US Tech Moguls Stockpiling Profits Overseas
Look back to the later 1990s and early 2000 years that brought many US Corporations under heavy scrutiny by a once known paradox as corporate “inversions” or “expatriations”. U.S. firms set a precedent with organization of their corporate structure, constructing a “foreign parent corporation” of the group rather than establishing in the United States. The overarching objective to this shift was tax savings that involved minuscule economic activity on the home front. Bermuda and the Cayman Islands (countries with no corporate income tax) were the location of many of the newly created parent corporations. All major corporations of the 21st century partook in maneuvering profits overseas. While the idea is common amongst corporations to escape high U.S. taxation on revenue (35%), only now does the Obama Administration in conjunction with the U.S. Treasury seek to put emphasis on corporate tax reform. Yet much legislation has taken affect from the days of offshoring accounts, politics prevail and new legislation tax reform for 2016 is still on the table. The Obama administration aspires for reform in the sense of a ‘one-time’ taxation at 14% of all American companies that are stockpiling earnings abroad to tap into a 2 trillion plus bank roll of corporate earnings held overseas. A result of approximately $280 billion in tax would be used for infrastructure repair and upgrades.
Mogul tech companies like Apple Inc., Google Inc., and Microsoft Inc. combined with only a hand full of other tech companies make up an astounding 20% of the $2.1 Trillion dollar offshoring profits according to Bloomberg News Review which assessed security filings of 304 corporations. With that being said keep in mind this is a tech company discussion and we are not including giants like General Motors, Cisco, and Pfizer to name a few. The ‘top three’ tech companies as referred to above boosted profits by 20% in the last year that increased overseas profits to over $16 billion each. Apple alone tops the charts totaling over $181 billion in profits in combined overseas companies other than the United States (ctj.com). The profits keep climbing per year at a rate of 8–10%. The most notorious of movements, known as ‘inversion’ allows these tech giants to action profits overseas while keeping company executives in the U.S. and
taking advantage of public benefits for company employees all the while escaping the close hold and not falling victim to the Internal Revenue Service.
Here is a little bit of history to how the technique of ‘inversion’ came to fruition. Tax inversion was pioneered in 1983, when the construction company McDermott International changed its address to Panama to avoid paying more than $200 million in taxes. The tax lawyer who masterminded the “Panama Scoot” was later immortalized in an operetta performed for his colleagues (motherjones.com). Because of this technique to minimize tax on profits by accumulating wealth in the domestic realm companies use ‘inversion’ as a method to avoid taxes.
Likewise inversions are not the only way to avoid the IRS. Once profits were allocated to overseas parent companies, the next step to avoid taxation was by “expatriation”. Companies would not incur tax if profits were not brought back to the United States. American firms circumvented about 500 billion in unpaid taxes within the last 3–4 years primarily due to the mere avoidance of being taxed by reentering funds back to American subsidiaries. Companies like the tech moguls mentioned above primarily moved operations to countries like Ireland and the UK due to the light corporate tax but more notably based on a “Territorial Tax System” of which the U.S. does not participate in.
The United States is one of the few countries that has a worldwide tax system and levies a tax on the foreign-source income of domestic corporations. Changing corporate tax residence to a country with a territorial tax system (where foreign earnings would not be taxed at all) is thought to drive inversion decisions. This issue has led to proposals for the United States to adopt a territorial tax system to stop inversion transactions.1 A major concern to adopting this tax system is the tension the current transfer system would incur. The worldwide tax system puts a limit on the amount of profit shifting being allowed meaning that expatriation will result, but under the “Territorial Tax System” that would not be the case. Interesting enough tech companies that trademark, copyright, or patent their intellectual property have greater leeway than those companies who’s goods and services are needed by being boots on the ground hence the movement to development of foreign parent corporations.
The United States Treasury as well as the current presidential administration and congress are trying to create policy to alleviate such movement and keep profits in United States. But like most politics, policy to become a reality takes time, and while new laws are being drawn up companies like Apple, Google, and Microsoft all the while continue to take advantage or foreign corporations to avoid massive taxation from the IRS.
1 McBride (2014)
