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Stock Option Tax Break Saved Fortune 500 over $27 Billion in 3 Years

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By Michael Cohn
April 29, 2013

A tax break for executive stock options has saved 280 of the largest corporations an estimated $27.3 billion over the last three years, according to a new report.

The report, by the advocacy group Citizens for Tax Justice, found that in 2012 alone, the tax break cut income taxes at the Fortune 500 by $11.2 billion. Just 25 companies received more than half of the total excess stock option tax benefits that went to Fortune 500 corporations over the past three years.

Apple received 12 percent of the total excess stock option tax benefits during this period, garnering $3.2 billion in stock option tax breaks over the past three years. Over the past three years, Apple slashed its federal and state income taxes by 20 percent using this single tax break.

In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.

Corporate tax breaks have been provoking an increasing amount of controversy, with a committee in the British House of Commons publishing a report last Friday criticizing the Big Four accounting firms for encouraging clients to avoid taxes (see U.K. Parliament Blasts Accounting Firms’ Role in Tax Avoidance).

In February, the international Organization for Economic Cooperation and Development released a study pointing to wide disparities in the low tax rates paid by many multinational corporations compared to the taxes paid by individuals and small businesses (see OECD Calls for Curbs on Tax Avoidance by Multinationals).

Last week, at the Taxand Global Conference in New York, a high-ranking Treasury Department official discussed the growing controversy in the United Kingdom and other European countries over accusations of tax avoidance by Starbucks, Google, Amazon and other U.S.-based multinationals. Starbucks recently agreed to pay about 10 million pounds (or about $16 million) a year in taxes after coming under criticism for paying little in taxes last year, despite earning 398 million pounds in sales from its 700-plus stores in the U.K. The company only paid about 8.6 million pounds (or about $13.8 million) for the 14 years it has been doing business in the U.K. In part, Starbucks was able to lower its tax bill by shifting royalty payments to a unit in the Netherlands, The New York Times reported.

At the Taxand conference, Robert Stack, deputy secretary for international tax policy in the Treasury Department’s Office of Tax Policy, noted, “Starbucks is a complicated question.” He pointed out that U.K. Secretary of Business Vince Cable had looked into the matter and found that Starbucks wasn’t making a large profit in the U.K.

However, Stack later acknowledged that it was important for the tax authorities to create regulations that can be fairly implemented. “I think that the onus is on us to write the rules that companies can live by and then companies can apply them,” he said.

Earlier this month, another Treasury Department official addressed the subject of base erosion and profit shifting, also known as BEPS, at a KPMG-sponsored lecture on tax planning for U.S. inbound investment at the New York University School of Law. Danielle Rolfes, international tax counsel at the Treasury Department’s Office of Tax Policy, pointed out that U.S.-based multinational corporations are not the only ones involved in BEPS. The OECD is engaged in a BEPS project in which the Treasury is involved, but Rolfes warned that it is important that the project not run afoul of “scope creep.”

BEPS refers to the practice of multinational corporations shifting income to low- or no-tax jurisdictions. “From a U.S. perspective, a goal of BEPS is not to increase source-based taxation,” she said. “There has been rhetoric from some suggesting that one easy way to resolve BEPS in this mobile economy is just to increase source-based taxation around the world. We don’t think that’s a principles-based approach, and most of the mechanisms imposed are actually doing that.”

Rolfes noted that President Obama has proposed a framework for addressing the problem, as has House Ways and Means Committee chairman Dave Camp, R-Mich. She warned that governments are determined to make progress on the problem, and companies should not expect to see all of these tax breaks preserved.

“It is not helpful to have folks say that this aspect of the status quo is working, and frankly we don’t have time for those meetings at this point,” she said.

“Is BEPS really relevant to inbound [transactions]? We think it is relevant to inbound in the United States because we do think that foreign-based multinationals are stripping out of the United States, most simply through interest stripping, but I also suspect that some of the other pressure areas are very relevant to the United States,” she added. “I will note that if you read foreign press stories, you would not get that impression. I have read stories in the German press indicating that it is a U.S. problem, and German companies do not engage in BEPS, that they can’t. We have been very focused and I can assure you the [U.S.] government has been very focused in all of the fora in which we are engaged, including the OECD. This focus on U.S.-based multinationals is false, and it’s not helping, and it won’t help us achieve collective action on these things where we agree that collective action is needed.

“Similarly, we think that moralizing about BEPS is not helpful,” Rolfes added. “The pressure areas that we’ve identified and the kinds of planning techniques that we’ve identified that cause BEPS are typically normal tax planning techniques that are perfectly legal. So it’s the government’s responsibility to set the laws and I think we can ask our companies to follow the laws. And there’s been some notion of moralizing about companies paying their fair share, and I think that kind of skirts the responsibility to enact laws that ensure companies pay their fair share. Companies obviously have responsibilities to shareholders. But some of the moralizing has been downright funny.”

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