[OPE-L] More about US corporate income tax-dodging

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sun Apr 08 2007 - 08:11:18 EDT

(Of course, even if the income tax liability of corporations themselves is
strongly reduced, payroll tax still has to be funded from corporate gross
revenue - JB).

FINANCE: Corporate Profits Take an Offshore Vacation
Analysis by Lucy Komisar

NEW YORK, Feb 23 (IPS) - Last week, Merck, the pharmaceutical multinational,
announced that it will pay 2.3 billion dollars in back taxes, interest and
penalties in one of the largest settlements for tax evasion the U.S.
Internal Revenue Service (IRS) has ever imposed.

Merck had cooked its tax books by moving ownership of its drug patents to
its own Bermuda shell company -- an entity that has no real employees and
does no real work -- and then deducting from U.S. taxes the huge royalties
it paid itself. While setting up a shell company is not inherently illegal,
it is if tax authorities determine that its only purpose is to evade taxes.
Bermuda is a tax haven that has no levy on royalties.

Merck also faces legal action in Canada for 1.8 billion dollars in back
taxes and interest.

What Merck did isn't unusual but in fact is becoming common for
multinationals in the era of globalisation. It's one of the ploys in a
corporate bag of tricks called profit laundering. A company figures out how
to move its book profits offshore so it can evade millions and even billions
in taxes to the country where it really operates. In an era where much of a
company's assets may be intangible intellectual property -- patents, logos,
manufacturing processes -- this strategy can make reported profits and taxes

People understand that nations' economies are hurt when jobs move overseas.
But what happens when intellectual capital, on which the increasingly
knowledge-based economy depends, is also moved out?

IRS Commissioner Mark Everson said last June, "Tax issues associated with
the transfer of intangibles outside the United States have been a high risk
compliance concern for us and have seen a significant increase in recent
years. Taxpayers, especially in the high technology and pharmaceutical
industries, are shifting profits offshore."

The cost of manufacturing drugs or computer technology is minimal compared
to the cost of research and development. So, beginning in the early 1990s,
several dozen pharmaceutical and computer companies established subsidiaries
in Bermuda and other tax havens to game the system.

They set up shell companies and transferred patents or logos or other
intangible property there. Then, when profits rolled in, the company paid
big license fees or royalties to its own shell -- at the price it decided --
and deducted that from home taxes. Revenues were sucked out of the U.S. or
other countries even though the patents were created and were still used for
work within home borders.

Although almost 60 percent of U.S. pharmaceutical companies' sales take
place in the U.S., where the government's refusal to control drug prices
makes profits higher than elsewhere, the companies report to the IRS that
their profits come largely from international sales. The world's biggest
drug firm, Pfizer, with most of its sales in the U.S., said that in 2004 it
had 4.4 billion dollars in pretax profits in the United States and 9.6
billion dollars internationally.

Last year, Martin Sullivan, a former U.S. Treasury Department economist,
noted in the journal Tax Notes that pharmaceuticals had accelerated their
movement of profits to low-tax jurisdictions. He wrote that "In 1999,
foreign profits accounted for 39.2 percent of worldwide profits of large
U.S. drug companies. By 2005 that percentage had jumped to 69.9 percent."

He figured that the companies' foreign assets were 41 percent and their
sales 43 percent of the world total, so that foreign profits should be 43
percent. But the companies reported them as 66 percent, cheating the U.S. of
23 percent of profits. That amounted to nearly three billion dollars a year
from nine drug companies, including Merck, which cut 1.5 billion dollars
from its taxes over a decade.

Prime technology companies playing the offshore game are Microsoft and
Google. Microsoft gets about 75 percent of its 40 billion dollars in revenue
from licensing fees. A few years ago, it set up an Irish subsidiary called
Round Island One Ltd. to own its 16 billion dollars worth of copyrights on
software developed in the U.S.

In 2004, it shifted nine billion dollars in profits to Ireland and thereby
avoided paying some 500 million dollars in U.S. taxes. Using the Irish
company, Microsoft also avoids taxes elsewhere in Europe, the Middle East
and Africa. The maneuver helped Microsoft drop its worldwide tax rate from
33 percent to 26 percent.

Google similarly set up an Irish subsidiary, Google Ireland Holdings Ltd,
which in 2004, its first year, helped the company avoid paying about 131
million dollars in U.S. taxes. Google noted in its annual report that year
that it expected its effective tax rate to drop even more significantly. It
explained, "This is primarily because proportionately more of earnings in
2005 compared to 2004 are expected to be recognised by our Irish subsidiary,
and such earnings are taxed at a lower statutory tax rate (12.5 percent)
than in the U.S. (35 percent)."

Both companies may have some minimal operations in Ireland, but the issue is
how much value they allot to that jurisdiction for tax purposes.

IBM didn't use an offshore shell but shifted royalties to another operating
location. According to The (London) Observer, whistleblower Gerard
Churchhouse, a former IBM marketing manager, revealed that in the early
1990s, IBM U.S. was losing money, so IBM UK transferred artificially high
royalties to the U.S. company. He said it thereby evaded as much as 1.4
billion dollars in British taxes. Churchhouse said he was fired for raising
the issue with his bosses. IBM refused to confirm or deny his story, but in
2001 it paid the British Inland Revenue about 1.4 billion dollars to settle
claims of tax evasion.

The situation is getting worse. According to Sullivan, U.S. Commerce
Department data show that U.S. companies increased the profits assigned to
18 tax havens by 68 percent, from 88 billion dollars in 1999 to 149 billion
dollars in 2002. He said the increase in offshore profits was not related to
increased economic activity and that, "subsidiaries of U.S. corporations now
generate profits mainly in tax havens rather than in locations in which they
conduct most of their business."

The result of this and other sorts of tax trickery is that nearly two-thirds
of the companies operating in the United States reported owing no taxes from
1996 through 2000, according to a 2004 report by the investigative arm of
Congress, the Government Accountability Office.

Jack Blum, an expert on tax evasion and former counsel for the Senate
Foreign Relations Committee, said, "Since the 1960s the percentage of tax
revenue at the federal level that comes from corporations has declined from
around 30 percent to around 8 percent. A substantial portion of this decline
is the consequence of the ability of companies with global operations to
shift income to jurisdictions where tax collectors cannot find it."

The U.S. Treasury and IRS say they are reviewing accounting rules on
transactions involving intellectual property, but the U.S. government has
failed to adopt tough measures to end royalty-shifting.

Most of the 2.3 billion dollars Merck has to pay is back taxes and interest;
only 100 million dollars is penalty. No Merck official has been charged with
a crime. That signals that companies have little to lose by continuing their
tax scams.

The Financial Times reported in 2004 that Merck "would have failed to meet
consensus earnings forecasts without the improved [tax] rates." Merck may
think it took a profitable risk.

*Lucy Komisar is a New York-based investigative journalist writing a book on
the international impact of the offshore bank and corporate secrecy system.

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