Breaking Bad. The Biggest Tax Offenders in America

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Top 500 U.S. companies hold about 2.1 trillion dollars in the low-tax jurisdiction to avoid paying taxes at home. While the entire 2015 United States federal budget is only $3.8 trillion. The amount of money these companies would have to pay if they had entrusted their money to the U.S. tax system is estimated to reach $620 billion, says the joint report from Citizens for Tax Justice and the US Public Interest Research Group Education Fund (PIRG).

According to the published data, nearly three-quarters of firms from the Fortune 500 list operated subsidiaries in tax haven jurisdictions as of the end of 2014. Among others – all-time favorite technological giant Apple, that holds about 180 billion in offshore havens – more than any other U.S. company. According to the study, if Apple kept the money “at home”, it would have to say goodbye to 59 billion dollars. Of course, there are other well-known names.

The corporation General Electric holds nearly 120 billion dollars in subsidiaries, the software giant Microsoft – $108 billion, pharmaceutical Pantagruel Pfizer – $74 billion. “At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014,” – says the study. Together these companies maintain at least 7,622 tax haven subsidiaries.

Letters to tax offenders

Some American companies even changed the address of their corporate headquarters, but only on paper, – a maneuver called “inversion.” Because once a corporation defines itself as “foreign”, the profit that was obtained abroad is exempt from tax in the U.S.

The corporate inversion is often accompanied by “earnings stripping” – commonly used tactic to escape high domestic taxation by shifting profits out of high-tax jurisdictions to lower-tax ones. In many cases, the foreign branch is merely a mailbox. According to Michel Babak of PIRG, companies get huge benefits from the American state not fulfilling their part of the contract. “The American multinationals that take advantage of tax havens use our roads, benefit from our education system and large consumer market, and enjoy the security we have here but are ultimately taking a free ride at the expense of other taxpayers,” – says Babak.

“The things these companies are doing, 20 years ago would almost certainly have been illegal. But now you’ve got so many big, powerful corporations doing it that it’s the norm,” – says the president of Citizens for Tax Justice Bob McIntyre. According to him, the systematic tax evasion helps explain why corporate income taxes, which accounted for a third of US federal revenues in 1950, today provide less than 10%.

The tax strategy of Apple, which recently came under suspicion of tax evasion, always caused a lot of questions. Apple, which can not legally use their “offshore” billions – some say they are piled up in Manhattan’s banks – without paying US taxes, have repeatedly resorted to the issuance of bonds to finance its expenditure.

This is not only cheaper than to legalize its billions, but it also can get you hundreds of millions of dollars of tax benefits. According to an investigation conducted at the request of the US Senate, Apple used the “ghost companies” registered in Ireland as “a link to the transfer billions of dollars of revenues from the U.S.”

From 2009 to 2012, about $30 billion were listed as revenue of the subsidiary of Apple – Apple Operations International – a company that does not even have employees. Thanks to a loophole in the Irish and American tax legislation, Apple Operations International wasn’t even required to declare itself as a tax resident of any of these countries and therefore pay taxes.

As a result, for at least five years the company’s profits were not taxed. Apple is trying to find the “Holy Grail of tax avoidance,” – once said the chairman of the Senate Permanent Subcommittee on Investigations Carl Levin. However, Apple continues to insist that its accounting practice is fully legitimate. “We pay all the taxes we owe,” – said Apple CEO Tim Cook, speaking before Congress.

Pfizer: “little” tricks of the large company

Pfizer – one of the world’s largest pharmaceutical companies. However, in addition to numerous prescription drugs, it also produced more than a handful of recipes for tax evasion. Despite allegations of fraud, bribery, and illegal marketing, Pfizer continues its surprisingly successful business.

The company sells 40% of its products in the United States, the largest and most lucrative market for drugs in the world, but that has not stopped the company to show no revenue since 2007. This information can be found in the report, prepared by two non-governmental organizations – Americans for Tax Fairness and The Institute for Policy Studies.

According to the U.S. Securities and Exchange Commission (SEC), from 2009 to 2012 Pfizer announced more than $9 billion of losses in the U.S., while in other parts of the world its revenue reached 43 billion dollars.

Like many other companies that have a large number of patents and trademarks, Pfizer registers their intellectual property in tax havens where there is no tax on corporate profits.

When a customer buys drugs, a significant part of the funds forwarded to the offshore company for the patent usage, whereas the cost of management, research and marketing remain in the U.S., causing “losses” for Pfizer at home.

Over the last decade, Pfizer pleaded guilty to three high-profile cases, including fraud, bribing doctors abroad and illegal marketing. In the latter case, which ended in conviction in 2009, Pfizer was condemned for misleading doctors about the safe dosage of painkiller drug Bextra.

Pfizer agreed to remove the drug from circulation and to pay a fine of $2.1 billion. However, to be able to continue to supply drugs for state programs, the Group once again resorted to trickery. Pfizer forced subsidiary, that never sold drugs, to take responsibility and pay a fine.

Now a subsidiary company can not supply drugs for the state programs, but Pfizer can.

General Electric – finance and corporate lobbying

General Electric – GE, the eighth-largest US corporation in the Fortune 500, now earns more for financial services than for selling electrical equipment. However, aggressive tax avoidance has become the core of its business model, says the report Corporate Tax Dodgers.

According to the SEC, for 11 years, GE reported more than 88 billion dollars of profit in the U.S. but only paid 2.1 billion dollars in taxes. The company paid only 2.4% compared with the official rate, which is 35%. It allowed GE to save as much as $28.9 billion.
One of the reasons why GE pays so little – offshore loophole known as Active Financing Exception. This is an exception from the normal rules that do not allow corporations to transfer profits abroad to avoid paying taxes in the U.S.

Not surprisingly, GE is consistently ranked among the top five largest corporate lobbyists in the US. According to the authors of the above-mentioned report, over the five years, GE has spent more than 284 million dollars to lobby its interests in Congress. On average – 100 thousand dollars every working day for the past 15 years.

Citigroup and the “revolving door” of American politics

Citigroup is the third largest bank in the United States. Its assets amount to approximately 1.88 trillion dollars. It also has the largest financial network of offices in 140 countries. 427 departments are situated in the tax havens and only 41 of it Citigroup agreed to reveal.
From 2008 to 2014 the corporation reported a doubling of its capital in the tax havens. In 2012, it held 24 billion dollars there. Now – 44 billion dollars.

“Citigroup has paid no federal income taxes for the last four years after receiving a total of $2.5 trillion in financial assistance from the Federal Reserve during the financial crisis,” – wrote in an article for the Huffington Post by US Senator Bernie Sanders of Vermont in 2013.

According to the NGO OpenSecrets.org, Citigroup is spending millions on lobbying in Congress. Like General Electric, Bank promotes the renewal of the act of Active Financing Exception, which allows corporations to “save”.

Interestingly, 85% of Citigroup lobbyists – 53 out of 62 – are either former members of the Congress or were previously working for the company. It is the so-called “revolving door” of American politics – a phenomenon that describes the movement of legislators and regulators to consultants for the industries and vice versa.

The software giant from Puerto Rico

Microsoft is the world’s largest software producer, that dominated the market of computer operating systems for years. However, it is not a top expert in the field of transferring its revenues to the tax havens. So far Microsoft is only the third of American companies.

At first glance, Microsoft dutifully pays its taxes. According to the SEC, from 2010 to 2012 the company earned 20 billion dollars and paid 9.8 billion dollars in income taxes. But at a closer look of NGOs, the company has aggressively transferred profits to tax havens, particularly to Puerto Rico.

According to Levin, the investigation found that 47 cents of every dollar of income earned in the U.S., Microsoft has been transferring to its subsidiary in Puerto Rico. Such schemes have led to explosive growth in tax-free profits for Microsoft. In 2011-2012 only its offshore capital increased by 36% or 60 billion dollars.

In 2007 the company reported ten subsidiaries in tax havens, but in 2014 revealed only five of them. During this time the company’s capital in offshore increased from 7.5 billion dollars to 108.3 billion dollars.

According to the investigation of The Wall Street Journal, 93% of the capital, that Microsoft officially holds in tax havens, was invested in the U.S. assets.

The bankers of goodwill

Of course, the problem of tax evasion is not a problem only in the United States. This phenomenon is widespread. But the United States, that is the most developed economy in the world, can be a good indicator of the scale of trouble. According to the economist of the University of California Gabriel Zucman, about $7.6 trillion, or 8% of total global wealth is stored in the tax havens.

In an interview with Bloomberg Zucman said that the government can no longer rely on the “goodwill of bankers” for sharing information. He said that the companies’ revenues should be shared between countries based on real factors – the volume of sales or number of employees.

Zucman stresses that the problem of tax evasion goes beyond the loss of income. “If a significant fraction of rich people can evade taxes and if the rest of the population feels taxes are not fairly enforced. Then the willingness to pay taxes will disappear,” – he said.
Whatever is said about “legitimate accounting practices”, legitimacy is something relative. And history doesn’t leave a chance for tax evaders – any system can not survive for a long time under the condition of imbalance.

So either the companies themselves will agree to adequately and responsibly pay taxes or these companies will simply cease to exist, at least in the form they do now. Whether – is not the question, the question is when. In any case, it is hard to rely merely on the people of goodwill.

First published in 2015

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