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Saturday, October 22, 2016

Reading companies’ annual reports to the Securities and Exchange Commission is a reliable cure for insomnia. Every so often, though, there is a significant revelation in the paperwork. Last year, one of the most important revelations came from Microsoft’s filings, which spotlighted how the tax code allows corporations to enjoy the benefits of American citizenship yet avoid paying U.S. taxes.

According to the SEC documents, the company is sitting on almost $29.6 billion it would owe in U.S. taxes if it repatriated the $92.9 billion of earnings it is keeping offshore. That amount of money represents a significant spike from prior years.

To put this in perspective, the levies the company would owe amount to almost the entire two-year operating budget of the company’s home state of Washington.

The disclosure in Microsoft’s SEC filing lands amid an intensifying debate over the fairness of U.S.-based multinational corporations using offshore subsidiaries to avoid paying American taxes. Such maneuvers — although often legal — threaten to significantly reduce U.S. corporate tax receipts during an era marked by government budget deficits.

Microsoft has not formally declared itself a subsidiary of a foreign company, so the firm has not technically engaged in the so-called “inversion” scheme that President Obama and Democrats have lately been criticizing. However, according to a 2012 U.S. Senate investigation, the company has in recent years used its offshore subsidiaries to substantially reduce its tax bills.

That probe uncovered details of how those subsidiaries are used. In its report, the Senate’s Permanent Subcommittee on Investigations noted that “despite the [company’s] research largely occurring in the United States and generating U.S. tax credits, profit rights to the intellectual property are largely located in foreign tax havens.” The report discovered that through those tax havens, “Microsoft was able to shift offshore nearly $21 billion (in a 3-year period), or almost half of its U.S. retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the United States, or just over $4 million in U.S. taxes each day.”

Microsoft, of course, is not alone. According to a report by Citizens for Tax Justice, “American Fortune 500 corporations are likely saving about $550 billion by holding nearly $2 trillion of ‘permanently reinvested’ profits offshore.” The report also found that “28 corporations reveal that they have paid an income tax rate of 10 percent or less to the governments of the countries where these profits are officially held, indicating that most of these profits are likely in offshore tax havens.”

In the political debate over taxes, conservatives often cite inversions and other games with offshore subsidiaries as proof that the U.S. corporate tax rate is too high in comparison to other industrialized countries. Yet, when all the existing tax deductions, write-offs and credits are factored in, America’s effective corporate tax rate is actually one of the industrialized world’s lowest.

With the U.S. tax code now permitting companies to use brazen tax avoidance schemes in true tax havens, the real question is more fundamental than what the proper corporate tax rate should be. Instead, the question is now whether corporations should have to pay any taxes on their profits at all?

The answer should be obvious. Companies enjoy huge benefits from operating in the United States — benefits like (among other things) intellectual property protection, government provided security (police, firefighting, etc.) and publicly financed infrastructure. Those services and assets cost money.

If the tax tricks employed by companies like Microsoft become the rationale to eliminate corporate taxes entirely, then America would allow companies to be exempt from paying their fair share of those costs. That would be a truly endless and unacceptable bailout — one given to executives and shareholders and paid for by the rest of us.

David Sirota is a senior writer at the International Business Times and the best-selling author of the books Hostile Takeover, The Uprising, and Back to Our Future. Email him at [email protected], follow him on Twitter @davidsirota or visit his website at

Photo: Oxfam International via Flickr

  • rednekokie

    This revelation is not new, but is still disgusting. Just another reason to describe the US as no longer a democracy, but, indeed, an oligarchy.

  • i2grok

    I wish I had an answer but if the best thinkers in the government cannot figure out how to make companies pay a fair tax rate, it is clearly beyond me.
    Obviously Congress could solve this with legislation if only so many members of Congress were not de facto employees of large corporations and other special interests.

  • Kurt CPI

    Blame the tax laws. If you had a choice to keep $550 billion in your pocket, what would you do? As has been pointed out before, the cost is much higher than just loss of tax revenue. Microsoft’s products are primarily based on intellectual property rights, not hardware – a full retail copy of MS office runs about $450, but the DVD itself is worth less than a buck. But other companies provide tangible products. Those products require raw materials, energy, facilities and labor to produce – somewhere other than in the US. That means American workers from mining to final assembly have lost their jobs to those foreign factories. Even the practice of re-branding products produced by non-US owned foreign companies provides an imaginary patch of foreign soil to shelter revenue.

    My solution?

    1) Allow those companies to repatriate their profits at no tax cost – it’s a $550 stimulus package that’s not financed by piling debt upon debt (“purchasing” debt – exactly the scheme that caused the 2008 crash, except with public debt instead of private mortgage backed securities).

    2) Offer future tax credits based solely upon every dollar spent on US soil industries that require those same materials, facilities and labor.

    3) Deregulation. I know it’s a dirty word, but much regulation is designed to maintain the status quo for existing, lobbying, campaign contributing companies which stifles competition. You can’t have a free market when the playing field is deliberately tilted against competitive challengers. I’m not talking about dumping toxic industrial waste water into rivers, I’m talking about regulatory processes that cost so much and take so long that new entries into that regulated market are impossible.

    4) Tariff the [email protected] out of imported products. This is the tricky part. the combination of tariffs, tax credits and deregulation need to make it more lucrative to do 100% of corporate business in America than to farm it out or build it somewhere else.


    Free Trade: the wholesale export of American capital to American companies pretending to be foreign companies.

    Quantitative Easing: Mortgage backed securities for every American – like it or not

    Citizens United: A way of empowering corporations and PACs to pay politicians to legislate on their behalf.

    Clean Water Act: Another way of making it impossible for small farmers to compete with corporate agriculture. If you think it’s about protecting the environment you’re living under a rock. It insures that only big Agra can afford to pay for land use permits. Good-bye independent farmers.

    The list goes on and on and the losers are, as always, the hard-working people of America.

  • Eleanore Whitaker

    The question is moronic. First of all, do these companies in any way, at any time take tax subsidies from individual taxpayers? Where in the US Constitution does it state our tax revenues are solely intended to keep any business in existence?

    For centures, business men were responsible for keeping their business viable. Now suddenly, that’s the job of taxpayers? This is BS.

    Walmart is the best example of how the Walton’s became multi billionaires. First, they get state tax exemptions just for locating in a specific state. Loss of revenue right there individual taxpayers have to recoup.

    Then, they get to pay an average property tax rate of $11 sq. ft. Meanwhile, small businesses pay $17 sq. ft in property taxes. But wait, it gets even better. The Walmart stores ALL get huge reductions in the cost of their utilities and other natural resources. Don’t ask why yours keep going up and up.

    The answer to these moronic question is….Yes companies should have to pay their fair share in taxes. This should depend on how much they TAKE in tax subsidies. Does Big Oil need a Tax Subsidies annually of up $15 billion? Would the GOP hand off that same amount to clean energy? You bet not.

    The big lie of the GOP is that businesses are “overtaxed.” Compared to which country? Businesses in Bahrain? Fiji? Dubai?

    So…here’s the deal. If these businesses NEVER use our roads, tunnels, bridges, governmental services. Fine. They can be totally tax free. Until they get off taxpayer dole, they owe us. We do not owe them.

  • kg_from_hi

    Isn’t corporate tax a people tax? How many companies roll their tax burden into the products and/or services that they sell to we the people of the world? The difficulty lies in what to do, reduce corporate taxes and you might be giving the windfall to only the people at the top of each corporation, and leaving everyone at the bottom demanding lawmakers to raise minimum wages.

  • Jim Sylvester

    Companies were originally given corporate citizenship for the purpose of taxing them. It was believed under the constitution that only “People” could be taxed and petition the government. Eliminate corporate personhood and they can’t be taxed, but they can’t lobby either. Lobbying is a business expense they could no longer claim. So all that former tax money and lobbying money could now be distributed to shareholders. Tax investment income the same as earned income and boom, you’re taxing all that money that formerly was spent on lobbying and taxes. A clean, clear-cut way back to common sense.

    I first read this proposal in Robert Reich’s book, Supercapitalism, 2007.

  • beancounnter42

    The Supreme Court and Mitt Romney said corporations are people, my friend. So tax them like people at 39.6% over $400,000 or admit they are not people with people rights.

  • Nick

    What these companies are doing is not illegal. These companies made money in a foreign country and have to pay taxes to that foreign country. As long as the money stays in the foreign country then there’s no problem.

    • JPHALL

      Except these companies are taking money from the US and claiming they are using it to expand their business overseas. Yes, sitting money overseas in numbered bank accounts is considered, under the US tax code, as a tax deductible investment.

  • RobertSeattle

    I think there is an argument to doing away with corporate income taxes. Our political system has been so corrupted by big money influence – primarily for the tax preferences – maybe the country would be better if we found a replacement for corporate income taxes.

    • JPHALL

      I guess you just don’t get it. This complicated tax system is the main reason for our deficits. Until the Reagan revolution (cutting the tax rate and numerous loopholes) the government had the revenue to pay its debts. Also it was not worth using tax shelters.

    • Insinnergy

      I think a better answer is companies cannot “offshore” sales/IP or themselves and still gain US government tax benefits, grants and government contracts of any sort. If your IP, or more than 40% of your sales income goes offshore… All those doors get closed..

      The typical graft is “selling” your Money Making IP to a foreign-owned subsidiary (often in Ireland a la Google) and arguing accounting-wise that any profit in the US must be paid to the owner (Company in Ireland). This way the US based part of the company gets all the perks, and a nice tax rebate, and the offshore part of the company gets all the sales, and doesn’t have to pay much in tax.

      Perhaps another option is to say any money made in the US by a foreign company or subsidiary, and not correctly taxed in the US company accounting, gets an automatic “Sales tax” of 33% before it can be transferred to a foreign company overseas.

      The problem is that these companies employ rafts of tax lawyers to find the gaps and exploit them.

  • Böcker

    I say we start taxing them at 1950 tax rates, no more allowing them to off shore their profits.

  • dutchman3

    Setting aside the basic goal of all businesses, ( which is to remain viable), the job of businesses is jobs! And, no mater what the SC claims, businesses are not people!!! Taxing businesses is just plain stupid because businesses simply pass tax costs on to us, the consumer. Check it out!

    • Insinnergy

      You’re an idiot.
      Read something educational as to what companies do when you give them a tax break…
      Short answer: Stock pile cash, then buy out their competition so they can gain more market share, or even better: a monopoly… then screw the consumer. Or buy back their own shares to gain more control and force the stock price higher (heavily linked to CEO pay and bonuses).
      What do they do when you tax them heavily?
      Reinvest into more efficient processes to get costs down and maintain profit margins.

      Level of tax is a poor lever to try to get companies to employ more people.

      • dutchman3

        I’m not sure just who is the idiot here, but as an MIT alum with an Econ degree, I don’t think “idiot” is quite correct. Maybe naïve when it comes to running a business, but in any event, what I do know is that when the government taxes businesses heavily, they tend to move offshore, and take their jobs with them. Not a small problem!
        Perhaps you are aware that a lot of supposedly smart folks are proposing to switch to a national consumption tax which would remove all taxes from businesses. While I don’t support the overall Fairtax scheme, the idea of a consumption tax has merit. Check it out!

        • DrPedia

          I’ll be for a consumption tax on businesses, if the employees of those companies get a raise.

  • Exctyengr

    Here’s an idea. Simply pass a government regulation that says that companies with offshore tax dodges are not eligible for government contracts. I think that GE, Boeing, might reconsider