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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


Ten big US companies sheltered $58 billion in earnings overseas in 2008; Irish official to begin working with US tax lobbyists next week
By Finfacts Team
Apr 22, 2009 - 8:06:56 AM

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The US Capitol

The Wall Street Journal reports today that just ten of the largest US companies sheltered nearly $58 billion in earnings overseas during 2008, representing about $20 billion in potential tax revenue. Total US corporate tax receipts last year were around $304 billion. The Irish Government has announced that an official from IDA Ireland, will begin working with US tax lobbyists next week.

The Journal says the Obama administration's nascent proposals to tax offshore profits may have a sizable impact on the likes Pfizer, Cisco Systems, Coca-Cola and Hewlett-Packard, which shelter tens of billions in income offshore annually.

On Monday, the Tánaiste (Deputy Prime Minister) Mary Coughlan, told the Irish Times that an official from the Irish inward investment agency IDA Ireland, will arrive in Washington next week to work on international tax issues with lobbyists for American companies.

US companies can defer taxes indefinitely on the profits they say they have earned overseas until they "repatriate" that money back to the US. Subject to some restrictions, deferred tax funds can be held in the US. The Obama administration has proposed changing the law, and has already baked in the new tax receipts into its budget figures for 2011.

The US corporate tax rate is 35% but the effective rate is lower because of various allowances. In 2007, US tax expert Martin Sullivan said the effective tax rate was at a 10-year low of 22.2%. It compares with Ireland's 12.5% rate.

In 2005, Sullivan did an analysis on what he termed a $4.8 billion tax subsidy, which was the equivalent to an economic development grant from the US Treasury payable in part to the Irish government and in part to corporations investing in Ireland. He said of the $18.3 billion of profit reported by Irish subsidiaries of US multinationals in 2002, $13.7 billion did not belong there. With a statutory tax rate of 12.5%, Ireland collected approximately $1.7 billion of extra corporate tax on that shifted profit. "That's pure gravy for the Irish Treasury. At the same time, US corporations enjoyed a 22.5% lower rate (35% minus 12.5%) as a result of shifting income from the United States to Ireland. On $13.7 billion of profit, that is a tax reduction of $3.1 billion. Combining the two, the total US subsidy for Ireland attributable to profit shifting in 2002 equals $4.8 billion," he said.

Ireland has a tax exemption on patent income and two of Ireland's largest companies by revenue are owned by Microsoft. They have no staff; book billions in revenues; one of the Microsoft units pays tax to the Irish Exchequer; The other handles patent income from other overseas units and they operate from the offices of a Dublin law firm.

Ireland's tax exemption in respect of certain patent royalties, has been one of the driving factors behind investment by pharmaceutical companies in particular. The patents usually result from research and  development done elsewhere.

A Treasury Department spokeswoman has told the Wall Street Journal that the administration "is committed to reforming deferral to improve the overall efficiency and equity of the tax code by reducing incentives to divert investment from the U.S. in order to avoid taxation."

The Journal says in the technology sector, Hewlett-Packard and Cisco cut their effective tax rates by 16.9 percentage points and 16.1 percentage points respectively during 2008 due to earning foreign income taxed at lower rates abroad, securities filings show. Google. generated $3.8 billion such earnings last year, which cut $1 billion off of a tax bill that wound up being roughly $1.6 billion.

 

The Journal concludes that a full repeal of the deferral rules is considered unlikely. One potential blueprint is the proposal made by Charles Rangel, chairman of the tax-writing House Ways and Means Committee, in a tax overhaul bill introduced in 2007 that would disallow certain deductions. Currently, companies can get deductions in the US, even though the spending may generate overseas income on which they never pay US taxes.

Operations of US Multinational Companies in 2005 (pdf)

US Multinationals Profit from Tax Havens

Two out of every three US companies paid no federal income taxes from 1998 through 2005; Among foreign corporations 68% did not pay taxes during the period

US Affiliates of Foreign Companies Operations in 2006 (pdf)

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