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Corporations go overseas to avoid U.S. taxes

April 29, 2017 at 5:19 PM EDT
On Wednesday, the Trump administration announced a portion of its tax plan, including a cut in the corporate tax rate from 35 percent to a 15 percent. The plan aims to bring revenue back into the country from U.S. companies holding it overseas in order to avoid paying taxes. Newshour Weekend Special Correspondent Patricia Sabga reports.

By Zachary Green and Ivette Feliciano

PRESIDENT DONALD TRUMP: My economic team is developing historic tax reform…

PATRICIA SABGA: From the White House to Capitol Hill, Republicans are determined to lower the 35 percent corporate tax rate — the highest of any developed economy.

Matt Gardner is a Senior Fellow with the Institute on Taxation and Economic Policy, a liberal, Washington-based think tank.

MATT GARDNER: The biggest, most profitable corporations are now finding it almost routine to escape paying the 35 percent tax. In some cases, they’re easily finding ways to avoid paying any income tax at all.

PATRICIA SABGA: That’s because even though the U.S. taxes income earned anywhere in the world, the tax code allows American companies to defer paying taxes on income earned by their foreign subsidiaries indefinitely, as long as the profits are not returned to the parent company in the U.S.

Here’s a simple example: An American company that earns 1 billion dollars in profits on sales in the United States would face a U.S. tax bill of 350 million dollars before deductions, credits and write-offs.

But if the company records those profits to an overseas subsidiary in say, Ireland, where the corporate tax rate is only 12.5% — it would owe the Irish government 125 million dollars before any adjustments, and nothing to the U.S Treasury as long as the money is not brought home.

PATRICIA SABGA: When a major corporation basically shifts a lot of its profits overseas how then do ordinary Americans end up footing the bill?

MATT GARDNER: The most direct way is through large scale spending cuts, less direct spending on all the things that make the United States a good place to live: healthcare, transportation, education, all the public services that we find most vital.

PATRICIA SABGA: One legal maneuver companies use to minimize their U.S. tax bill is to sell or license intangible assets, like software or drug patents, to a lower tax foreign subsidiary. When a product made with that intellectual property is sold, the foreign subsidiary records the income. And because of that, U.S. taxes can be deferred.

MATT GARDNER: We counted 10,000 tax haven subsidiaries among Fortune 500 corporations. Deferral creates a clear incentive for companies to shift their activities offshore, but more damagingly, it creates a clear incentive for them to pretend they’re shifting their activities offshore.

PATRICIA SABGA: Pretending to shift activities offshore is also the main critique of another legal tactic known as an inversion. That’s when an American company changes its corporate citizenship by acquiring a firm based in a lower tax country or jurisdiction. Since the 1980s, more than 50 American companies have pulled this off…with 25 such deals in the past five years alone.

Samsonite, the century-old luggage maker, moved its tax address from Massachusetts to Luxembourg, where the corporate tax rate is 19 percent. Restaurant Brands International, parent of fast-food chain Burger King, relocated its headquarters from Florida to Canada, where the corporate tax rate is 15 percent. But the number one destination for tax inversions is Ireland where at 12-and-half-percent, the corporate tax rate is nearly two-thirds lower than the U.S.

The biggest company to change its tax address from the United States to Ireland is medical device maker Medtronic, which still maintains a hefty presence in its native Minnesota.

Medtronic’s operational headquarters and its top executives are in the United States. But its official headquarters is here, in Dublin, Ireland, in that building behind me. That change of address was engineered two years ago, when Medtronic bought Covidian, an Irish-based medical device maker.

This modest building in Dublin may be Medtronic’s global headquarters, but the company employs around 4-thousand people in Ireland, compared to more than 43-thousand in the United States.

MATT GARDNER: They went out of their way to guarantee that they weren’t going to move employees out of Minnesota, that everything from a U.S. perspective would remain exactly as it was before.

PATRICIA SABGA: Medtronic declined NewsHour Weekend’s request to be interviewed.
In a written statement, the company said: “The Covidien acquisition was driven by a strategic decision to combine the companies and become the world’s premier medical technology and services company. The deal allows us to accelerate our three core strategies — therapy innovation, globalization, and economic value…”

MINISTER CHARLIE FLANNIGAN: We don’t offer any sweetheart tax deals to any individual companies.

PATRICIA SABGA: Ireland’s Minister of Foreign Affairs and Trade, Charlie Flannigan, makes no apologies that 12 of the 20 biggest companies in Ireland have roots in the United States. He says multinational companies have brought hundreds of thousands of jobs to his country and pay their fair share of Irish taxes.

MINISTER CHARLIE FLANNIGAN: We will continue with a very attractive rate of corporation tax. But we also offer something that perhaps might not be as evident in the United States, and that is a very skilled and adaptable workforce.

PATRICIA SABGA: Veronique de Rugy is a Senior Fellow with the Mercatus Center at George Mason University — a conservative think tank partially funded by the Koch Brothers. She says corporate taxes ultimately fall on workers.

VERONIQUE DE DERUGY: Economics 101 — we know now that the person writing the check is not necessarily the one shouldering the burden of the tax. 70 percent of the burden of the corporate income tax falls on the workers in the form of lower wages.

PATRICIA SABGA: When the Trump Administration unveiled, its one-page outline for rewriting the tax code this week, it featured a cut in the corporate tax rate from 35 to 15 percent.

The White House also wants a one-time “tax holiday” that would allow American companies to repatriate that 2.6 trillion dollars in overseas cash at a reduced, though as yet reduced rate.

SECRETARY STEVEN MNUNCHIN: Which will bring back trillions of dollars that are offshore to be invested here in the United States to purchase capital and to create jobs.

PATRICIA SABGA: In addition, the White House wants to stop taxing profits earned overseas. That’s also a staple of the tax reform blueprint put forward by House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady.

The Ryan-Brady plan would cut the corporate tax rate to 20 percent — not 15 — and would introduce a new tax on imports to offset the revenue loss.

Republican Illinois Congressman Peter Roskam chairs the House Ways and Means Subcommittee on Tax Policy.

REP. PETER ROSKAM: Tax cuts have to pay for themselves. Our argument is this will create growth, and that pays for itself.

PATRICIA SABGA: The proposed new tax is called a Border Adjustment Tax — a 20 percent levy on imports, which Roskam says, will encourage companies to produce more in the U.S. and keep profits here.

REP. PETER ROSKAM: Right now, if you’re a manufacturer in the Chicago area, if you’re in my constituency and you’re making a product, the cost of your product includes the income tax that the company pays for that. Then when it’s exported and it goes into another jurisdiction, it goes to, let’s say Germany, for example. The Germans move that in, and they tax it as well. Our weakness here is that the inverse is not true. So if you’re a German manufacturer, and you’re making something in Stuttgart, Germany, when it comes to the United States, we don’t tax it. So literally our products are double taxed, theirs are not taxed.

PATRICIA SABGA: The CEOs of 16 American exporting giants which underpin millions of American jobs — including Boeing and Caterpillar — agree.

In a letter to Congress, they said the border adjustment tax is a “critical element” of tax reform “that ensures goods and services produced abroad face the same tax burden as those produced in the United States.”

But more than 100 American companies and trade groups that rely on cheap imports — including retailer Wal-Mart, which alone employs one-and-a-half million Americans — oppose a border adjustment tax. They say it would increase their costs, leaving them little choice but to raise prices for consumers.

But Congressman Roskam says that’s unlikely, because a border adjustment tax will increase of the value of the dollar and effectively lower the cost of imports.

REP. PETER ROSKAM: As these border adjustment moves in, the dollar gets stronger. The price of imports gets lower, and we can make transition rules that are reasonable for companies.

PATRICIA SABGA: Many economists, including Veronique de Rugy, question whether the dollar would rise sufficiently.

VERONIQUE DE DERUGY: The idea that the dollar will adjust not only perfectly and completely to the border adjustment tax but also quickly is an article of faith.

PATRICIA SABGA: In February, President Trump said a border adjustment tax: “could lead to a lot more jobs in the United States.”

But this week, Treasury Secretary Steven Mnuchin said the White House does not support it “in its current form.”

The White House says its corporate tax cuts will pay for themselves through higher economic growth. But with many economists warning the plan could add trillions to the federal budget deficit, there are serious differences to bridge to parlay frustration with the corporate tax code into fundamental change.

REP. PETER ROSKAM: We can’t stay here. This current tax code is a failure. There is a massive amount of money, and whether it’s $1 trillion, $2 trillion, $3 trillion, or $4 trillion, it’s too much money that’s stuck overseas. And we need to create an environment where that money can come back.