Relevant and even prescient commentary on news, politics and the economy.

The Tax Free Tour; a look at the offshore tax haven system

We’ve all talked and read about the idea and practice of offshore accounting to reduce taxation. Here is an article produced by a show called Backlight.  Backlight appears to be a news journal show in the idea of Frontline by a Dutch public broadcasting organization known as VPRO.

This episode is titled: The Tax FreeTour.  To date it has only just over 22 thousand hits.  Considering the effect offshoring plays in everyone’s life, I think more people need to see it.   It is about 1 hour long taking a look at the places of tax havens and the structures to get there. I found it very interesting and highly encourage you to watch the entire episode.  I have not seen another presentation as complete as this on the issue of off shore tax havens and the system.
They interview international experts including one who worked for KPMG: Richard Murphy, accountant. He notes you need 3 things, banks, accountants and lawyers to have a tax haven and thinks accounts have gotten off easy.  A past chief economist for the McKenzie Consultancy James S. Henry who quantified the amount of capital parked in the off shore industry, $21 to $32 trillion year end 2010.  Business Intelligence Investigator William Brittian Catlin who’s job is to sort out the offshore links for investors. Ava Joly, former French Judge, currently EU Parliamentarian investigating $1 trillion in lost EU tax revenue.
I did not realize, but these big corporations have special deals with nations such as the Netherlands regarding their taxation that they are not allowed to talk about. How convenient.  The Netherlands has the most tax treaties in the world. Walmart has 6 entities there all with completely different unrelated names, yet does no physical business related to their core activity of retail sales in the Netherlands. Trust companies are the structures involved as they hold the mail boxes. $11 Trillion is routed through the Netherlands every year. Up to 20 times the Dutch GDP.  0.14% of the world’s population controls about 95% of the offshore money.

Do watch the entire show to get the full appreciation. There is so much more in it than what I highlight here. If your time is short then: To get a quick overview of the game, watch starting at 9:35 through 14:48 of the show and 32:24 to 33:00. To know about the people watch 20:00 to 22:54. To understand tax free zone use watch 25:40 to 26:50 and 27:19 to 28:00.

Here are four cuts from the show. The first two are to let people know what our Senate Banking committee hearings would look and sound like if there were more than just Elizabeth Warren.

These two get at the effects on our ability to govern our self.

These two get at the effects on our ability to govern our self.

My thought after watching The Tax Free Tour? What we are experiencing here in the US when companies go shopping and pit one part of the nation, state or town against another is the same model including the government responses that is the off shore industry. Globalization is the scaling up of home developed systems that have proven successful in reducing taxation via government rule changes ultimately maximizing profit with no regard toward anything beyond the need of the one’s money. The “one” being an entity or an individual. Globalization means more than just out sourcing manufacturing. Globalization is the expansion to the globe of money management systems developed over time designed to segregate the rich in the major aspect of their lives from the rest of the people of the world; the wealthy’s connection with the rest of humanity via national identity.  The systems are designed to assure the wealthy are guiltless in the presence of harm. Kind of a plausible deniability?

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Much of MNEs’ "offshore" (and hence untaxed) cash hoards held onshore

by Linda Beale

Much of MNEs’ “offshore” (and hence untaxed) cash hoards held onshore

The Wall Street Journal, in its editorial pages a great friend to big business and low taxes for same, had a decent front-page article  on the corporate hoard of cash designated as “permanently invested offshore”.  In fact, much of that cash is sitting in U.S.-dollar-denominated assets in the good ole USA.  Nonetheless companies are permitted under the tax rules to claim that those profits are earned overseas and kept there.  See  Kate Limbaugh, Firms keep stockpiles of cash in U.S., Wall St. J. (Jan 22, 2013).

Some companies, including Internet giant Google Inc., GOOG +5.74%software maker Microsoft Corp. MSFT +1.36%and data-storage specialist EMC Corp.,EMC +1.03%keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies’ cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn’t flow back to the U.S. parent company, the U.S. doesn’t tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.


Of course, the designation can be changed in an instant if the company is prepared to accept the tax bite.  United Technologies Corp., for instance, used $4 billion of such “permanently” reinvested funds held by foreign subsidiaries to help pay for last year’s acquisition of Goodrich Corp. Id.
That last quoted paragraph is a giveaway.  Thse foreign subsidiaires are controlled by the US MNE and have no real say in the ultimate use of the cash.  When the MNE wants it for something, it can get it in an instant.  As my colleague Calvin Johnson at University of Texas has noted, this “reinvorces the idea that a foreign sub is just a ledger entry, with no significance”  (email statement quoted with permission).

Meantime, these US-based MNEs are busy lobbying Congress to give them even more tax breaks.   They want a so-called territorial system or the ability to bring home their hoarded cash at low (or effectively negative) tax rates.   MNEs are married to the idea of pushing for paying nothing for the many ways the US economy has boosted their profits through tax expenditures and nothing for the many other ways in which the US system has increased their profits–both at home and abroad.

Remember that their owners already get an extraordinarily preferential rate of tax on dividends paid out to them (treated as net capital gains, recently made permanent in one of the sillier giveaways of the “deal” between Dems and Republicans on whether or not to let the Bush tax cuts expire as the Republicans originally wrote the bill) and on capital gains when they sell the shares.  The very low effective corporate tax rate–not infrequently a negative rate because of the way the rules and time value of money works–means that wealthy shareholders are still getting very much a free ride to accumulated wealth through the US tax system.  It’s time that stopped.

The Journal article’s suggestion–that the Congress needs to “set[] the [corporate income tax] rate low enough that companies opt to pay the tax rather than continue to pile up an estimated $300 billion a year beyond Uncle Sam’s reach.”  Id.  That suggestion must be tongue in cheek–no matter how much the rate is lowered on the wealthy corporations making incredibly high profits, they still insist that they don’t want to pay any tax.  They will not be happy unless the rate is zero or negative.  That is the reason that Oracle “derives about half of its revenue from the US but keeps more than three-quarters of its cash and short-term investments–or $26 billion-in the hands of its foreign subsidiaries” and has established a bunch of new foreign subsidiaries in tax havens for holding these profits.  Id.

From my perspective, Congress should not lower the rate.  It should instead stop many of the loopholes that permit companies to claim to “sell” essential IT property to offshore affiliates in order to then claim profits offshore.  And it ought to deal with similar gambits to lower US taxes, such as disallowing completely any interest deductions for debt to the extent that the company holds “offshore” funds of its controlled foreign subsidiaires in US-dollar-denominated assets in the United States –i.e., no interest deduction for debt of the US MNE consolidated group that is matched by a US-dollar denominated, US asset held by a controlled foreign subsidiary.

Professor Johnson recommends a “global consolidated return” for multinationals, with international negotiations to determine each country’s taxing jurisdiction on that whole.
These and similar ideas should be considered by a Congress truly intent on reasonable reform, economic justice, and distributional justice.


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Dell’s Offshored Cash Hoard and Fair Taxes

by Linda Beale

Dell’s Offshored Cash Hoard and Fair Taxes

As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout. LBOs, of course, use the company’s own assets as collateral for debt to purchase the company–one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies.

Michael Dell has a particularly interesting “problem”. Like most high-technology companies, Dell has avoided a lot of US tax by offshoring and claiming its profits in offshore tax havens rather than in the US. So it has more than $14 billion of highly liquid assets in offshore affiliates and not here. See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, (Jan. 18, 2013).

We shouldn’t allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like “lowering tax rates” and “simplifying the tax code”, both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any “simplification” as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.

Congress of course hasn’t had the gumption to take on Big IT for years.

And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been “bad” tax citizens–the 2004 misnamed “American Jobs Creation Act” that allowed the bad companies that had offshored their profits to avoid tax the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates–the so-called “repatriation holiday” provision. As usual, the right-wing claimed that these corporate tax breaks would create jobs. They didn’t (as shown by Bush’s dismal job creation record, even before the onset of the great Recession). Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets. So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments.

So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful “repatriation holiday.” The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs. But that’s bunk. The evidence is in from the last repatriation holidy–it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.

Obama and the Democrats in Congress should resist. Ordinary Americans should not bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates. And ordinary Americans surely shouldn’t be called upon yet again to subsidize profit-making corporation’s low-tax regimes through the cuts ordinary Americans will suffer to needed services.

crossposted with ataxingmatter

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