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Should Companies Have To Pay Taxes?

Should Companies Have To Pay Taxes?

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. This 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 three-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, writeoffs 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 bestselling author of the books Hostile Takeover, The Uprising and Back to Our Future. Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

AFP Photo/Markku Ruottinen

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Warren Buffett Is ‘Betting Against America’ On Burger King. Or Is He?

Warren Buffett Is ‘Betting Against America’ On Burger King. Or Is He?

By Michael Hiltzik, Los Angeles Times

Back in February, in his annual message to shareholders in his company Berkshire Hathaway, Warren Buffett said this: “Who has ever benefited during the past 237 years by betting against America? … America’s best years lie ahead.”

You can expect these words to be thrown back in Buffett’s face this week (as we’re doing), as word spreads of his investment in a corporate “inversion” deal, in which Burger King will relocate its tax home to Canada.

But it’s worthwhile to take a closer look at Buffett’s involvement, and about his opinion of corporate taxation — indeed, of taxes in general. Here’s a spoiler: He doesn’t think U.S. corporate taxes are too high, and he’s not really in favor of the inversion loophole.

First, some background.

Inversion deals involve U.S. companies buying smaller foreign firms to take advantage of the latters’ lower tax rates and other opportunities for financial manipulation. (We outlined the issues here and here, citing Ed Kleinbard of USC, author of the definitive analysis of inversions.) Buffett’s investment is in an especially high-profile example, the purchase by Burger King of the Canadian restaurant chain Tim Hortons; Berkshire Hathaway reportedly will be putting up about 25 percent of the financing for the merger.

Inversions are controversial because they often appear to be paper transactions undertaken as a tax dodge — and one that leaves U.S. taxpayers stuck with the bill. Typically, managements don’t relocate and the workforce and manufacturing plants aren’t moved abroad.

The deals have acquired a noxious political odor. President Obama has denounced their participants as “corporate deserters,” which isn’t far from the truth.

Pfizer attempted an inversion by acquiring the British drug company AstraZeneca, but the deal fell through, and political headwinds might keep Pfizer from seeking another partner. Walgreens, which contemplated an inversion this month via the purchase of the Switzerland-based retailer Alliance Boots, dropped the idea after it provoked a public uproar.

Obama and Democrats in Congress propose forbidding a U.S. corporation to move its tax domicile abroad unless more than 50 percent of the shareholders of the corporation are foreigners after the merger, up from 20 percent. Kleinbard suggests that by ending a policy that “rewards tax perversity over commercial reality,” such a change, along with a few other alterations in tax law, would stop most inversions in their tracks.

As a familiar street-corner name, Burger King might face the same reaction as Walgreens. So Buffett’s participation in the Burger King deal has some people scratching their heads.

That’s especially so since he’s become a spokesman for the idea of improving the fairness of the tax system. His observation that his personal tax rate was lower than his secretary’s led to the “Buffett Rule” proposal, which would produce a minimum tax rate for the 1 percent. The rule has never been enacted, but it probably helped Buffett get the Presidential Medal of Freedom from President Obama in 2011.

That’s why people are saying that Buffett’s attachment to the Burger King deal is an embarrassment for the White House. (“Looks awkward” is the Wall Street Journal’s uncharacteristically charitable description of the optics.) But is it?

To begin with, Buffett is taking pains to downplay the tax aspects of the Burger King deal. In a statement to the Financial Times, he portrayed it more as a political compromise, designed to quell Canadian sensitivities about the fate of an emblematic Canadian brand. “I just don’t know how the Canadians would feel about Tim Hortons moving to Florida,” he said. “The main thing here is to make the Canadians happy.”

Investment experts don’t necessarily buy that; the deal is likely to provide the merged company with a way to shift reported earnings from the U.S. to lower-tax jurisdictions around the world where it has restaurants, cutting its U.S. taxes.

More to the point, Buffett may feel the need to minimize the tax implications of the merger because they’re at odds with his own pronouncements about corporate taxes. Consider what he said during an extended interview with CNBC on May 5, after Berkshire Hathaway’s annual shareholder meeting.

There he scoffed at claims that American corporations are significantly disadvantaged by their U.S. tax burden. “Pfizer is a very profitable company,” he said. “They’d like to make even more money by not paying taxes. But they have a wonderful business paying U.S. corporate tax rates.”

He observed that as a percentage of gross domestic product, since World War II corporate taxes have “come down from 4 percent to about 2 percent…. That’s while corporate profits have been hitting record levels. So if you look at the budget of the United States, individuals have paid more taxes, corporations have come down from 4 percent of GDP to 2 percent of GDP. No other group has come down as much percentage-wise as corporations. Corporations are doing fine in the United States.”

(If you want to amuse yourself, watch the CNBC anchors try to goad him into taking the fleeing companies’ side. He doesn’t bite.)

Of the inversion loophole, he said: “I would personally change that part of the law. … It’s probably a mistake to have that part of it. … But American business, I will tell you, whether it’s Berkshire Hathaway or Pfizer or Apple, are doing wonderfully under this tax code and are not short of capital in any way, shape or form, or are having any trouble competing.”

Finally, he recognized that the surge in high-profile U.S. companies pursuing inversions would provoke Congress to “address” the loophole. But he warned that “will cause one hell of a fight in corporate America.”

So why would Buffett invest in the Burger King deal? Leaving aside his assertions about international politics, one reason may be his relationship with Burger King’s majority owners, 3G Capital Management, a Brazilian private equity firm.

Berkshire Hathaway joined with 3G in the acquisition of HJ Heinz Co. last year, and Buffett has expressed admiration for its managing partners. He told the Financial Times that 3G offered him a chance to invest in its original acquisition of Burger King in 2010, and he considers it a “mistake” that he turned it down.

So this may be a chance for him to get in on a company he thinks 3G may yet turn around. But it doesn’t look like he’s changed his mind much on inversions in general. He thinks the inversion loophole is a bad idea, and he doesn’t buy the argument that skipping out on American taxes is the only way for a corporation to make money in America.

Michael Hiltzik is a columnist for the Los Angeles Times. Readers may send him email at mhiltzik@latimes.com.

Photo: Mike Mozart via Flickr

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