Nobody In Congress Dares To Close The Trillion Dollar Loophole That Apple, Google And Microsoft Use To Reduce Taxes

US Tax burden corporate payroll individual

[credit provider=”Senate Report”]

One recurring theme of the fiscal cliff debate is the desire to close certain loopholes in the tax code.Still, almost nobody in Washington has brought up closing one of the most significant loopholes – the Subpart F corporate tax loophole, which was detailed in a Senate report released in late September. 

According to the report, that loophole is a major reason that the share of federal revenue derived from corporate taxes is a third of what it was in 1952.

Here are the stats: American multi-national corporations have more than $1.7 trillion in undistributed foreign earnings — some of which is deliberately held offshore to defer taxation — and taken as a whole, keep at least 60 per cent of their cash overseas.

The corporate tax rate is a flat 35 per cent, but companies with controlled foreign companies have a way to bring that rate down. 

foreign tax shelters

[credit provider=”Senate Report”]

The investigation explains that, to exploit the loophole, a company will “sell” their intellectual property rights to a foreign, controlled company in a tax shelter.That controlled foreign company gains the profits from domestic and international sales without the burden of American taxation, since the income is considered passive.

The multinational will then occasionally repatriate some of the income through permissible short term loans between the controlled foreign company and the American corporation. 

Meanwhile, the main multinational uses the foreign-held corporation as a tax-free bank account. 

The issue is, the intellectual property was mostly developed in the U.S., and these companies are keeping mountains of untaxed cash reserves offshore. For instance, according to the report Microsoft kept half of their retail sales revenues offshore between 2010 and 2011. 

Here are the top companies with offshore cash reserves exceeding $5 billion:

offshore profits

[credit provider=”Senate Report”]

You’ll notice a couple things. 

  • There are, among these 18 companies alone, upwards of $378.5 billion dollars kept offshore. 
  • Most of these companies are tech, pharmaceutical, or medical technologies companies — industries where patents and intellectual property define the business model.
  • Some companies like HP, Cisco, Microsoft, Coca-Cola and Johnson & Johnson keep all or almost all of their cash offshore. 

Here’s the main point: Both sides have talked about closing loopholes in the tax code. At the same time, both sides have taken vast amounts of money from all of these companies. The companies have been aggressive lobbyists and — especially with technology and pharmaceuticals — very generous campaign donors. 

That’s one of the reasons that Subpart F hasn’t been an issue in the fiscal cliff talks. While everyone loves to talk about closing loopholes, nobody wants to close the big ones that are used by powerful entities.