|Ha'penny Bridge, Dublin - Microsoft's Round Island One is Ireland's biggest company. It operates from the offices of corporate lawyers and reported €3.23 billion ($3.88 billion) in fiscal 2004 pretax profit and paid $308 million in Irish corporate tax.
The Obama administration plans to propose measures in coming months, to deal with offshore avoidance of US tax by US corporations operating overseas, Treasury Secretary Timothy Geithner said on Thursday.
Geithner who as an IMF staffer, had his own problems with the tax system, told the Senate Budget Committee, that the recently announced Budget addresses the use of offshore structures and accounts by US corporations and individuals to avoid and evade US taxes. Over the next several months, the President will propose a series of legislative and enforcement measures to reduce such US tax evasion and avoidance, he said.
"Some proposals will focus on the rules in our tax code that put those who invest and create jobs in the United States at a disadvantage. We will propose rules to both reform US corporations' ability to defer foreign earnings and deter high income individuals and corporations from using tax havens to avoid," Geithner added.
The Government Accountability Office last January, released a study (link broken on GAO site) reporting that 83 of the 100 largest publicly-traded corporations and 63 of the 100 largest federal contractors maintain offshore subsidiaries in 50 tax havens. Many recipients of tens of billions in federal bailout money maintain hundreds of offshore subsidiaries in tax havens, including Citigroup (427 subsidiaries in tax havens), Morgan Stanley (273), and Bank of America (115).
Of the 83 companies, 74 held federal contracts, including General Motors with 11 subsidiaries in countries such as Barbados, Bermuda, Ireland, Switzerland, Singapore and the Cayman Islands.
Some of the companies identified by the GAO, including software giant Oracle, which has 77 subsidiaries in foreign tax havens, are urging Congress to renew a 2004 tax holiday that would let them pay an effective rate of 5.25% on foreign profits they remit to the US, instead of rates as high as 35% that otherwise would be due.
Democratic Senators Byron Dorgan and Carl Levin said on publication of the GAO report, that a majority of the largest publicly-traded companies and federal contractors in the United States use multiple subsidiaries in offshore tax havens to conduct business. Dorgan and Levin, who have focused on combating offshore tax abuses causing an estimated $100 billion in lost US tax revenues each year, point out that many of these companies are paid with taxpayer dollars and some have also received billions of dollars in taxpayer bailout funds.
“This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And, some of those companies have even received emergency economic funds from the government,” said Senator Dorgan. “I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that.”
Senator Levin said, “We need to put an end to the use of offshore secrecy jurisdictions as tax havens. We must get to the bottom of activities such as the following: Citigroup has set up 427 tax haven subsidiaries to conduct its business, including 91 in Luxembourg, 90 in the Cayman Islands, and 35 in the British Virgin Islands. Hundreds more tax haven subsidiaries operate under strict secrecy laws in places like Switzerland, Hong Kong, Panama, and Mauritius. But not all large U.S. companies are major tax haven users and there is great contrast between competitors. For example, Pepsi has 70 tax haven subsidiaries, while Coca Cola has 8; Morgan Stanley has 273, while Fannie Mae has 0; and Caterpillar has 49, while Deere has 3.” Levin chairs the U.S. Permanent Subcommittee on Investigations which has made offshore tax abuse a major subject of its investigations.
Dorgan and Levin requested the GAO report to get detailed information on both US corporations and federal contractors using tax havens. Using publicly-available data filed with the Securities and Exchange Commission, GAO determined that 83 of the 100 largest publicly traded corporations and 63 of the 100 largest federal contractors maintain subsidiaries in 50 tax havens.
US companies use the Irish tax exemption on patent income to locate patents in Ireland even though much of the related intellectual capital may have originated in the US.
US software giant Microsoft have two Irish companies, which operate from the offices of Dublin law firm Matheson Ormsby Prentice. The companies are used to channel billions of dollars in revenue from other overseas locations and were converted to unlimited status to prevent access to accounts information, following a November 2005 report in the Wall Street Journal, which said: "a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004."
Ireland top location for US multinationals' profits
Last year, the Bush administration requested the Irish Government to open discussions on updating a 1997 agreement on transfer pricing and the tax rules relating to US multinationals operating in Ireland.
The 1997 agreement covers a number of key areas, such as income tax, corporation tax and capital gains tax. It also sets out the law in relation to the treatment of dividends between subsidiaries and parent companies, and company royalties.
The decision by US authorities to renegotiate the agreement with Ireland is important and its outcome could have a profound effect on the taxation status of US multinationals operating in Ireland.