California corporations pay far less than nominal tax rate
The Orange County Register
In 2010, Irvine chipmaker Broadcom earned more than $1 billion in profits but paid just $15.5 million in income taxes worldwide – a tax rate of 1.4 percent.
Broadcom's tax rate, a third of the 4.68 percent rate paid by an average family of four last year, was no fluke. Over the past five years, according to the company's public reports, it has paid a median income tax rate of 2.8 percent.
President Obama, Republicans and business leaders all have said the 35 percent U.S. corporate income tax rate – among the highest charged by any nation – must be cut.
But an Orange County Register analysis of 25 major California corporations shows that most pay less than the official rate, sometimes far less.
Over the past five years, Apple, which earned $18.5 billion before taxes last year, has paid a median worldwide income tax rate of 15 percent. Google, which earned $10.8 billion last year, paid a median 20.1 percent rate. Northrop Grumman, which earned $2.6 billion last year, paid a median 31.6 percent rate. Amgen, which earned $5.3 billion last year, paid a median 20.8 percent rate.
Among the reasons: a corporate tax code that encourages companies to stash hundreds of billions in profits overseas while treating decade-old losses as valuable assets.
PLAYING FAVORITES
The tax law plays favorites.
"The more domestic a company is, the less it can play around," said Edward Kleinbard, a tax law professor at the University of Southern California and former staff chief to the congressional Joint Committee on Taxation. "The more international you are, the more you can horse around."
The tax code also favors drug and tech companies, allowing them to move high-value intellectual property to low-tax jurisdictions. But it treats oil companies harshly.
Over the past five years the state's biggest corporation, Chevron, has paid a median worldwide income tax rate of 40.6 percent. Occidental Petroleum has paid 37 percent.
"The only thing that every country in the world agrees on is that we should tax the bejesus out of oil companies," Kleinbard said.
(To be sure, what the government takes from the oil industry with one hand, it gives back with the other. The White House estimates that the industry gets $4 billion a year in federal subsidies, largely in the form of tax breaks for exploration and production.)
The biggest single reason that most of the 25 corporations in the Register analysis pay less than the official corporate tax rate is because of their international operations.
In part that reflects a simple fact of life: There are huge economic opportunities abroad, particularly in fast-growing regions such as East Asia.
But it also reflects a tax-fueled competition for jobs.
Jerry Thompson runs the tax department at Santa Ana-based Ingram Micro, the world's largest information technology distributor.
Ingram operates on a paper-thin margin. During the past five years its pre-tax profit has averaged a penny on the dollar. Thompson's job is to comply with the tax laws in the 30-plus countries where Ingram does business while keeping its tax bill as low as possible.
"If we're paying more for taxes than our competitors," Thompson said, "then it's not a sustainable position.
"The jurisdictions in which we operate are all relatively lower tax-rate (than the United States)," Thompson said. "There's been a dynamic over the last 10 years where foreign countries are lowering their corporate income tax rates."
TAX HAVENS
Ireland, with its 12.5 percent corporate tax rate, has been luring American manufacturers for decades. Switzerland officially charges 25 percent but negotiates lower rates.
A handful of countries offer the ultimate in sweetheart deals: "tax holidays" – years-long, tax-free periods for companies that open factories there.
In 2008 and 2009, the Singapore tax holiday accounted for Broadcom's entire profit and then some.
Tax holidays in Malaysia and Thailand accounted for 98 percent of Lake Forest-based Western Digital's profit in 2008, 51 percent of its 2009 profit and 40 percent of its 2010 profit.
For a corporation, the math could not be simpler: A dollar earned in the United States is taxed at 35 percent. The same dollar earned in Ireland is taxed at 12.5 percent. In Singapore or Malaysia or Thailand or Costa Rica, with the right agreement in place, the tax rate might be nothing at all.
One example among many: Foreign operations trimmed Apple's corporate tax bill by $2.1 billion in 2010.
Most countries make up for low corporate taxes with a levy that is political poison in the United States: the value-added tax. Unlike the sales tax, which is levied only at the point of sale, the VAT is added to the cost of a product or service at every point in the production cycle.
In 2010, Irvine chipmaker Broadcom earned more than $1 billion in profits but paid just $15.5 million in income taxes worldwide – a tax rate of 1.4 percent.
Broadcom's tax rate, a third of the 4.68 percent rate paid by an average family of four last year, was no fluke. Over the past five years, according to the company's public reports, it has paid a median income tax rate of 2.8 percent.
President Obama, Republicans and business leaders all have said the 35 percent U.S. corporate income tax rate – among the highest charged by any nation – must be cut.
But an Orange County Register analysis of 25 major California corporations shows that most pay less than the official rate, sometimes far less.
Over the past five years, Apple, which earned $18.5 billion before taxes last year, has paid a median worldwide income tax rate of 15 percent. Google, which earned $10.8 billion last year, paid a median 20.1 percent rate. Northrop Grumman, which earned $2.6 billion last year, paid a median 31.6 percent rate. Amgen, which earned $5.3 billion last year, paid a median 20.8 percent rate.
Among the reasons: a corporate tax code that encourages companies to stash hundreds of billions in profits overseas while treating decade-old losses as valuable assets.
PLAYING FAVORITES
The tax law plays favorites.
"The more domestic a company is, the less it can play around," said Edward Kleinbard, a tax law professor at the University of Southern California and former staff chief to the congressional Joint Committee on Taxation. "The more international you are, the more you can horse around."
The tax code also favors drug and tech companies, allowing them to move high-value intellectual property to low-tax jurisdictions. But it treats oil companies harshly.
Over the past five years the state's biggest corporation, Chevron, has paid a median worldwide income tax rate of 40.6 percent. Occidental Petroleum has paid 37 percent.
"The only thing that every country in the world agrees on is that we should tax the bejesus out of oil companies," Kleinbard said.
(To be sure, what the government takes from the oil industry with one hand, it gives back with the other. The White House estimates that the industry gets $4 billion a year in federal subsidies, largely in the form of tax breaks for exploration and production.)
The biggest single reason that most of the 25 corporations in the Register analysis pay less than the official corporate tax rate is because of their international operations.
In part that reflects a simple fact of life: There are huge economic opportunities abroad, particularly in fast-growing regions such as East Asia.
But it also reflects a tax-fueled competition for jobs.
Jerry Thompson runs the tax department at Santa Ana-based Ingram Micro, the world's largest information technology distributor.
Ingram operates on a paper-thin margin. During the past five years its pre-tax profit has averaged a penny on the dollar. Thompson's job is to comply with the tax laws in the 30-plus countries where Ingram does business while keeping its tax bill as low as possible.
"If we're paying more for taxes than our competitors," Thompson said, "then it's not a sustainable position.
"The jurisdictions in which we operate are all relatively lower tax-rate (than the United States)," Thompson said. "There's been a dynamic over the last 10 years where foreign countries are lowering their corporate income tax rates."
TAX HAVENS
Ireland, with its 12.5 percent corporate tax rate, has been luring American manufacturers for decades. Switzerland officially charges 25 percent but negotiates lower rates.
A handful of countries offer the ultimate in sweetheart deals: "tax holidays" – years-long, tax-free periods for companies that open factories there.
In 2008 and 2009, the Singapore tax holiday accounted for Broadcom's entire profit and then some.
Tax holidays in Malaysia and Thailand accounted for 98 percent of Lake Forest-based Western Digital's profit in 2008, 51 percent of its 2009 profit and 40 percent of its 2010 profit.
For a corporation, the math could not be simpler: A dollar earned in the United States is taxed at 35 percent. The same dollar earned in Ireland is taxed at 12.5 percent. In Singapore or Malaysia or Thailand or Costa Rica, with the right agreement in place, the tax rate might be nothing at all.
One example among many: Foreign operations trimmed Apple's corporate tax bill by $2.1 billion in 2010.
Most countries make up for low corporate taxes with a levy that is political poison in the United States: the value-added tax. Unlike the sales tax, which is levied only at the point of sale, the VAT is added to the cost of a product or service at every point in the production cycle.
While the VAT is considered regressive, a tax that hits the poor and middle-class harder than the wealthy, "the corporate income tax hits them just as hard," Ingram's Thompson said. "They just don't know it. ... The consumer is paying for it, whether they're charging the corporate income tax or the VAT."
Through a variety of legal means businesses can shift not only jobs but also intellectual property and the income that goes with it to foreign subsidiaries.
Bloomberg News highlighted one example last October, showing how Google saved $3.1 billion in taxes in three years by shifting the foreign rights to some of its most valuable patents to an Irish subsidiary. Google used tax maneuvers known as the "Double Irish" and the "Dutch Sandwich" first to transfer those assets to Ireland and then to move most of the profits tax-free to Bermuda.
Billions of dollars hang in the balance when a corporation moves assets overseas. Once transferred, these assets can generate huge profits beyond the reach of the Internal Revenue Service.
Tax rules require the corporation to sell the asset to a subsidiary at a market price, an obscure area of tax law known as transfer pricing. But the IRS is often outgunned in transfer pricing cases.
"Because transfer pricing cases often involve hundreds of millions, if not billions of dollars, companies have a major incentive to hire the best tax lawyers, accountants and economists money can buy," said Richard Harvey, a tax law professor at Villanova University, former senior advisor to the IRS commissioner and former managing partner at PricewaterhouseCoopers. "The IRS usually does not have the same resources at its disposal for any particular case."
As long as a company keeps its profits overseas, those profits remain beyond the reach of the IRS. Together the 25 companies in the Register analysis stashed about $140 billion in profits overseas, their public filings show. By comparison their worldwide profits last year totalled just $108 billion.
WINNING BY LOSING
Companies do not have to go abroad to shelter profits. They can legally avoid taxes at home, even if they make money.
Take Broadcom. It earned $229 million in domestic profits in 2010 yet appears to have paid no federal income tax.
Its "provision for income tax," an accounting entry that may or may not represent money actually paid in taxes, shows a credit to the company from the federal government totaling $35 million over the past five years. Broadcom lost money in the U.S.market from 2006 through 2009 but earned a profit domestically in 2010.
How can a company make money and yet not pay taxes?
Broadcom did not respond to a request for comment but part of the answer lies in a provision of the tax code known as the "net operating loss carryforward." It lets companies that lose money one year deduct the loss against profits later. Here's the kicker: They can bank the losses for up to 20 years.
Broadcom has nearly $2.7 billion in net operating loss carryforwards on its books. Together the 25 companies in the Register's analysis have $8.8 billion they can deduct against future profits.
Companies don't have to actually suffer a loss to use the net operating loss deduction. In perhaps the ultimate example of the corporate tax code at work, they can buy this particular deduction. Google, one of the state's most profitable companies, made acquisitions in 2010 that added $71 million in net operating losses to its books.
In 2007, the last year for which nationwide records are available, American corporations used the net operating loss deduction to reduce their taxable income by 7 percent, $128 billion.
Through a variety of legal means businesses can shift not only jobs but also intellectual property and the income that goes with it to foreign subsidiaries.
Bloomberg News highlighted one example last October, showing how Google saved $3.1 billion in taxes in three years by shifting the foreign rights to some of its most valuable patents to an Irish subsidiary. Google used tax maneuvers known as the "Double Irish" and the "Dutch Sandwich" first to transfer those assets to Ireland and then to move most of the profits tax-free to Bermuda.
Billions of dollars hang in the balance when a corporation moves assets overseas. Once transferred, these assets can generate huge profits beyond the reach of the Internal Revenue Service.
Tax rules require the corporation to sell the asset to a subsidiary at a market price, an obscure area of tax law known as transfer pricing. But the IRS is often outgunned in transfer pricing cases.
"Because transfer pricing cases often involve hundreds of millions, if not billions of dollars, companies have a major incentive to hire the best tax lawyers, accountants and economists money can buy," said Richard Harvey, a tax law professor at Villanova University, former senior advisor to the IRS commissioner and former managing partner at PricewaterhouseCoopers. "The IRS usually does not have the same resources at its disposal for any particular case."
As long as a company keeps its profits overseas, those profits remain beyond the reach of the IRS. Together the 25 companies in the Register analysis stashed about $140 billion in profits overseas, their public filings show. By comparison their worldwide profits last year totalled just $108 billion.
WINNING BY LOSING
Companies do not have to go abroad to shelter profits. They can legally avoid taxes at home, even if they make money.
Take Broadcom. It earned $229 million in domestic profits in 2010 yet appears to have paid no federal income tax.
Its "provision for income tax," an accounting entry that may or may not represent money actually paid in taxes, shows a credit to the company from the federal government totaling $35 million over the past five years. Broadcom lost money in the U.S.market from 2006 through 2009 but earned a profit domestically in 2010.
How can a company make money and yet not pay taxes?
Broadcom did not respond to a request for comment but part of the answer lies in a provision of the tax code known as the "net operating loss carryforward." It lets companies that lose money one year deduct the loss against profits later. Here's the kicker: They can bank the losses for up to 20 years.
Broadcom has nearly $2.7 billion in net operating loss carryforwards on its books. Together the 25 companies in the Register's analysis have $8.8 billion they can deduct against future profits.
Companies don't have to actually suffer a loss to use the net operating loss deduction. In perhaps the ultimate example of the corporate tax code at work, they can buy this particular deduction. Google, one of the state's most profitable companies, made acquisitions in 2010 that added $71 million in net operating losses to its books.
In 2007, the last year for which nationwide records are available, American corporations used the net operating loss deduction to reduce their taxable income by 7 percent, $128 billion.
No comments:
Post a Comment