Nearly 1,600 profitable corporate subsidiaries paid no taxes

Nearly 1,600 corporate subsidiaries in the U.S. and elsewhere reported paying no income taxes despite being profitable in 2017, according to data released by the U.S. Internal Revenue Service on Friday.

The money-making, tax-saving units collectively accrued refunds or negative tax bills of $20.6 billion in 2017. On top of that, 11,055 groups reported no profits, and an additional 5,586 corporate groups paid an effective tax rate of less than 5 percent, according to the country-by-country data -- a new global effort for governments to share information about corporate taxes collected.

The subsidiaries were based all around the world -- not just in the U.S. -- and the negative balances didn’t necessarily come in the form of a tax refund, because they were subject to local laws in the countries where they were accrued.

Right to tax

But the numbers set the stage for a fight brewing on the global stage: What country has the right to tax which corporations, and on what profits? That’s something the Organization for Economic Cooperation and Development, along with nearly 140 countries, is hoping to resolve within the next 12 months.

The negotiations have the potential to upend the global corporate tax system, which has traditionally been based on where a company books its profits. However, the digital economy, a highly mobile workforce, and crafty lawyers have created opportunities for companies to find ways to reduce their tax bills by reporting earning much of their income in low-tax countries.

Digital taxes

The OECD tried to stop some of this gamesmanship in 2016, with new standards requiring companies to justify their income by showing they had employees in those countries. The changes also created a requirement for companies to report the income and taxes they paid in each country.

But there’s widespread acknowledgment that that wasn’t enough. So countries including France, the U.K. and Canada have introduced new digital taxes on companies, such as Facebook Inc. and Alphabet Inc.’s Google, based on where the users are located, rather than where companies base their headquarters or book their earnings.

France’s efforts have drawn the ire of President Donald Trump and a threat to impose tariffs on $2.4 billion in French exports to the U.S.

Campaign issue

The OECD negotiations intend to devise a global solution to the problem that will make the need for these country-specific taxes obsolete. A deal will be difficult but necessary because “the alternative is bleak,” Pascal Saint-Amans, the director of the OECD’s Center for Tax Policy and Administration, said on Friday.

Corporate taxation -- or lack thereof -- has also become an issue in the 2020 U.S. presidential campaign, with major candidates for the Democratic nomination publicly shaming companies with low tax bills.

“Of my three brothers, one’s a Democrat and two are Republicans,” Senator Elizabeth Warren said Thursday at the Democratic debate in Los Angeles. “But you know what unites them? They’re furious that Amazon reported record profits and paid zero dollars in taxes. Americans are ready to root out corruption and fight back.”

Online retailing giant Amazon Inc. reported no federal income tax liability in 2017 and 2018, according to regulatory filings.

Bloomberg News