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Foreign Tax Havens Cost U.S. Small Businesses

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November 29, 2016

Small businesses in the U.S. on average pay an extra $5,128 in taxes to make up for revenue lost to the use of offshore tax havens by multinational corporations, according to a new study.

The report, by U.S. Public Interest Research Group Education Fund, found the federal government loses $128.5 billion in corporate tax revenue due to tax haven abuse. Every small business would need to pay an additional $4,481 in federal taxes to account for the revenue lost.

On top of that, offshore tax havens cost state governments an estimated $18.5 billion in lost tax revenue, according to the report. U.S. small businesses would need to pay an average of an extra $647 to make up for the lost state tax revenue.

In addition, because state corporate tax rates vary so much, small businesses in some states would need to pay up to $2,520 to make up for state tax revenue lost to tax havens.

“The amount of cash corporations book to offshore tax havens is only growing, and it’s not because these businesses are conducting prolific amounts of business in the Cayman Islands,” said U.S. PIRG tax and budget associate Alexandria Robins in a statement. “Our tax code is balanced in favor of big multinational corporations, and that means here at home we’re losing out on lower tax rates, more funding for public programs, or cuts to our national debt.”

The report pointed to the use of foreign tax havens by some of the largest multinationals. General Electric, for example, maintained 20 tax haven subsidiaries and kept $104 billion offshore last year. GE was thus able to pay an effective federal tax rate of -1.6 percent over the past 10 years, a negative rate because it received net tax payments from the federal government.

Microsoft, for its part, has five tax haven subsidiaries and keeps $124 billion offshore, on which it would otherwise owe $39.3 billion in extra U.S. taxes. Meanwhile, the drug maker Pfizer operates 181 subsidiaries in tax havens, holding $193.6 billion in profits abroad for tax purposes, the second highest amount among Fortune 500 companies.

Clark Gascoigne, deputy director of the FACT Coalition, an advocacy group, noted the report comes at a time when the incoming administration and Congress are set to consider expansive tax reforms. “For too long, lawmakers in Washington have used the tax code to pick winners and losers,” he said in a statement. “Sadly, the 'winners' have been multinational companies that shift jobs and profits overseas, while the ‘losers’ are small businesses and middle-class Americans who are stuck with the bill. We are about to have a very public debate on corporate taxes. It's important to remember that fixing the problems should include changes that level the playing field between domestic businesses and multinational companies. Real change must not, as we have seen in some proposals, double down on a two-tiered system that favors multinational over wholly domestic companies.”

The report includes letters from Maurice Rahming, owner of O’Neill Electric in Portland, Oregon and ReShonda Young, owner of Popcorn Heaven in Waterloo, Iowa. Both are members of the small business advocacy group, Main Street Alliance.

“It is extremely difficult to compete against larger corporations,” said Rahming. “Their ability to dodge their tax responsibility is a huge reason for that. For every dollar large corporations pay in taxes, I pay eight. We certainly can’t call that a level playing field.”

“Corporate tax dodging is a triple whammy for small business owners like me,” said Young. “First of all, along with all other taxpaying citizens, we have to fill the gaps when corporations avoid paying their fair share. That means paying more ourselves, suffering inferior services, watching the national debt climb—or some unfortunate combination of those options.”

Comments (3)
USA Corporations, “foreign earned income is taxed in the jurisdiction it is earned”. Is very debateable as one sees the extensive manipulations that most USA Corporations exercise in the amount of further transactions that then take place beyond the sale to the end user under the explanation, “we are only operating within the law”. For example Apple has amassed billions of dollars in the Republic of Ireland totally disproportionate to the accumulated value of purchases by the residents of this country whereas the declared profit in a country with greater than 10x times population is miniscule but somehow ends up in the Republic of Ireland. Whether the USA ‘squanders its resources’ is a different issue, it has for many, many years and continues to enable foreign earnings unremitted back to the USA, to have its tax deferred. The impact is on all residents and citizens of the USA and hardly the cause for the USA to waste its resources.
Posted by cliff567 | Thursday, December 01 2016 at 2:47PM ET
I respectfully and assertively disagree with the premise of the Public Interest group that any profits earned by foreign subsidiaries should be subject to taxes by the US Treasury. Foreign earned income is taxed in the jurisdiction it is earned, and the decision to retain those net profits in a foreign jurisdiction is nothing more than effective tax planning.... something good CPAs should be focused on. Not the whining of a anti business org protest. The title of the author's biased perspective is inaccurate and misleading, but not unusual. The title is proved false in the 2nd and 3rd paragraph that 'projects' that other taxpayers 'would have to pay' because the US treasury is somehow deprived of tax revenue. Nonsense!
The US government squanders a huge sum that far outstrips the alleged 140 billion claimed by this self-appointed consumer watchdog org, the bios of 3 of the 4 directors show little experience of any kind in business, and Mr Cohen merely reprints their recent report without doing any serious analysis of the facts or providing any real assessment of the source of the data nor identifying the background of the organization. Shame on Accounting Today for the lack of editorial review.
Posted by tomasinpty | Thursday, December 01 2016 at 12:19PM ET
My knowledge only goes back to 1966 where my employer was retaining foreign earnings in Switzerland to defer the tax due had they been remitted back to the USA. So for 50 years at least the cause for the proliferation of ‘where shall put this cash has been general knowledge’. Not a new issue.
Posted by cliff567 | Wednesday, November 30 2016 at 12:37PM ET
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