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Capital Ideas: Who Will Crack the Code?

May 25, 2013 by Leave a Comment

In Singapore, Coca-Cola recently opened a plant with the capacity to produce the underlying ingredient for 18 billion cans of soda a year. In Cork, Ireland, PepsiCo has located its “worldwide concentrate headquarters,” which until 2007 had been in New York. More than half of all PepsiCo soda sold around the world starts, as concentrate, in Ireland.

What Ireland and Singapore share is a low corporate tax rate. And because soda is such a simple product, with so much of its financial value stemming from the concentrate, Coke and Pepsi can reduce their overall tax rates by manufacturing it in low-tax countries.

Partly as a result, the industry paid a combined corporate income tax rate — spanning federal, state, local and foreign taxes — of only 19.2 percent over the past six years, according to an analysis for The New York Times by the financial research group SP Capital IQ. The average rate for the companies in the Standard Poor 500 was 29.1 percent.

The soda industry’s success at legally avoiding taxes shows why so many economists and tax experts believe the United States corporate-tax code is terribly flawed. It includes a notoriously high statutory rate that causes companies to devote resources to avoiding taxes. But it has so many loopholes that the effective corporate tax rate in the United States is slightly lower than the average for rich countries.

The decline in corporate-tax collection in recent decades has contributed to budget deficits. It has also aggravated income inequality: a company’s shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who tend to be much more affluent than the average American, see their wealth increase.

“It’s clearly a broken system,” said Michelle Hanlon, an accounting professor at M.I.T.

Corporate taxes burst into the spotlight last week, with the release of a Senate committee report on Apple’s tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert and former Democratic Congressional aide, said he had been impressed so far by the seriousness of the committee’s work.

The effort has a long way to go, but if it succeeds, both liberal and conservative tax experts hope it will reduce the statutory rate while also eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.

Many voters, meanwhile, want to see companies paying higher taxes. In a Gallup poll last month, 66 percent of respondents said that corporations paid “too little” in taxes, compared with 61 percent who said the same about upper-income people, and 19 percent who said the same about lower-income people.

Low-tax companies are often large, global companies with the ability to use accounting maneuvers to shift earnings around the world. Having intangible assets (like a computer algorithm) or portable ones (like soda concentrate and pharmaceutical ingredients) can also help.

Carnival, the cruise-ship company, paid a minuscule 0.6 percent of its earnings in taxes over the past five years, according to Capital IQ. Starwood Hotels and Resorts, which owns the St. Regis, Sheraton, and W chains, paid 8 percent.

Amazon.com paid 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, Eli Lilly and Raytheon, 19 percent; and FedEx, 23 percent.

Individual executives also matter. The most creative can “play a significant role” in reducing taxes, according to a published study by the accounting professors Scott D. Dyreng, Edward L. Maydew and Ms. Hanlon. They built a database of 908 top executives who switched companies and identified some who were successful at holding down taxes wherever they went.

The professors did not name names. But a few executives — like John Samuels, head of the General Electric tax department — are famously shrewd.

Some companies with low tax rates, including Coca-Cola, have recently started a lobbying group called the LIFT America Coalition. Their main goal is to protect their advantages, if not bring down their taxes further. Other companies, like General Electric, are also major donors to Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee, and to Senator Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee.

ON the other end of the corporate-tax spectrum are smaller companies and those whose businesses tend to be tied down, less easily moved than Coca-Cola syrup or technological know-how. The retailers Best Buy, CVS, the Gap and Whole Foods each paid a combined rate of between 35 percent and 40 percent over the past five years. Wal-Mart paid 31 percent. Oil companies also pay relatively high rates, with Exxon Mobil at 37 percent.

To many economists, a fairer system would not lavish billions of dollars of tax breaks on only some industries for reasons that are almost accidental. “No one likes the current system,” Donald Marron, a former official in the George W. Bush administration who is now at the Tax Policy Center in Washington, said, speaking for his fellow economists if not for corporate executives.

Why, for example, should the government tax a retailer that sells soda at a much higher rate than a company that makes soda? Public-health experts note that the soft-drink industry is an especially odd candidate for taxpayer generosity, given its central role in increasing obesity and health costs.

Mr. Kleinbard, a law professor at the University of Southern California, says the only kind of overhaul that can get through Congress is one that reduces the headline corporate tax rate, from its current 35 percent to between 25 and 28 percent. In exchange, Congress would also most likely force companies to pay more taxes on their overseas profits.

Business lobbyists like the LIFT coalition are pushing for the opposite: lower overseas taxes. They say that Washington puts American companies at a disadvantage by trying (if often failing) to tax their overseas operations on top of the taxes that foreign governments collect. Instead, many companies want a so-called territorial system, in which only the local government imposes a tax.

The weakness in such a system, of course, is that some countries allow companies to operate almost tax-free. And in a globalized economy, many companies have figured out how to put much of their operations in those countries. Thus Ireland has become the world’s cola maker.

One compromise being discussed in Congress is a version of the territorial system — but with a minimum tax for any overseas operations. If companies were not paying at least that minimum to a foreign government, they would have to pay the difference to Washington.

So many companies are paying such low tax rates that even a modest minimum tax may result in a tax increase. Doubtless, though, the companies and their lobbyists will do the work to figure out how any proposed overhaul will affect them. If Congress is really going to reverse the long slide in corporate tax collection, it will have to make enemies along the way.

David Leonhardt is the Washington bureau chief of The New York Times. Kitty Bennett contributed reporting.

Article source: http://www.nytimes.com/2013/05/26/opinion/sunday/who-will-crack-the-code.html?partner=rss&emc=rss

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High & Low Finance: How Apple and Other Corporations Move Profit to Avoid Taxes

May 2, 2013 by Leave a Comment

A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.

It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated.

Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever.

The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend.

The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible.

Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.

Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all.

Anger at such tax avoidance — we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.

Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.

Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult.

“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”

The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States.

The company makes no secret of the fact it has not paid taxes on a large part of its profits. “We are continuing to generate significant cash offshore and repatriating this cash will result in significant tax consequences under current U.S. tax law,” the company’s chief financial officer, Peter Oppenheimer, said last week. A company spokesman says the company paid $6 billion in federal income taxes last year. When I asked how much it had paid in prior years, there was no answer.

There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/05/03/business/how-apple-and-other-corporations-move-profit-to-avoid-taxes.html?partner=rss&emc=rss

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Economix: Are Taxes in the U.S. High or Low?

May 31, 2011 by Leave a Comment

Today's Economist

Bruce Bartlett has served as an economic adviser in the White House, the Treasury Department and Congress.

Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product.

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.

The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.

Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of G.D.P. in revenue this year, about a third of what it was in the 1950s.

The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.

Revenue Statistics of O.E.C.D. Member Countries, 2010

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.

For example, Stephen Moore of The Wall Street Journal recently asserted that Democrats were trying to raise the top income tax rate to 62 percent from 35 percent. But most of the difference between these two rates is the payroll tax and state taxes that are already in existence. The rest consists largely of assuming tax increases that no one has formally proposed and that would be politically impossible to enact at the present time.

Ryan Chittum, in Columbia Journalism Review, responded with a commentary that called the Moore analysis “deeply disingenuous.”

Nevertheless, one routinely hears variations of the Moore argument from conservative commentators. By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.

The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.

Article source: http://feeds.nytimes.com/click.phdo?i=a3928c0dcd4572674a185ab8305e3008

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