Majority of U.S. Offshore Profits Claimed in 12 Tax Havens
U.S. corporations have reported to the Internal Revenue Service that 54 percent of their offshore profits are earned in 12 tax haven countries that, combined, only account for 4 percent of economic output among all countries where U.S. corporations do business.
A new report by the advocacy group, Citizens for Tax Justice, casts doubt on this claim, however. For example, U.S. companies reported subsidiary profits in Bermuda of $94 billion in 2010, when that country’s gross domestic product in terms of total output of goods and services was only $6 billion. Similarly, American companies reported $51 billion in Cayman Island profits, even though its GDP was just $3 billion.
The 10 other countries with dubious corporate profits versus GDP ratios are the Bahamas, Barbados, the British Virgin Islands, Cyprus, Ireland, Luxembourg, Netherlands, Netherland Antilles, Singapore and Switzerland.
CTJ contends that U.S. companies are using accounting gimmicks to make it appear as though they are earning profits in tax haven countries to avoid U.S. taxes, and this is happening on a large scale.
Separately, a group of multinational corporations lobbying for lower corporate tax rates, the Alliance for Competitive Taxation, has released a report in response to the controversial trend of U.S. companies pursuing new tax domiciles by merging with overseas companies, as in the case of Pfizer’s recently abandoned bid to acquire AstraZeenca. The report describes the corporate inversion trend, the parts of the U.S. Tax Code that are encouraging these mergers, along with the economic and tax effects of such transactions.
In addition, the ACT report examines how the United Kingdom dealt with this issue, and what it means for U.S. corporate tax reform efforts today. Speaking at a press briefing earlier this month, ACT economic advisor Dr. Laura D. Tyson, who formerly chaired the President’s Council of Economic Advisers during the Clinton Administration, said, “There has been a recent wave of cross-border mergers where the U.S. company is larger, but the merged entity has chosen to establish tax headquarters in a foreign jurisdiction. When I look at those facts, I conclude very quickly, as do most observers of what is going on, that this is a clear indication that the U.S. corporate tax system is increasingly no longer competitive, that it increasingly makes the U.S. not an attractive location to incorporate a new business.”
The USA could make dividends paid to shareholders tax deductible to the corporation. That way if the corporation paid out all its net income each year it would have a ZERO tax rate. The shareholders would need to pay tax on the dividend income. The corporation could just withhold 30% or so at the source and if it turned out that the amount withheld was too high, the shareholder could claim a refund for the over withheld amount on the shareholder’s tax return.
The shareholder could engage in an automatic re-investment plan where the dividends paid could be automatically re-invested in more shares of stock in the paying corporation.
All this much like what we have today with RICs.