Magazine article Newsweek

Corporate Deadbeats: How Companies Get Rich off of Taxes; the Corporate Tax Dodge Behind the Proposed Burger King Merger with Tim Hortons Sticks Little Guys with a Huge Bill

Magazine article Newsweek

Corporate Deadbeats: How Companies Get Rich off of Taxes; the Corporate Tax Dodge Behind the Proposed Burger King Merger with Tim Hortons Sticks Little Guys with a Huge Bill

Article excerpt

Byline: David Cay Johnston

You and your wallet have a big stake in huge tax-dodging deals being crafted by big American companies, like Burger King merging with Tim Hortons, the Canadian coffee and doughnut chain.

Burger King is looking to swap the 35 percent corporate tax rate in the U.S. for Canada's 15 percent rate, even though its working headquarters will remain in Miami. The little people--the millions of us who pay our taxes week to week--will pick up some of the tax burden Burger King and other multinationals shirk through these so-called inversions, in which they move their headquarters, on paper, to escape taxes while continuing to enjoy all the benefits of doing business in America.

It's just one of several ways multinationals don't pay their fair share, and they get away with it because the federal government encourages such behavior. If Congress taxed you the way it taxes multinational corporations, you would have a much fatter wallet. If you were Apple, General Electric, Google or Microsoft, taxes would not be a burden at all. Instead, taxes would help you prosper.

How can a tax burden become a boon? Simple. Congress lets multinationals earn profits today but pay their taxes by-and-by. In effect, Uncle Sam is loaning these companies all that money they do not immediately turn over as taxes. And all of these loans come with the same attractive interest rate: zero.

Imagine how your bank statement would look if, instead of having taxes taken out of your weekly paycheck, Congress let you keep that dough in return for your promise to pay your taxes years or decades from now--and sometimes, never.

That's the extraordinary deal Congress gives many big American companies now sitting on hundreds of billions of dollars of what are, essentially, interest-free loans. Apple and GE owe at least $36 billion in taxes on profits being held tax-free offshore, Microsoft nearly $27 billion and Pfizer $24 billion, according to Citizens for Tax Justice, a nonprofit organization respected for the integrity of its numbers even by groups that dislike its progressive perspective.

The big companies get such "interest-free loans" in myriad ways, but most of them involve delaying the payment of taxes. Delay is a modern philosopher's stone, but instead of turning lead into gold, this tax alchemy makes the black ink of profits look red when examined by Internal Revenue Service auditors.

One technique is for American multinationals to pay their offshore subsidiaries royalties for the use of patents, logos and manufacturing techniques. This converts profits earned in the U.S. into tax-deductible expenses. You could do the same thing by moving a dollar from your left pocket to your right, but with one crucial difference--you won't get to deduct that dollar. But big companies do.

The use of offshore tax havens to convert profits into expenses stems from a 1986 change to Section 531 of the tax code. Starting in 1909, Congress imposed a 15 percent penalty on corporate cash-hoarding. That was supposed to encourage companies to reinvest and pay salaries and dividends, rather than weaken the economy by stuffing profits into the corporate equivalent of the proverbial mattress.

The 1986 amendment said companies could hold unlimited amounts of cash, provided it was in offshore accounts. Today at least 362 of the Fortune 500 companies have more than 7,800 tax haven subsidiaries, many stuffed with cash, according to a tiny nonprofit research organization, the Institute on Taxation and Economic Policy. Its detailed analysis of company disclosure statements found that in the five-year period from 2008 through 2012, no taxes were paid by 25 of 288 big American companies. Those 25 got cash back--refunds--from Uncle Sam on their tax bills. The immensely profitable Verizon earned more than $30 billion in profits over those five years, but instead of paying taxes, it collected income tax refunds of more than a half-billion dollars, which works out to a tax rate of minus 1. …

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