New Analysis: Stopping Corporations from Shifting Profits to Tax Havens Won't Drive Companies Overseas

With Washington gearing up for additional high-stakes budget battles over the next few months, Congress has continued to ignore a solution worth about $90 billion annually: closing loopholes that allow corporations to avoid taxes by pretending their profits are earned in offshore tax havens. Corporate lobbyists often claim that closing these loopholes would drive companies to flee the U.S. and re-register themselves in low-tax countries. U.S. PIRG's new analysis explains why this is not the case.

"When corporations claim they'll flee the country if forced to pay their full tax bill, it's an empty threat. Today, we're exposing this bluff," said Dan Smith, Tax and Budget Advocate for U.S. PIRG.

While it's easy for companies to threaten to relocate overseas, the reality is that the two possible ways to do so are unpractical. The first is for a company to physically relocate most of its business activity to other countries. This option is unattractive to most companies because it is expensive and it forces them to forgo the benefits of proximity to America's markets, educated workforce, and infrastructure.

The more relevant option is for a company to reorganize its corporate structure to register with tax authorities as headquartered overseas. Companies used to have an easy time declaring a post office box in Bermuda as their corporate headquarters in order to dramatically shrink their tax bill. This reorganization process - called "inversion" - has become prohibitively difficult for most companies as a result of a series of bipartisan reforms over the past decade. Most recently, new rules issued by the Treasury Department in June 2012 require that inverted companies be treated as American companies for tax purposes unless the company proves that at least 25 percent of its business activity takes place in a foreign country.

Because physical relocation and legal inversion are not realistically seen as viable options, companies instead avoid U.S. taxes by using accounting gimmicks to artificially shift profits to offshore subsidiaries and disguising their U.S. profits as "foreign." These loopholes, also used by some wealthy individuals, cost the federal government $150 billion annually in tax revenue, contributing to the nation's budget crisis. Closing these tax loopholes should be a top priority for Congress.

"We can't ignore corporate tax-dodging antics. Contrary to the scare tactics of tax-dodging corporations, by eliminating any incentives to locate subsidiaries overseas, closing loopholes will effectively keep jobs here in America," added Smith. "When American companies use offshore tax havens to shirk their tax bill, ordinary taxpayers and small businesses are forced to pick up the tab through cuts to public programs, higher taxes, or more debt. That's not acceptable."

The report issues a number of policy recommendations that Congress can enact right now to clamp down on offshore tax dodging. Many of these recommendations are included in Senator Carl Levin's Cut Unjustified Tax Loopholes Act. They include:

- Eliminating the incentive for U.S. companies to transfer intellectual property (e.g. patents, trademarks) to shell companies in tax-haven countries for artificially low prices and then pay inflated royalties to use them in the United States.
- Requiring multinational corporations to report their profits on a country-by-country basis so they can't mislead each nation about the amount of their income that was taxed in other countries. Companies already compile this information for their own records and could easily disclose it to authorities.
- Rejecting calls for a "territorial" tax system, which would actually create greater incentives for tax-haven abuse. Under this system, companies could temporarily shift profits to tax-haven countries, pay minimal tax under those countries' tax laws, and then freely bring those profits back to the United States without paying any U.S. tax.

"Tax-dodging corporations are acting like the Big Bad Wolf, huffing and puffing their threats," said Smith. "Congress should resist this fear mongering and build our house of bricks good and strong," he concluded.

You can download the report - "Who's Afraid of Inversion?" - here: www.uspirg.org/reports/usp/whos-afraid-inversion