Friday, July 01, 2011

It's a WIN-when? situation

What is the corporate tax rate in the USA? Doesn't matter if there is nothing taxed, does it? It's a European holiday for free.

If companies are allowed, indeed encouraged by certain "transfer pricing" regimes or other structured loopholes mechanisms, to park profits overseas and then every few years simply bring them back "home" to "repair" balance sheets, "create jobs" or just about any other euphemism you can choose for "avoid tax payments", companies get away with tax avoidance scott-free regardless of the ersatz tax rate.

Indeed, such "repatriation" schemes, from the stance of global companies, is just one more "transfer pricing" get out of tax jail free card.

Yeah, the US corporate tax rate may or may not be competitive/fair/productive or whatever, but it really doesn't matter if it is never imposed, or if imposed, done so on only a very small portion of profits. So, yeah, they may be taxed at a higher rate, but when if not ever?

Back in 2004 many of these global companies, claiming a tax "home" in the USA, transferred billions of dollars from other tax havens back to the US tax haven is a scheme called "repatriation", but it was like repatriating draft dodgers, only here it was repatriating tax dodgers.

They did it under a cynical scheme, sold easily to the US Congress, called the "Homeland Investment Act of 2004".

Same guys, same scheme is being reheated in the Congressional kitchen under the new banner of the WIN America Campaign, as reported a few days ago by Jesse Drucker in Bloomberg.

Biggest Tax Avoiders Win Most Gaming $1 Trillion U.S. Tax Break
Cisco, Oracle Corp. (ORCL), Microsoft Corp. (MSFT) and others formed a coalition called WIN America Campaign that plans to spend several million dollars pushing the issue.

“We simply don’t think it’s a good idea to do nothing while a trillion dollars sits overseas,” said Doug Thornell, a vice president for the firm who is advising the campaign.

Companies including Google Inc. (GOOG), Apple Inc. (AAPL) and Pfizer Inc. (PFE) are also pushing the proposed tax holiday, which would allow profits to return to the U.S. at a discounted 5.25 percent rate. Under current law, American companies can defer federal income taxes on most overseas earnings indefinitely. When they do return to the U.S., they’re taxed at the corporate rate of 35 percent -- with credits for foreign income taxes paid. Thus, companies paying little overseas face higher U.S. tax bills upon repatriation, and would get more benefit from the discount.

One way multinationals avoid taxes is through “transfer pricing,” transactions among subsidiaries that allow for allocating expenses to high-tax countries and profits to tax havens.

Cisco Systems Inc. (CSCO) has cut its income taxes by $7 billion since 2005 by booking roughly half its worldwide profits at a subsidiary at the foot of the Swiss Alps that employs about 100 people.

Cisco transfers a portion of the patent rights to technology developed in the U.S. to a Dutch unit, which sells some of the resulting products back to its parent for eventual distribution in the U.S., according to annual reports filed by the Amsterdam subsidiary. That means Cisco credits about $5 billion in U.S. sales annually to the Netherlands.

At the same time, most of the income from sales in countries like Germany, France and Japan [and the US], where statutory income tax rates average more than 30 percent, is ultimately transferred to Switzerland, meaning the other nations lose potential tax revenue. The result: Cisco’s international earnings have been taxed at about 5 percent since 2008, records show.

All told, Cisco has accumulated $31.6 billion in overseas earnings on which it has paid no U.S. income taxes yet, records show -- part of more than $1 trillion in U.S. companies’ offshore profits, according to data compiled by Bloomberg. In total, almost 90 percent of Cisco’s cash sits overseas.

Cisco, the largest maker of networking equipment, wants to save even more -- by asking Congress to waive most federal taxes due when multinationals bring such offshore earnings home. Chief Executive Officer John T. Chambers has led the charge for the tax holiday, which would be the second since 2004. He says it would encourage companies to “repatriate” as much as $1 trillion held abroad, spur domestic investment and create jobs.
[In the Homeland Investment scheme, they used these "talking points":

* Increasing domestic investment in plant, equipment, R&D and job creation;
* Increasing investments in business ventures in emerging technologies,
* Increasing funding for pension plans depleted by declines in the stock market;
* Improving the long term financial strength of U.S.-based companies by reducing domestic debt loads, strengthening corporate balance sheets, and lowering corporate bond rates; increasing dividends to shareholders (which can be productively redeployed); and raising equity market valuations by increasing funds available for share repurchases.

Actually, that last point was rather right on the main purpose of the supporters, and perhaps too blatant.]

“I create jobs overseas,” Chambers told interviewer Lesley Stahl on the CBS News program “60 Minutes” in March. “I build plants overseas and I badly want to bring that money back.”

The company needs that cash to prop up its share price.

U.S. companies used $312 billion they repatriated under a 2004 tax holiday largely for stock repurchases, while doing little direct hiring or domestic investment, according to a paper in the current issue of the Journal of Finance by professors at the University of Illinois, Harvard University, and the Massachusetts Institute of Technology. It was the latest in a series of studies that reached similar conclusions.

“Cisco complies with all global tax laws,” said John Earnhardt, a spokesman for the San Jose, California-based company, which makes switches, routers and other products, in an e-mailed statement. “In the past three years alone, Cisco (which has over 35,000 U.S. employees) has paid approximately $4.4 billion in U.S. federal corporate income taxes.” The company reported an effective tax rate last year of 17.5 percent, half the U.S. statutory rate.

While Treasury Secretary Timothy F. Geithner has expressed skepticism about a new repatriation break, Representative Kevin Brady, a Texas Republican, introduced a bill on May 11 that, like the 2004 measure, would not require companies to use their cash for hiring.

Brady declined to address why his measure does not include a hiring requirement. “With millions of Americans seeking work it makes good economic sense to temporarily lower the tax gate and allow up to a trillion dollars of stranded American profits to flow back into our economy,” he said in a statement.

The idea gained momentum last week after Senator Charles Schumer, a New York Democrat, said his party’s caucus was discussing whether short-term revenue from the holiday could fund an “infrastructure bank” to create jobs. Senator John Kerry, a Massachusetts Democrat, has also signaled that he may reconsider his previous opposition.

“Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues?” said Kleinbard, a former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP. “Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies -- where their customers and key employees are in reality located -- to tax havens.”

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