PGL and tax haven report
PGL at Econospeak notes:
Darla Cameron and Jia Lynn Yang want to report on how US multinationals are shifting profits to foreign tax havens but their key statistic is the ratio of US tax expenses to worldwide profits:
A Washington Post analysis of data compiled by Capital IQ found that in the late 1960s and early 1970s, companies in the current Dow 30 routinely cited U.S. federal tax expenses that were up to half of their worldwide profits. Now, most are reporting less than half that amount. The reason? The slow but steady transformation of the American multinational after years of globalization. Companies now enjoy an unprecedented ability to move their capital around the world, and the corporate tax code has not kept up with the changes. Across industries, virtually every major U.S. firm has seen the rate of its tax contributions plummet, at least according to publicly available financial statements.
Let’s consider two very different situations. Company A has mostly US activities but has shifted its intangible assets to a Cayman affiliate. If half of its profits are attributable to intangible assets, then not only has its US tax expenses dropped below 20%, its effective tax rate is also below 20%. Company B does not create much in the way of intangible profits but has half of its activity in high tax Europe. Its effective tax rate – calculated as worldwide tax obligations relative to worldwide income – is still high even though its US taxes are likely less than 20% of worldwide profits. Company A is involved with the kind of transfer pricing manipulation that the press should be complaining about. Company B is not. But this statistic cannot distinguish between the two very different situations.
(Dan here: Examples of special treaties, also needing more than a look, and such have been noted at Angry Bear here).
Absolutely correct. But then PGL so often is.
“Company B does not create much in the way of intangible profits but has half of its activity in high tax Europe. Its effective tax rate – calculated as worldwide tax obligations relative to worldwide income – is still high even though its US taxes are likely less than 20% of worldwide profits. Company A is involved with the kind of transfer pricing manipulation that the press should be complaining about. Company B is not.”
And the thing is we know absolutely that a lot of the Company B stuff is going on. Back 50 years, yes, the largest Us companies were some of the largest in the world. But much, if not all, of their business was still inside the US and thus subject to US corporate income tax.
In our more globalised world this simply isn’t true any more. Apple. Microsoft, Google, Facebook etc. They all do more bhusiness outside the US than they do inside. So even if they were all squeaky clean about their taxes, as the Company B example assumes, they would still be paying much less of their profits as US corporate income tax.
One number I like to illustrate this: it was just a couple of years back that foreign revenues from Hollywood movies overtook domestic revenues. It’s just globalisation that’s causing some/a lot of this.
It would be very interesting indeed to know how much is A and how much B. My guess, and it is a guess, is that it’s mostly to largely B causing it. The reason for that guess being that I’m not entirely sure that the IRS would let you get away with A type activity.
Tim Worstall,
“The reason for that guess being that I’m not entirely sure that the IRS would let you get away with A type activity.”
I had a few posts on that some time back (http://www.angrybearblog.com/2010/12/ireland-questions-nobody-seems-to-be.html).
It seems a CBO report indicated that 20% of US returns abroad by US companies from 1993 to 2003 came from Ireland and Bermuda. I think that’s prima facie evidence of large scale transfer pricing games, if not outright fraud.
I also raised a few questions some time ago. One was how much the growth in places like Ireland was real. Another was this:
“Are the beggar-thy-neighbor countries (or states, natch) more susceptible to downturns than other countries? After all, when the doo-doo hits the fan, and profits are down, Siemens and Intel and the rest of ’em have less of an incentive to minimize profits in high tax jurisdictions, and more of an incentive to show losses in those same high tax jurisdictions. Activities of any sort in Ireland becomes an afterthought. Additionally, I imagine that the Irelands of this world are disproportionately dependent on financial transactions.”
I’m not sure the answer to that is “no.”