WASHINGTON, January 30th – State taxpayers across the country could save over $1 billion from a simple reform to crack down on offshore tax dodging, according to a new report released today by the U.S. Public Interest Research Group (U.S. PIRG). The reform, which has already proven effective in Montana and passed in Oregon, would require companies to treat profits booked to notorious tax havens as domestic taxable income.
“Last year, while states struggled with budget problems, they collectively lost $20 billion as a result of the abuse of offshore tax loopholes,” said U.S. PIRG Tax and Budget Advocate and report coauthor Dan Smith. “States need not wait for action in Washington. By modernizing their tax codes with this simple reform, states can curb incentives for moving business offshore, level the playing field for small businesses that compete with multinational corporations, and protect regular taxpayers from picking up the tab for tax dodgers."
For years, some corporations that do business here in the U.S. have dodged taxes by booking profits made in America to tax havens like the Cayman Islands, that levy little to no tax. Taxpayers are hurt twice by this tax dodging because they must make up the difference on both their state and federal tax bills.
Montana and Oregon have taken steps to address this problem. They simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.
To ultimately put an end to offshore tax dodging – which costs the federal Treasury $90 billion annually and state governments $20 billion annually – federal action is required. But Montana and Oregon have shown that states can do more than sit on their hands waiting for Congress to act. The Montana experience (Oregon’s law, which passed last year with strong bipartisan support, will first take effect this year) has shown that this reform is simple to implement, and can play a real role in closing the state budget gap.
“Tax dodging is not a victimless offense. When corporations skirt taxes, the public has to make up the difference. That means higher taxes for average taxpayers or cuts to public programs,” added Smith.
As of 2012, at least 82 of the top 100 publicly traded corporations in the U.S. used tax havens, according to an earlier U.S. PIRG study. American multinational companies collectively hold a staggering $1.9 trillion offshore.
Here are some increasingly notorious ways that some of America’s largest corporations drastically shrink their tax bill:
Pfizer, the world’s largest drug maker, made 40 percent of its sales in the U.S. over the past five years, but thanks to their use of offshore tax loopholes they reported no taxable income in the U.S. during that time. The company operates 172 subsidiaries in tax havens and has $73 billion parked offshore which remains untaxed by the U.S., according to its own SEC filing. That is the second highest amount of money sitting offshore for a U.S. multinational corporation.
Google used accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to Bloomberg News. Using two Irish subsidiaries and one in Bermuda, Google helped shrink its tax bill by $3.1 billion from 2008 to 2010.
Citigroup – a bank that was bailed out by taxpayers during the financial meltdown of 2008 – maintains 20 subsidiaries in tax havens and has $42.6 billion sitting offshore, on which it would otherwise owe $11.5 billion in taxes, according to its own SEC filing. Citigroup currently ranks eighth among U.S. multinationals for having the most money stashed offshore.
According to Dan Bucks, the former chief of Montana Director of Revenue who administered the law for the state from 2005 to 2013, “Montana’s tax haven law brings a measure of tax justice to small businesses, farmers and ranchers, retirees and wage earners who already pay taxes on income they earn in Montana. Without the law, these Montanans would pay more to make up for taxes wrongly avoided by large corporations shifting their Montana income to tax havens.”