Overseas corporate holdings dwarf economies of tax havens
Multinational corporations hold an estimated $1.5 trillion in cash overseas, dwarfing the entire economies of some tax haven countries where the money has been stashed, a U.S. Senate investigation revealed Thursday.
“Thanks to these gimmicks and practices, massive amounts of cash are held in offshore tax havens by subsidiaries of U.S. multinationals,” Sen. Carl Levin, D-Mich., chair of the Permanent Subcommittee on Investigations, said.
The Senate findings – to be discussed Thursday at a Washington hearing – come as a Tribune-Review investigation uncovered the widespread practice of U.S.-based corporations utilizing subsidiaries in financial secrecy jurisdictions worldwide.
The Trib found that 20 of the 25 largest publicly traded companies in the United States have subsidiaries in countries identified as tax havens or financial secrecy jurisdictions by the Government Accountability Office in 2008. Those companies control 691 entities in places such as the Cayman Islands, Gibraltar, Luxembourg and Switzerland.
Thirty public companies with headquarters or a major presence in Pittsburgh have subsidiaries in those secrecy havens, the Trib found.
Some multinational corporations have used their overseas affiliates to shift massive amounts of profits to countries with low or no taxes and high levels of financial privacy, Senate investigators found. The amount of money held by foreign companies in Bermuda is 650 percent of that country’s gross domestic profit. The amount in the Cayman Islands is 500 percent of the country’s economy.
Congress and the IRS share the blame, Levin said, with lawmakers creating loopholes and regulators not doing enough to prevent them from being abused. IRS officials are scheduled to testify at the hearing, along with executives of Microsoft and Hewlett-Packard, two companies targeted by the investigation.
“It’s kind of a mixed picture,” Levin said. “We’ve got some loopholes in the law that should be changed.” Offshore entities are “absolutely common” among multinational corporations seeking not only to reduce taxes but to avoid regulation or perhaps hide information from competitors or oversight agencies, said Stephen Shay, a Harvard Law School professor. He also is scheduled to testify at the Senate hearing.
Almost always, large companies can point to some provision in the tax code to justify an overseas tax break, Shay said. But it’s always a question of what corporations are willing to do to push the boundaries of what’s permissible, he added.
“This world of multinational business is largely a world of maximizing the benefits where the rules permit them or where they are gray,” Shay said.
Executives at some Pittsburgh firms said they have overseas companies to serve their customers and receive little or no tax advantages.
Headquartered amid farm fields 30 miles north of Pittsburgh, II-VI makes optical lenses for lasers and has a corporate reach that extends to Singapore, Hong Kong, Switzerland and the Cayman Islands.
All four places have been deemed by a federal agency as tax secrecy havens. The company says it has operating facilities in many of the countries where it does business, and it inherited the Cayman Islands holding company through a larger acquisition.
“It’s not for the taxes,” said Craig Creaturo, chief financial officer. “We definitely think of ourselves as a global company. … We have to be close to where our businesses are, where our customers are and where we can grow around the world.”
AK Steel in Butler County has a subsidiary in Vanuatu, an island nation in the South Pacific that has 250,000 residents and a thriving offshore financial services industry.
That company and others in Singapore and the Cayman Islands were formed decades ago by a predecessor company, AK Steel spokesman Barry Racey said. It would cost more to dissolve the companies than to keep them, he said.
“There are no tax benefits to AK Steel associated with these subs, nor are they ‘financial centers,’ ” Racey said. “Their remaining, minor assets are reported annually on AK Steel’s U.S. corporate tax returns filed with the IRS.” Curtis Dubay, senior tax policy analyst at The Heritage Foundation, a conservative Washington think tank, said that the U.S. tax code is very strict, and companies have a business interest in paying their taxes accurately.
“Everyone should pay what they rightfully owe,” Dubay said. “There’s no doubt about that. But I can’t just earn income here, deposit it in a Cayman Islands account and not pay taxes on it.” The tax system has enough gray areas, however, that large corporations can shift profits to low-tax jurisdictions, said Rebecca Wilkins, senior counsel for federal tax policy at Citizens for Tax Justice, a Washington nonprofit. Foreign earnings by subsidiaries of U.S.-based parent companies are not taxed unless the profits are returned to the United States.
“That encourages companies to locate overseas,” Wilkins said. “It also encourages them to play games and to engage in transactions that are just paper transactions that have no basis in reality — just accounting entries to move profits offshore and avoid paying tax.” In its simplest form, a U.S. company can shift profits when it sells a product for a low price to a company it controls in a tax haven, thereby logging a minimal profit in the United States to show to the IRS. Its tax-haven partner then sells the product at a much higher price to a developed market. By doing so, a large profit shows up in the haven, not the United States, and is taxed at the haven’s low rates, if it is taxed at all.
Typically, products — such as petroleum — do not actually move to the tax haven; only paper ownership does. This process, which can involve multiple layers and complicated side deals, is called transfer pricing.
Executives from Microsoft, which has five offshore subsidiaries, and Hewlett-Packard, with 101 of them, are scheduled to testify at the Senate hearing. All of the Microsoft foreign companies and 18 of HP’s are located in secrecy havens.
The GAO has identified tax secrecy havens as places with some combination of low taxes, lax regulations and a high level of privacy.
In the Trib’s analysis of large U.S. corporations, Bank of America had the most foreign subsidiaries, with 308 in secrecy havens. The company has 190 in the Cayman Islands alone.
Bank of America spokesman Jerry Dubrowski said the bank sets up services where its customers bank. He said the bank itself pays all required taxes. Bank of America prefers to group all taxes of whatever type into one lump sum. Worldwide, he said, that sum was $55 billion for the past decade.
“We take our role as corporate citizens seriously,” he said.
Among Pittsburgh-area companies, Thermo Fisher Scientific, based in Waltham, Mass., has 71 subsidiaries in secrecy havens, stretching from Barbados, Bermuda and the Cayman Islands in the Caribbean, to Gibraltar and Malta in Europe, and Singapore in the Far East. A spokesman declined to comment on the subsidiaries.
Emerson Electric, headquartered in St. Louis, does business in 150 countries and has “a wide range of legal entities” for managing them, spokesman Mark Polzin said. More than 55 percent of its sales occur outside the United States, and the company has paid $1.4 billion in federal, state and local income taxes in the past three years, he added.
“Emerson is a responsible corporate citizen and taxpayer,” he said in an email. “That said, we are and have been consistently urging the U.S. government to revise international tax and trade policy to level the playing field and take away the unfair advantages many of our non-U.S.-based competitors enjoy.”