A new report from the advocacy group Citizens for Tax Justice finds that 301 Fortune 500 companies hold a combined $2 trillion offshore, collectively avoiding $550 billion in U.S. corporate income taxes, while a contrasting report from the Tax Foundation found that U.S. multinational corporations reported paying more than $128 billion in corporate taxes to foreign countries on $470 billion of taxable income in 2010—an effective rate of 27.2 percent before also paying U.S. taxes.
The CTJ report examines companies’ 2013 Securities and Exchange Commission filings. The report identified 28 corporations, including Apple, Bank of America, Wells Fargo, Microsoft, Nike and others, that disclosed the U.S. corporate income tax rate they would pay if they repatriated their profits.
The report also found 243 companies that disclosed “permanently reinvested income” but do not report how much corporate income tax they would pay if they repatriated their profits. Twenty-eight of the companies admitted using tax havens, according to the group, and the companies’ 2013 financial filings reveal hundreds more likely do the same.
“It’s time to have a conversation about the corporate income tax that goes beyond calls to lower the U.S. corporate income tax rate,” said CTJ director Robert McIntyre in a statement.
“Multinational corporations have been abusing the U.S. tax system at the expense of ordinary taxpayers, and they should not be rewarded for their bad behavior.”
In addition to Apple and Microsoft , a diverse array of companies are using offshore tax havens, including U.S. Steel, the pharmaceutical giant Eli Lilly, the clothing manufacturer Nike, the supermarket chain Safeway, the financial firm American Express, and banking giants Bank of America and Wells Fargo, according to CTJ.
A total of 301 companies reported holding nearly $2 trillion offshore. Most corporations do not report what they would pay in U.S. taxes if their profits were officially brought to the United States, but if corporations that do disclose are representative, then the Fortune 500 as a group is saving $550 billion by holding profits offshore, according to the report. The report recommends that Congress should pass a law to end “deferral,” the rule allowing American corporations to indefinitely avoid paying U.S. income tax on profits officially earned offshore until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether generated in the United States or abroad, would be taxed by the U.S. in the year they are earned.
On Tuesday, a group of Democrats in the House and Senate introduced legislation to end the practice of corporate inversions that allow U.S.-based companies to avoid U.S. taxes by combining with a smaller foreign business and moving their tax domicile overseas. (see Congress Introduces Bill to Restrict Corporate Tax Inversions). CTJ noted that use of tax havens is an important issue right now because some companies with the most reported offshore profits, such as Pfizer, are currently pursuing “inversions” that would effectively make the companies residents of other countries for tax purposes and would make it easier for these companies to never pay U.S. taxes on the $2 trillion they officially hold offshore.
Tax Foundation Report
In contrast, a report from the Tax Foundation, a tax policy research organization found that U.S. multinationals are paying an effective tax rate of 27.2 percent before also paying U.S. taxes.
The Tax Foundation report noted that the U.S.’s worldwide system of corporate taxation requires multinational corporations to pay taxes twice, first to the foreign country in which they do business and then to the IRS after they repatriate their profits. Multinational corporations reported paying $128 billion in corporate taxes to foreign countries on $470 billion of taxable income in 2010, according to the most recent IRS data.
Over the past 18 years, according to the report, foreign corporate taxable income has grown by about 250 percent and foreign corporate taxes paid by 265 percent, while the effective tax rate has remained around 26 percent. The effective tax rate on foreign income was 27.2 percent in 2010, prior to paying additional taxes to the United States. More than 60 percent of all reported foreign taxable income was earned in Europe and Asia in 2010.
The effective tax rate faced by U.S. multinationals abroad varies substantially by region and country and is higher than 60 percent in some nations, the Tax Foundation noted. While some corporations pay low effective rates in some countries on foreign income, U.S. multinationals faced effective rates over 20 percent on most income earned overseas, prior to paying taxes to the United States. Sixty percent of income earned abroad was by manufacturers. Most was income from petroleum and coal manufacturers, who paid an average effective tax rate of 36 percent.
“While it is undoubtedly true that U.S. multinational firms use numerous tax planning techniques to minimize the taxes they pay on their foreign earnings, IRS data dispels the narrative that they pay little to no taxes on foreign income,” said Tax Foundation economist Kyle Pomerleau in a statement.
The Tax Foundation report contends that many of the claims about corporate tax avoidance stem from a misunderstanding of how U.S. international tax rules work. The group said that those who criticize U.S. companies for “avoiding” taxes on their foreign earnings should keep in mind that the worldwide tax system requires U.S. firms to pay taxes twice on their foreign profits, once to the host country and a second time to the IRS.
The Tax Foundation has also produced a new interactive corporate tax map that tracks U.S. multinational corporations’ reported foreign taxable incomes, taxes paid, and effective tax rates from 1992 to 2010 in over 90 countries using the latest available data from the IRS.
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