As European officials get tough on corporate tax-avoidance schemes, a great big curtain has been pulled back on how U.S. powerhouses including General Electric and McDonald’s have exploited tax laws and loopholes to hoard a massive amount of cash abroad. For years, American companies have deployed torturously complicated schemes to skirt the taxman. Some are so ingenious they have earned creative titles like the Double Irish with a Dutch Sandwich and the Panama Scoot.
While there’s nothing new about companies doing everything they can to lower tax bills, the sheer amount of money U.S. firms have hoarded overseas over the past 15 years is unprecedented. Globalization and technological advancements have made it easier than ever for money to zip from one place to the other, and officials in countries overseas try to lure American businesses seeking tax shelters. The result: Today more than $2 trillion worth of U.S. corporate profits reside in cushy tax shelters across the globe. Instead of repatriating their profits to reinvest in the States, U.S. companies have gone as far as to borrow money to fund their American operations to avoid paying U.S. taxes on global earnings.
Gary Kalman, executive director of the Financial Accountability and Corporate Transparency Coalition, has devoted most of his life to consumer safety, economic fairness and corporate accounting issues. He’s fought to remove lead from toys and helped get dangerous collapsible baby cribs off the market. Following the financial crisis that began in 2007, Kalman steered his advocacy crusade toward Wall Street, where he worked to improve transparency in mortgage contracts.
In April Kalman took the helm at the FACT Coalition, which this week released a report and urged the Securities and Exchange Commission to mandate greater transparency from publicly listed American companies. Specifically, FACT is calling for multinationals to disclose in their annual reports their financial, tax and employment arrangements on a country-by-country basis.
Under current rules, companies can lump the financials for all their global operations into one reporting basket, which can mask their tax burden for a specific country. It wasn’t until Australian tax authorities launched an investigation into Chevron that the world learned a subsidiary of the California-based behemoth paid in 2014 $248 on $1.7 billion in profit earned Down Under. Under FACT’s proposal, Chevron would have been required to disclose that in its annual report.
Country-specific disclosures, Kalman argues, are vital to shareholder interests. Shareholders should have a right to know how much risk a company is taking in pushing the boundaries of legal tax accounting. Kalman spoke with Salon recently about his call for regulatory action. This interview has been edited for clarity.
What do you want the public to know about your recent paper on investors’ right to know a company’s financial situation on a country-by-country basis?
The issue of international corporate taxation is coming to the fore in the news on any number of stories, most recently around some of the revelations around Apple’s aggressive tax planning and the European Union’s decision to force [the company] to pay Ireland about $14 billion in back taxes. If you look at what’s happening out there in the world there is a lot of money that is stashed offshore by multinational corporations.
The estimates are somewhere around the $2.3 [trillion] to $2.4 trillion level. The Securities and Exchange Commission has also recognized that the implications of all these profits being held offshore is that tax liabilities are not being properly reported in statements to investors.
Earlier this year the Securities and Exchange Commission issued what [officials] call a concept release, which is a fancy term for “we want to gain some information and insights to see if it would be appropriate for us to increase the disclosure requirements so that investors would know what the [international corporate tax] liabilities are.”
Why is it important also to know the number of employees a company has in each of these countries?
There are legitimate reasons for a U.S. company to hold profits in other countries besides the United States. There are also practices that raise some questions and could raise liabilities. Take the example of Apple. [The company] put billions and billions of dollars through a subsidiary in Ireland. This subsidiary had no formal building and no employees. It was truly a shell company. That should be a warning sign to investors.
The entire issue around the European Commission’s decision around Apple is that Apple didn’t have a reason for having money in Ireland other than to avoid paying taxes.
The same thing was true when French tax authorities raided Google’s offices in Paris. Paris said [the company] had a bunch of money in Ireland as well. And the authorities are saying there’s no real reason for Google to do that, because it had no employees in Ireland, no factories, no sales, nothing.
Let me give you an example on the other side. Let’s say you’re Hilton [Worldwide Holdings] and you actually do have a hotel based in Dublin and people pay to stay at the hotel and Hilton has employees there. That is a very different situation than a company in Ireland that’s on paper only.
So if you’re General Motors with factories and thousands of employees in Europe, it’s a different situation.
Absolutely. I as an investor am not going to be worried if a U.S. company has 3,000 employees in a European factory pumping out car parts, and I see that the company is claiming that some of the profits are based in that country. There’s no concern that tax authorities are going to call a foreign subsidiary with that kind of presence in a country a shell company.
Why are health care and technology companies more likely to store profits overseas?
It turns out that it is easier for certain types of companies to move money offshore, like companies that rely a lot on intellectual property as opposed to physical property. If you are Target based in the United States and sell clothing or whatever in your stores, it’s harder to legally move that money offshore. It’s not impossible to do legally, but it’s harder.
But let’s say you are a pharmaceutical company and you come up with a patent for a new drug. You can sell the rights to that patent to a shell company. You don’t have to move anything. You just sell the rights to a patent to a shell company in the Cayman Islands. And then you manufacture here, have sales here, your management is here. Everything happens here, but at the end of the year you pay royalties to that shell company in the Cayman Islands and wipe out most of your profits that way. It’s just easier to sell intellectual property that way and not have to manipulate any other portion of your business.
That’s interesting because we saw that with Starbuck’s, which wiped out its British tax burden for a few years by paying itself royalties.
They’re selling branding rights.
But isn’t this just Starbuck’s charging itself fees to avoid paying taxes?
Of course. I mean, they do set up subsidiaries, but they’re all owned by the same company. It’s a web of affiliates.
You’ve pointed out that this offshore money just sits there, earning almost nothing because it's in cash or buying low-yield government bonds. But corporate accountants will say, “Hey, it’s better to earn almost nothing on this money than to pay U.S. taxes on it.”
Investors should have the right to evaluate this and clearly understand how much money we’re talking about. Apple has over $200 billion offshore, and it’s fair to ask, “What is the opportunity cost?” Right now investors have no idea, there’s no transparency, and they don’t know the math and what goes into a company making a decision like this.
The second thing is that in 2004 we gave multinationals a tax holiday where we taxed [the money corporations brought to the U.S. from overseas] at about 5 percent. So now companies are putting their money offshore and are waiting for the next tax holiday from the U.S. government.
Companies may have done the math and decided it’s worth waiting for another tax holiday and lose the earnings potential the compan[ies] could have made over a few years by investing this money instead of holding it offshore. But given the amount of press, the aggressiveness of European tax authorities and the debate going on here in the United States, it’s unclear if companies are going to get another tax holiday.
So your proposal is that companies like Apple with so much money stashed abroad should just repatriate the money to the U.S., pay the tax and put that money to work for investors.
All we’re saying is tell investors exactly what’s happening and let them decide whether they agree or disagree with adequate disclosure. These companies don’t really want to do that.
Why not report income and taxes paid on a country-by-country basis? There are a number of reasons. These companies would prefer people not actually know their worldwide tax rates on a country-by-country basis because they pay so little in some places that it would be a political embarrassment.
The other thing is if they were required to say specifically where their offshore money is kept, the public would learn that most of it is in the United States anyway. There was a hearing done by the [U.S. Senate’s] Permanent Subcommittee on Investigations in 2011 and [officials] found that a majority of the money that is quote unquote held offshore is actually being held in the United States.
No one really wants to put their money at risk in unstable financial institutions. Irish banks are not necessarily the most stable right now. The European Union has gone through a lot of economic upheaval. They would rather just have the money there on paper and tell an Irish bank to use the cash to buy U.S. Treasuries or real estate in the United States, which are much safer investments.
If much of this offshore money isn’t even offshore but sitting in U.S. banks or in real estate investments, then why isn’t it taxed?
The difference is that they can’t use the money to pay dividends or build factories. They can’t use it for their own purposes. Once they do that they have to quote repatriate the money. There are legal restrictions.
But I think there are two reason why it’s important for people to know this. One is that it is an embarrassment to these companies because there is this argument that we need to bring this money back to the United States. But really all they’re doing is bringing it back from Manhattan.
And the second thing is if we were to bring the money back under different circumstances, there would be an economic boom. It would be a $2.4 trillion infusion into the U.S. economy. Forget about the tax liability, you’re also talking about companies being able to reinvest this money in the United States that’s currently quote sitting offshore.
As an investor you should have a right to know if money is sitting in an Irish bank or in fact invested more safely in the United States.
I pored over some of Apple’s annual reports and found no way to calculate a percentage of its taxes paid in Europe. There’s not a lot of detailed information about its tax burdens overseas. This is true for every earnings report I’ve ever read.
Right. At one point I recall Apple saying it was paying the full 12.5 percent Irish taxes and accused the European Commission of being wrong in its accusation Apple paid only 0.005 percent [on its European profits in 2014]. But the Irish government only taxes at the 12.5 percent [rate] on Apple’s sales in Ireland. [The company does] sell iPhones in Ireland. There is some amount of money actually raised in Ireland.
And Apple CEO Tim Cook fired back at European authorities recently by saying Apple paid $400 million in taxes to Ireland in 2014, the year the European Commission says Apple paid almost nothing.
This is just a reminder of the scale at which Apple operates. [This company has] $200 billion in offshore money and they make $50 billion a year in profits, and good for them. We support success. But it is not a complete picture to talk about what kind of taxpayer you are in Ireland. It’s about looking at all of the profits booked at the Irish subsidiary.
Then you look at the tax they’re paying in Ireland. If you include the shell companies that have the low rate, or no rate, then that’s how the European Commission is coming to that number.
Companies have complained for years that the U.S. has one of the highest corporate tax rates in the world. What do you say about that?
We hear a lot about how the U.S. rate is one of the highest in the world, but when you look at the effective tax rate, what companies actually pay, it’s much less. So the question is how do we rationalize a tax system where we’re ensuring that companies are paying what we want them to pay. We should not have a system where we come up with some rates, but nobody pays that and it’s impossible to understand the loopholes and laws that allow companies and people to avoid paying the actual rate.
How would you answer chief financial officers who might argue that it’s their duty to deploy all legal ways to minimize their company’s tax burden?
From our perspective I’d answer it in two ways: One is that companies are certainly going to do everything in their power to maximize their profits and run a good business. But when you’re setting up a shell company, you open yourself up to the accusation and potential liabilities, which can impact a company’s stock and harm shareholders when they get hit with regulatory actions.
You are pushing the limits of the spirit and letter of the law. Companies need to make sure they’re well within the guardrails we put up and I would argue that Apple and others are pushing the limits.
We have now seen pretty aggressive measures that companies are willing to go to manipulate their tax liabilities [so] that this information is critical for investors to know. Would it be nice if Apple or Google or GE were to more fully disclose these liabilities? Sure, but really the Securities and Exchange Commission needs to step up and require it from all companies. The SEC needs to set an appropriate threshold for investors to have the information they need to know.