The Wall Street Journal
December 5, 2012
America stands at the edge of a fiscal cliff with drastic budget cuts and painful tax increases on the middle class unless we can agree on a comprehensive, balanced deficit-reduction plan.
This challenge lends new urgency to cutting loopholes and gimmicks to avoid paying taxes.
Tax loopholes are one significant cause of the budget deficit, and they add to the tax burden ordinary Americans bear.
The Senate Permanent Subcommittee on Investigations, which I lead, this year exposed how multinational corporations have taken advantage of loopholes in tax law and weaknesses in enforcement to shift their profits overseas to avoid paying taxes.
The first step in shifting profits offshore is when a U.S. company sells or licenses a valuable asset, such as software developed in the United States, to a subsidiary in a low-tax jurisdiction for a price below fair market value.
Profits from the software’s sale are shifted to that tax haven.
We showed how Microsoft used this process, called “transfer pricing,” to shift $8 billion in income from products developed in the United States to subsidiaries based in Singapore and Ireland to dodge taxes.
We also showed how, through complex transactions, Microsoft was able to use a subsidiary in Puerto Rico to shift nearly half the profits from Microsoft products sold in the United States to Puerto Rico, avoiding a stunning $4 million a day in U.S. taxes.
The second step involves games played with profits shifted from one offshore entity to another.
Under our tax law, companies with income offshore normally don’t have to pay U.S. taxes until they bring that money home to the United States.
If the income consists of royalties, licensing fees or other funds that don’t require the active involvement of the business, that “passive” income is supposed to be taxed, even when it’s offshore.
Our hearing showed how some companies use an IRS regulation, which changed a provision in the tax code, to dodge those taxes.
Literally, they’re able to check a box on an IRS form and make offshore subsidiaries, and their taxable income, invisible for tax purposes.
From 2009 to 2011, Apple has been able to defer taxes on more than $35.4 billion using this loophole.
Google has deferred more than $24.2 billion in the same period.
For Microsoft, the number is $21 billion.
Yet many multinationals have at the same time launched a massive lobbying effort, promising to bring billions of offshore dollars back to the United States if they get a “repatriation tax holiday,” a large tax break for returning offshore funds to the United States.
These companies assert they intend to indefinitely or permanently invest this money offshore while planning to bring it home as soon as Congress grants them a tax holiday.
That’s not any definition of “permanent” that I understand.
We simply can’t afford these corporations’ offshore tax dodges.
Carl Levin is the senior U.S. senator from Michigan and chairman of the Senate Armed Services Committee. Write him at Russell Senate Office Building Room SR-269, Washington, D.C. 20510; call him at (202) 224-6221; or e-mail him at http://levin.senate.gov/contact/.