50 pages into the fiscal cliff avoidance bill, Congress renewed the legal loophole that tech companies, pharmaceutical developers and medical technology companies use to avoid taxes.
It’s not uncommon for things like this to get tacked on to bills. The fiscal cliff bill is full of tax credit extensions and other necessary sections that extend measures with expiration dates.
A groundbreaking report from the Senate Committee on Homeland Security and Governmental Affairs in September explained how dozens of firms — companies like Apple, Google, Microsoft and HP — exploit existing loopholes in Subpart F to reduce their domestic tax liability, saving billions annually.
Photo: Fiscal Cliff Bill
Here’s how this works. Subpart F of the tax code discusses the requirements companies have for paying U.S. taxes on profits held offshore.
Exceptions exist under the current tax regime that allow companies to finagle corporate structure to defer payment of taxes indefinitely.
The more exceptions there are to Subpart F, the easier it is for U.S. companies to avoid paying taxes.
U.S. companies hold $1.7 trillion offshore through complex schemes that exploit the loopholes built into Subpart F like the controlled foreign corporation look-through rule and check-the-box regulations.
Check-the-box is a Treasury Department policy that has been around since 1997, but the look-through rule was created in 2005.
As a result of the loopholes built into Subpart F, companies are able to keep huge portions of their profits and almost all of their cash offshore and away from the IRS by transferring intellectual property rights and patents overseas to low tax shelters.
Often, most of the intellectual property was developed in the United States and the foreign corporations collecting the revenue have a skeleton crew or a P.O. Box.
Companies like HP, Microsoft, Johnson & Johnson, Cisco and Coca Cola are able to keep all or almost all of their cash offshore in this way.
50 pages into the bill are sections 322 and 323 which reinstate the tax policies that make this simple.
Thanks to Sections 323 and 322 of the Senate’s fiscal cliff bill, another year was added to a number of exceptions to Subpart F, giving companies even more leeway to shelter cash offshore and reduce their tax burdens.
So even though the NASCAR, asparagus and algae add ons are sort of funny, this goes to show that there are some pretty big substantive extensions.
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