Corporate Tax Avoidance

Citizen Works Shines a Light on Corporate Tax Avoidance
Read the entire article at:  http://www.commondreams.org/news2005/0414-03.htm

Summary:

If recent trends are any indicator, large corporations will pay only about half of the statutory 35 percent corporate rate in income taxes.

Citizen Works Communications Director and corporate tax expert Lee Drutman had this to say:

“There are effectively two systems of taxation in the United States today. One is for big corporations and the wealthy, who can afford high-priced accountants and lawyers to tell them how to avoid paying taxes, who can afford high-priced lobbyists to help them get special exceptions and loopholes written into the tax code, and who have the means to set up an intricate web of shell corporations in Bermuda and Barbados and the Cayman Islands. The other is for the hard-working Americans, who can barely even afford to go on vacation to Bermuda.”

“When corporations pay less, it means that ordinary citizens are forced to cover more of the tax burden. At a time of rising budget deficits and vanishing social services this is simply unacceptable.”

The following is a summary of studies in the past year describing the extent to which corporations avoid paying federal and state taxes and some of the strategies that they have used.


FEDERAL TAXES

 In 2002 and 2003, 275 of the biggest U.S. corporations sheltered more than half of their profits from taxes, reporting $739 billion in profits to shareholders but only $363 billion in profits to the IRS, according to Citizens for Tax Justice (CTJ). According to CTJ, the 275 corporations paid an effective tax rate of 17.2 percent in 2002 and 2003, less than half of the effective corporate tax rate of 35 percent. That’s down from 26.5 percent in 1988, 21.7 percent in 1998, and 21.4 percent in 2001.

 

Additionally, of the 275 companies CTJ analyzed, 82 either paid no taxes or received a tax refund in at least one of the last three years. In 2003 alone, 46 companies paid zero or less in federal income taxes. These 46 companies, almost one out of six of the companies in the study, reported U.S. pretax profits in 2003 of $42.6 billion, yet received tax rebates totaling $5.4 billion.

 

Between 2001 and 2003, 28 companies paid negative federal income tax rates over the entire three-year period.

 

U.S. corporations shifted $75 billion of their profits into tax havens in 2003, depriving the IRS of between $10 billion and $20 billion in expected tax revenue, according to a study in Tax Notes, a tax trade journal. According to the study’s author, Martin A. Sullivan, corporations exploit legal loopholes and tax credits to avoid paying taxes by shifting income into subsidiaries located in no-tax or low-tax countries, such as Bermuda. Sullivan, a former Treasury Department economist, based his study on Commerce Department data.

 

The profits that U.S. multinational companies reported from their foreign subsidiaries have grown 68 percent since 1999, reaching $149 billion in 2003, according to a separate study published by Tax Notes. However, the data does not show any commensurate growth of actual economic activity in those tax havens. The implication is that multinationals are merely sheltering more income in tax havens.

 

In 2003 U.S. corporations had an estimated $650 billion sheltered offshore, more than 40 percent of which was in the manufacturing sector, according to a 2003 J.P. Morgan Chase study.

 

 

More than 10,300 individuals and 207 Fortune 500 companies have used tax shelters, accounting for a total tax revenue loss of nearly $129 billion, according to a recent GAO report. The report found that 114 of the Fortune 500 companies and 4,400 individuals using tax shelters obtained the services from an accounting firm.

 

 

Accounting firm KPMG's revenue from its Tax Services Practice rose from $829 million in 1998 to $1.2 billion in 2001, accord to a recent Senate Permanent Subcommittee on Investigations report. The report also documented how accounting firms such as Ernst & Young and PricewaterhouseCoopers, banks such as Deustche Bank and Wachovia Bank, and law firms such as Sidley Austin Brown & Wood "developed, implemented, and mass-marketed cookie-cutter tax shelters used to rip off the Treasury of billions of dollars in taxes," as Sen. Norm Coleman (R.-Minn.), the committee's chairman, put it.

 

In 2003, corporate revenues represented only 7.4 percent of federal tax receipts, the second-lowest level on record, according to the Congressional Budget Office. Sixty years ago, corporations paid half of the U.S. tax bill.


Summarized by Copernic Summarizer