Dodging tax is not just about offshore havens

The release of the so-called Panama Papers has shone a light on the secretive world of offshore tax havens and shown the exhaustive lengths that companies and wealthy individuals will go to in an effort to avoid paying tax.

The trove of documents leaked from the Panama-based law firm Mossack Fonseca to the International Consortium of Investigative Journalists has been greeted with outrage and protests in many countries, and already cost the Icelandic prime minister his job.

Now a new report from nonprofit Oxfam has outlined how alleged tax dodging by companies places a major burden on developing countries and starves governments of much-needed revenue. The practice has contributed to an ever-increasing concentration of wealth in the hands of the 1%, to the detriment of the 99%, according to Oxfam.

Using public documents from the top 50 U.S. companies, the report explores the myriad methods that companies use to minimize their tax bills, which go far beyond locating in known tax havens. Companies often engage in transactions that have no commercial function other than to reduce their tax bill. For example:

• U.S. companies are obliged to pay a 35% tax on all profits, wherever they are earned. However, as that rate only applies to money that has been repatriated back to the U.S., many companies keep funds “permanently reinvested” overseas. They can still use those funds as collateral to borrow in the U.S. without subjecting them to the full tax rate.

• Companies transfer the ownership of assets such as intellectual property to subsidiaries in a tax-friendly country, which in some instances exist only on paper as a mailing address. The U.S. parent then pays royalties to the subsidiary to use that intellectual property, lowering the parent’s profit and tax bill. The subsidiary pays a greater share of the parent’s tax at a lower rate.

• Companies can engage in “earnings stripping,” in which a subsidiary in a high-tax country borrows from a subsidiary in a low-tax country and then pays artificially high interest rates to the parent. For the overall company, no real commercial activity takes place, but its global tax bill is lowered.

• Companies can engage in a “tax inversion,” in which they buy a foreign company in a low-tax country and reincorporate there. In many inversions, nothing materially changes. The headquarters often remain in the U.S., and the company continues to conduct business as usual, but without paying the full U.S. tax rate.