to pay less than their fair share?