WASHINGTON – U.S. companies booked 61 percent of foreign earnings in just 10 low-tax countries in 2014, according to the Institute on Taxation and Economic Policy (ITEP). In five of those countries — Bermuda, the Cayman Islands, the British Virgin Islands, the Bahamas and Luxembourg — American businesses claimed profits that exceeded the value of the nation's gross national product.
Anyone looking at tax reform now knows that Republican majorities in the House and Senate plan to spark economic growth by cutting the U.S. corporate tax rate from 35 to 20 percent. What they may not grasp is how much this strategy depends on coaxing corporations to change course on tax havens.
Tax havens are countries that charge little or no corporate tax. U.S. companies use legal accounting maneuvers to book money to them in order to avoid paying an estimated $100 billion a year to the U.S. Treasury, according to ITEP, a progressive-leaning research organization that analyzes the effect of current and proposed tax policies.
The institute recently reported that 367 of the nation's Fortune 500 companies, including at least 12 from Minnesota, operate in one or more tax havens.
"Big chunks of these profits weren't earned where companies said they were earned," said Matt Gardner, a senior fellow at ITEP.
Whether the House or Senate tax plans have the power to inspire companies to invest more in America is unclear.
Congress hopes to undercut tax havens by letting U.S. companies pay taxes only in the countries where earnings are booked. Gone will be the requirement that they also pay the U.S. Treasury the difference between the foreign country's tax rate and the U.S. rate of 35 percent. This new territorial tax system will cost the U.S. Treasury more than $200 billion over the next decade, according to Congress' Joint Committee on Taxation.
Growth is supposed to offset the loss. But booking profits where they are earned is also critical.
Ascribing earnings from intangibles like patents or other intellectual property to tax havens like Bermuda or the Cayman Islands, where most companies have virtually no productive or administrative presence, "is a massive transfer of income properly attributable to the U.S.," said Gardner.
The 12 Minnesota companies ITEP lists as operating in tax havens are Ecolab, General Mills, Ameriprise Financial, UnitedHealth Group, C.H. Robinson Worldwide, CHS, 3M, Best Buy, Mosaic, U.S. Bancorp, Supervalu and Hormel.
ITEP says Ecolab operates 79 tax haven subsidiaries, more than any other Minnesota company.
"We have direct operations in more than 70 countries and sales in 100 more," an Ecolab spokesman said. "These are serving customers, not for tax purposes."
A 3M spokeswoman said half the company's manufacturing capacity is in the U.S. and that the company operates in 70 countries. Hormel said its foreign profits were invested in "the continued growth of our international business." Supervalu said it has two "historic" Bermuda entities, but very little in foreign earnings.
General Mills said it was studying the foreign profits issue. Best Buy, Ameriprise Financial and CHS declined to comment. Mosaic, C.H. Robinson, U.S. Bancorp and UnitedHealth Group did not respond.
Whatever tax reform bodes, "it is a difficult task to prevent investments and profits from being booked abroad," said Alan Viard, an economist at the American Enterprise Institute, a conservative think tank.
U.S. companies have $2.6 trillion in earnings booked to foreign subsidiaries, including more than $55 billion by Minnesota companies with corporate or operational headquarters in the state, according to federal securities filings. These earnings have not been taxed in the U.S. Proposed tax reforms require corporations to pay a deeply discounted one-time tax on these foreign profits.
The Senate plan sets the so-called "repatriation" rates at 10 percent on cash and cash equivalents and 5 percent on illiquid assets. Equivalent rates in the House plan are 14 and 7 percent. Each plan lets America's corporate sector repatriate foreign earnings for hundreds of billions of dollars less than they would have owed the U.S. government under current rules.
The Joint Committee on Taxation estimates that repatriation of earnings of foreign subsidiaries as proposed will provide a 10-year revenue boost to the federal treasury of $184 billion to $190 billion.
Supporters of the new tax plans say the old corporate tax rate was not only too high, but also punitive because it forced companies to pay taxes in the U.S. as well as where profits were booked.
"I would prefer no [U.S.] taxes on profits held overseas," said Adam Michel, who analyzes tax policy for the Heritage Foundation, a free market think tank. Michel thinks businesses unencumbered by government regulation produce the most efficient operations, rewarding owners and consumers alike.
Others say a low repatriation tax rate is unnecessary and rewards companies that stockpiled foreign profits, then lobbied to extract a giant tax break that won't lead to substantial new U.S. investment.
Rewarding bad actors?
Viard believes a sharp cut in the corporate tax rate will eventually lead to higher U.S. wages. But he thinks a tax break on repatriation will lead to very little additional investment in the U.S. In 2004, he said, companies voluntarily repatriated $300 billion in foreign profits by paying a one-time 5.25 percent tax, but "there was not a noticeable increase in investment in the U.S."
"It's pretty inescapable that the main beneficiaries of repatriation are bad actors," said ITEP's Gardner. "They shifted money offshore to avoid taxes. It seems strange to reward them."
Conservatives like Michel say the new corporate rate should have been less than the current 20 percent proposal, but that 20 percent is an acceptable starting point that will make tax havens less appealing.
Steven Rosenthal of the nonpartisan Urban-Brookings Tax Policy Center does not think a rate cut alone can remove the attraction of tax havens because the new corporate rate will remain substantially higher than the taxes companies pay in tax havens. Without other measures, the incentive to "shift jobs, production and profits abroad" will remain, said Rosenthal.
The House tax reform bill originally proposed a 20 percent excise tax on companies that book earnings from intangible property such as patents to low-tax or no-tax countries where they may have nothing more than a tiny office or a post office box. Corporate lobbyists cried foul. The measure has been largely gutted, Viard said.
The Senate plan includes a 12.5 percent tax on all intellectual property in hopes of keeping corporate tax revenue in the U.S.
In other strategies, the House plans to stem tax avoidance by requiring corporations to pay at least 10 percent on their total foreign income in order to avoid paying an additional tax to the United States.
The tax plans also seek to reduce transfers of money between entities within the same corporation that are designed to deprive the U.S. treasury. In that scheme, a U.S. company with a high tax rate drives down what it owes the American government by borrowing from a low-tax foreign affiliate and writing off the interest paid to that affiliate.
Michel predicts that multinational corporations will still figure out ways to minimize their tax bills. But a lower U.S. corporate tax rate and other new rules could make the administrative costs of using tax havens less attractive.
In any case, he added, "not everything can be booked outside the country."
Staff writer Patrick Kennedy contributed to this report.
