By William Greider, OCTOBER 17, 2017
A stunning view of South Shore Beach in Bermuda, a country with a GDP of only $5.5 billion, though Fortune 500 companies claimed, in the most recent year for which statistics are available, that they harvested a total of $104 billion in profits from the island nation.
The sleeper issue in Donald Trump’s tax-cutting agenda is a potential bombshell called the “territorial tax system.” It doesn’t get the headlines, or even much political discussion, so the public is clueless. The industrial titans of Silicon Valley like it like that. Their proposal would fundamentally alter the taxation of US multinational corporations, and beneficiaries would include celebrated brand names like Google, Microsoft, and Apple.
Those tech giants and other globalized companies have been after Congress for years to make the switch to “territorial.” But corporate execs are not making their campaign noisy, because their so-called “tax reform” would be a dead turkey if citizens understood the threatening implications.
That seems unlikely. The big names of information technology are popular companies and, yes, global trade is complicated stuff, hard to explain in a few sentences. Scores of independent watchdogs—citizen organizations like Tax Analysts and Americans for Fair Taxation—are sounding the alarm and lobbying members of Congress. But it’s an uphill struggle, especially since the Democratic Party has not tried to alert voters and mobilize public opposition.
In my experience, this is how American democracy frequently fails its promise. Politicians privately blame people for indifference; I mostly blame politicians for ducking their obligations. In my decades as a political reporter, I have found that people of ordinary intelligence can usually see through the corporate smoke and understand complex issues if the pols explain things with plainspoken clarity.
Political parties used to be personal teachers, going door to door in neighborhoods, listening to gripes and opinions, plugging the party line and ticket. In modern politics, cynical candidates needn’t bother. They can parrot what the pollsters tell them people want to hear. I prefer politicians who tell people what they need to know.
If the scheme is passed, American companies with operations dispersed globally would pay taxes only on the profits earned within US territory.
So here are critical points about the “territorial” tax system people need to understand but corporate advocates won’t mention: If the scheme is passed, American companies with operations dispersed globally would pay US taxes only on the profits earned within the territory of the United States. In the current system, Washington attempts to tax multinationals on their worldwide earnings but fails miserably because the corporations have figured out fiendishly complicated ways to hide their profits in low-tax foreign countries. (That speaks to a separate but related item on the multinationals’ current wish list for tax reform: “forgiveness” for the roughly $600 billion in profits they would owe once they repatriate those profits, an issue I have addressed previously in this column.)
At first glance, the territorial approach sounds vaguely patriotic—an “America first” approach to the taxation of US multinational corporations. In reality, this new system would be more like the “Get Out of Jail Free” cards in the game of Monopoly. The legislation would allow an ingenious scam, in which America’s celebrated high-tech champions would be rewarded for abandoning the mother country if they decide the price is right.
The Institute on Taxation and Economic Policy (ITEP), a nonpartisan organization, has warned, “Corporations would have even greater incentives to engage in accounting gimmicks to make their U.S. profits appear to be earned in offshore tax havens such as Bermuda and the Cayman Islands, where corporate profits are not taxed.”
The logic for companies is not complicated. Silicon Valley and other sectors like the drug industry are notorious for dodging US taxes. A basic technique involves assigning the supposed “ownership” of a company’s profit-making functions to affiliates in cooperating foreign nations. This works especially well for intangible assets like intellectual property—drug patents or hard-to-value high-tech innovations. The process reeks of fraud, but government enforcement has either been intimidated or overwhelmed by the volume of fictitious deals. The new territorial system does not in theory prohibit these fraudulent corporate arrangements with foreign countries; it merely ends Washington’s failed attempts to collect the taxes.
“Corporations would have even greater incentives to engage in accounting gimmicks to make their U.S. profits appear to be earned in offshore tax havens.” —Institute on Taxation and Economic Policy
The examples of US companies doing fraudulent deals or ignoring the rules are so numerous they seem like business as usual.
Bermuda, for instance, has a GDP of only $5.5 billion, but Fortune 500 companies claimed, in the most recent year for which statistics are available, that they harvested a total of $104 billion in profits from Bermuda. The European Union’s antitrust commissioner accuses Apple of funneling $15.2 billion in profits from two Irish subsidiaries to an unnamed office that had “no employees, no premises, no real activities.” And the commissioner has accused Amazon of an illegitimate tax agreement with Luxembourg, ordering that country to collect $293 million in unpaid taxes from the American retailer.
A 2017 policy paper from the Urban Institute, citing scholarly sources, traced the twists and turns of a single tax evasion without naming the company or its invention. Here’s how an American company hides its profits from the US tax collector:
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