How Would You Like To Pay Tax Like A USA Corporation

A major study of USA corporations published today, proved again that even though USA has a high 35% corporate income tax rate, none of the biggest corporations in the world, operating in USA pay taxes at that rate.

These are companies listed on the top of Fortune 500 rankings and admired by professionals, investors and consumers all over the world. Their net profits are in billions of dollars, huge cash stashed in offshore accounts, and they are being subsidized by tax rebates from the USA Federal government.

The study of 280 fortune 500 companies identified,

• They have received about $223 billion in tax subsidies.
• Financial service companies (Banks) received the largest share of subsidy (17% or $37bn).
• Over the last three years 2008-2010, 50% of the tax subsidy was awarded to financial services, utilities, telecoms and oil, gas pipelines.
• Wells Fargo Banks tops the list of subsidies received among the 280 fortune 500 companies with $18 billion in tax breaks from USA treasury in last three years.
• The average tax rate of all 280 companies over the three year period was 18.5%, for 2009-2010 it was 17.3%, less than half the statutory tax rate of 35%.
• 30 companies enjoyed a negative income tax rate over the three year period, despite combined pre-tax profits of $160 billion. Pepco Holdings (POM juice) had the lowest effective tax rate of all the companies in the study, at negative 57.6 percent over the three year period. Amazon.com paid a rate of only 7.9 percent on its $1.8 billion in profits from 2008-2010.
• U.S. corporations with significant foreign profits paid tax rates to foreign countries that were almost a third higher than they paid to the IRS on their domestic profits.

Are you wondering how did they do that? Is it legal?
Yes, these tax minimization strategies are legal for corporations. Sometime they get an advance ruling from IRS to implement these extreme strategies. And in many other instances they are already in the tax code, all you have to apply them to your tax minimization strategy.

Here are some of the tax minimization strategies these companies applied to cut their income tax to a bare minimum.

Accelerated depreciation. The tax laws generally allow companies to write off their capital investments considerably faster than the assets actually wear out. In early 2008, in an attempt at economic stimulus for the flagging economy, Congress and President George W. Bush dramatically expanded these depreciation tax breaks. This provision was extended and expanded through 2012 under President Barack Obama.
According to the congressional Joint Committee on Taxation, repealing accelerated depreciation would cut corporate subsidies by about $60 billion a year over the first 10 years, over and above the Bush/Obama expansions.

Offshore tax sheltering. Corporations and their accounting firms have become increasingly aggressive in seeking ways to shift their U.S. profits, on paper, into offshore tax havens, in order to avoid their U.S. tax obligations. These typically involve various artificial transactions between U.S. corporations and their foreign subsidiaries, in which revenues are shifted to low- or no-tax jurisdictions (where they are not actually doing any business), while deductions are created in the United States. Some companies have gone so far as to renounce their U.S. “citizenship” and reincorporate in Bermuda or other tax-haven countries to facilitate tax- sheltering. Not surprisingly, corporations do not explicitly disclose their offshore tax sheltering activities in their annual reports.

In November 2010, the congressional Joint Committee on Taxation estimated that international corporate tax reforms proposed by Senator Ron Wyden (D-Ore.) would increase U.S. corporate taxes by about $70 billion a year. Other analysts have pegged the cost of corporate offshore tax sheltering as even higher than that. Most Republicans in Congress, along with some Democrats, seem intent on making the problem of offshore tax sheltering even worse, by replacing our system under which U.S. taxes on offshore profits are indefinitely “deferred” with a so-called “territorial” system in which profits that companies can style as “foreign” are permanently exempt from U.S. taxes. This terrible approach, along with its cousin, a “repatriation holiday,” would encourage even more offshore tax avoidance.

Stock options. Big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, companies can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth.

Industry-specific tax breaks. The U.S. federal tax code provides tax subsidies to companies that engage in certain activities. For example: research (very broadly defined); drilling for oil and gas; providing alternatives to oil and gas; making video games; ethanol production; moving operations offshore; not moving operations offshore; maintaining railroad tracks; building NASCAR race tracks; making movies; and a wide variety of activities that special interests have persuaded Congress need to be subsidized through the tax code.

The big losers from all this, of course, is are ordinary taxpayers and particularly small and medium-sized enterprises which don’t get the same tax breaks and are therefore out-competed by them in markets on a factor that has nothing whatsoever to do with productive efficiency and everything to do with squeezing subsidies out of taxpayers. Take a look at Amazon’s tax rate highlighted at the top of this blog. It is also bad for the economy.