Firms May Be Forced to Deal With Tax Crackdown

All tax laws aren't equal, as some multinational corporations are well aware.
Author:
Publish date:

All tax laws aren't equal, as some multinational corporations are well aware.

President Obama reopened a hot debate about corporate taxes recently when he proposed an overhaul that would allow the U.S. to collect an extra $210 billion in tax revenue over the next decade.

One part of the proposed reform targets the profits at corporate subsidiaries located in offshore tax havens.

Calling the U.S. tax system "broken," President Obama cited "corporate loopholes that make it perfectly legal for companies to avoid paying their fair share."

The fix, however, won't be easy, say tax experts. One challenge is that users of the deferred tax on foreign profits are mingled with what critics call abusers of offshore tax shelters.

Under the heading of global competitiveness, companies can defer tax payments on overseas profits until that money is repatriated in the U.S. The rules were created to avoid double-taxing companies abroad -- once where the operation is based and a second time by the U.S. Treasury. During previous tax reform debates in 2004, the Bush administration supported rules to help multinational companies protect overseas profits from U.S. taxes.

A U.S. tax rule change in 1996 allowed companies to pick the entities they where they would be taxed. Companies created subsidiaries, in some cases multiple subsidiaries, in particularly tax-friendly locations like the Cayman Islands, which has a corporate tax rate of zero. By comparison, the U.S. corporate tax rate is 35%, Bulgaria 15%, Ireland 12.5% and Switzerland 8.5%.

"The unintended consequence was that it made it easier to create financing affiliates to save taxes," says Rosanne Altshuler of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

The U.S. Government Accountability Office, a research arm of Congress, said in a December report that 83 of the 100 biggest public companies -- based on 2007 sales -- have subsidiaries in overseas tax havens or financial privacy jurisdictions. The

report

showed, for example, that Citigroup had 427 subsidiaries based in what the GAO classified as such locations. Just to put that in context, that's twice the number of total countries recognized by the U.S. State Department.

Haven and Have Not

The issue of tax havens not only has political divisions, it also divides business leaders. In a statement opposing Obama's tax plan, Business Roundtable President John Castellani called it "the wrong idea at the wrong time for the wrong reasons." But asked for a comment on offshore tax shelters, a Roundtable representative said its "members oppose tax havens."

Marty Regalia, economist with the U.S. Chamber of Commerce, however, says businesses have a fiduciary duty to their shareholders to manage expenses and increase profits.

"If they are basing operations there and doing it legally, then what's the issue?" says Regalia.

So what do some of the largest companies say?

Big Oil

ConocoPhillips

(COP) - Get Report

did not reply with comment, and

ExxonMobil

(XOM) - Get Report

declined to comment on the issue.

A

Chevron

(CVX) - Get Report

representative said: "We are asking reporters to speak to the U.S. Chamber of Commerce for comments on potential changes to offshore tax rules."

For his part, Regalia said, "we think the corporate tax rate should be zero."

Valero

(VLO) - Get Report

, which, according to the GAO, has five subsidiaries in Aruba, three in the British Virgin Islands and two in the Cayman Islands, points out that it has business operations in those locations. "Valero owns and operates a large petroleum refinery in Aruba, and we have insurance subsidiaries in the Cayman Islands," a Valero representative said.

Big Finance

Citigroup

(C) - Get Report

, which has 90 subsidiaries in the Cayman Islands alone, declined to comment.

Bank of America

(BAC) - Get Report

, with 59 subsidiaries in the Cayman Islands, and

JPMorgan Chase

(JPM) - Get Report

with seven there, also declined to comment.

AIG

(AIG) - Get Report

, with five subsidiaries in Bermuda, did not reply to a request for comment.

General Electric

(GE) - Get Report

has three subsidiaries in Bermuda. A GE representative said that reflects the international scope of the company. "We have significant global operations in competitive businesses and our organizational structure reflects our businesses operations around the world," the representative said.

GM

(GM) - Get Report

did not reply for comment.

Tax Policy Center's Altshuler says President Obama's proposals are two-pronged, with one aimed at limiting deferrals and the other pointed at tax avoidance through subsidiaries located in areas identified as havens.

"Closing them down makes sense," says Altshuler. "The best tax system would not distort your business decisions. You don't want to have businesses doing things just for tax reasons."