The biggest American corporations had an average effective tax rate of 11.3% in 2018 — the taxes companies actually paid in 2019 as a percentage of 2018 profits — according to a study of 379 Fortune 500 companies, from the Institute on Taxation & Economic Policy (ITEP) that was published in Washington DC before Christmas. If all the Fortune 500 firms were included the rate would likely be below 11%.
A second report published in early December by Fair Tax Mark, an advocacy group based in Manchester, England, argues that Facebook, Apple, Amazon, Netflix, Google and Microsoft — the Silicon Six — over the last decade had significant differences between the cash taxes paid and both the expected headline rate of tax and, more significantly, the reported current tax provisions.
The Fair Tax Mark concludes that the corporation tax paid by the Silicon Six is much lower than is commonly understood. Fair Tax Mark says that over the period 2010 to 2019, the gap between the expected headline rates of tax and the cash taxes actually paid was $155.3bn, while the gap between the current tax provisions and the cash taxes actually paid was $100.2bn.
Foreign tax charges amounted to only 8.4% of the profit the companies declared as arising overseas during the decade.
The report says that profits continue to be “shifted to tax havens, especially Bermuda, Ireland, Luxembourg and the Netherlands.”
In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into US law, representing the most significant tax code overhaul in over three decades. It included a cut in the headline federal corporate tax rate from 35% to 21%. Trump forecast “6% growth” and Republicans claimed that it would not add a cent to the budget deficit.
However, the low corporate tax rates are among the factors that have raised deficit spending from $666bn in the federal government's 2017 fiscal year to $779bn in 2018 and $984bn in 2019. The Congressional Budget Office has forecast that the tax legislation overall will end up adding nearly $2tn in red ink over a decade.
According to Fortune magazine, "Measured by the percentage of profit companies pay in taxes, corporate tax rates have drastically and steadily fallen for 65 years. That corporations pay far less in taxes than book rates is nothing new."
Fortune 500 companies and tax
The ITEP report identified 379 companies that were profitable and where sufficient information was provided to enable a calculation of their effective tax rates. More than half of those 379 companies paid less than half of the 21% rate. Fifty-three paid an average effective rate of 2.2% while 91 companies paid no federal income taxes at all, or got money back.
Among the 379 Fortune 500 companies:
— 379 paid an average federal corporate tax rate of 11.3%;
— 91 of the sample didn’t pay corporate taxes or got net refunds;
— 53 paid average effective rate of 2.2%.
The 11.3% average effective tax rate paid by profitable corporations is the lowest average effective rate identified by ITEP since it began publishing these studies in 1984.
The report says that in 2018, 60 of America’s biggest corporations, including Amazon, zeroed out their federal corporate taxes on $79bn in US pretax income. "Instead of paying $16.4bn in taxes at the 21% statutory corporate tax rate, these companies enjoyed a net corporate tax rebate of $4.3bn."
The Silicon Six
The combined market capitalization of the Silicon Six is about $4.5tn and they are worth more than the 1,000 companies listed on the London Stock Exchange. In comparison Germany's GDP (gross domestic product was valued at $4.7tn in 2018.
Fair Tax Mark says, "The bulk of the shortfall almost certainly arose outside the United States, given this ‘foreign’ activity accounts for more than half of booked revenue and two-thirds of booked profits. 10-K filings (financial statements lodged with the Securities and Exchange Commission do not breakdown cash taxes paid, but it is noteworthy that the foreign current tax charge was just 8.4% of identified foreign profits over this period (which is a third of the consolidated current tax charge, at 25.3%)."
Amazon had the lowest taxes of the six firms, paying $3.4bn in corporate taxes since 2010. Fair Tax Mark says the cash tax paid by the firm amounted to 12.7% of its profit over the decade.
Facebook which over the decade booked about half its global revenues in Ireland had a cash tax rate of 10.2% of the profit the company made over the period 2010-2019 and its rate was the lowest of the Silicon Six.
The Fair Tax Mark report also says Facebook's foreign tax charge was the lowest of the six, at just 5% of foreign profits.
Google/ Alphabet was ranked third, with the cash tax 15.8% of profits. Its foreign tax charge was 7.1% for the decade with the assistance of Irelands' Double Irish tax dodge.
Fair Tax Mark noted that, "The trend of low current tax provision in connection with foreign profits continues in 2018, with just $1.25bn booked on $19.1bn of foreign profit, giving a booked current tax rate of just 6.5% — this is less than the company’s already low average for the decade, which is 7.1%."
Netflix, ranked fourth, with a cash rate of 15.8% of its profits. With its thin margins (just 5.3%) the cash taxes paid as a percentage of revenue were a tiny 0.8% — "which is less than a fifth of the ratio generated by Microsoft, Apple and Google. Reported foreign profit margin is even slimmer, at 4.3%."
Apple which calls itself "the largest taxpayer in the world," is in fifth place, with a tax rate of 17.1% over the decade. "The trend of low current tax provision in connection with foreign profits continues in 2019, with just $3.9bn booked on $44.3bn of foreign profit, giving a booked current tax rate of just 8.9%."
Microsoft paid the highest rate of tax over the decade and had a cash tax rate of 16.8%.
The Fair Tax Mark report says Microsoft "has the least aggressive approach to tax avoidance of the Six. Makes the second-largest tax contribution of the Silicon Six, having paid $46.9bn in income taxes this decade (on profits of $278.5bn and revenue of $882.5bn). However, the cash tax paid as a percentage of profit is still a relatively low 16.8%."
"We comply with all laws..."
"We comply with all laws..." is a typical mantra of multinational firms but what they avoid addressing is that they also have leading roles in making laws to aid them in avoiding or evading taxes.
This week The New York Times reported that when the Tax Cuts and Jobs Act (TCJA) became law in December 2017, there were many details missing from proposals. Starting in January 2018, Treasury officials "found themselves in nonstop meetings — roughly 10 a week at times — with lobbyists for companies and industry groups."
Chip Carter, the lead Treasury official had worked in both PwC, the big accounting firm, and Baker McKenzie, a big law firm, advising firms on tax avoidance, while some of the lobbyists were former Treasury officials.
The New York Times noted:
"Thanks in part to the chaotic manner in which the bill was rushed through Congress — a situation that gave the Treasury Department extra latitude to interpret a law that was, by all accounts, sloppily written — the corporate lobbying campaign was a resounding success...many leading American and foreign companies will owe little or nothing in new taxes on offshore profits, according to a review of the Treasury’s rules, government lobbying records, and interviews with federal policymakers and tax experts. Companies were effectively let off the hook for tens if not hundreds of billions of taxes that they would have been required to pay.
'Treasury is gutting the new law,' said Bret Wells, a tax law professor at the University of Houston. 'It is largely the top 1% that will disproportionately benefit — the wealthiest people in the world.'”
When then-senator Carl Levin said to Tim Cook, Apple's CEO, at a May 2013 hearing in Washington, "You shifted that golden goose to Ireland. You shifted it to three companies that do not pay taxes in Ireland. These are the crown jewels of Apple Inc. Folks, it's not right."
Cook indignantly responded, "We pay all the taxes we owe, every single dollar. We do not depend on tax gimmicks...We do not stash money on some Caribbean island."
Apple did have an Irish offshore firm in the British Virgin Islands, but it was able to avoid the "Double Irish" tax dodge which involves transferring profits from Ireland via the Netherlands to Irish shell companies in Bermuda and the Cayman Islands.
These are accounting transactions made in the United States and no money is stashed "on some Caribbean island."
When it was discovered that Apple had decided that its Irish offshore companies were not tax resident anywhere, the Irish authorities helpfully said that Apple had only exploited a "loophole" even though Section 83 the Irish Finance Act 1999 required "to be delivered deliver (sic) to the Revenue Commissioners a statement in writing containing particulars of — "(ii) in the case of a company which is incorporated, but not resident, in the State — (I) the name of the territory in which the company is, by virtue of the law of that territory, resident for tax purposes."
Simply, the big companies with their battalions of accountants, lawyers and lobbyists, can get away with tax shenanigans that would be called fraud if used by smaller fry.
In late 2014 Jersey, an island tax haven in the English Channel, became the new tax home of the Irish shell companies Apple Sales International and Apple Operations International while a third Apple subsidiary, Apple Operations Europe, became resident in Ireland.
Apple's overseas cash remained in New York banks or in US Treasury bonds.
Accounts for Apple Operations International filed in Ireland in 2019 (for the first time since 2005 following an EU directive) for fiscal year 2018 show revenues of $156bn — 59% of Apple's total sales. The provision for taxes on overseas profits of $47bn was $5.7bn. However, in Apple Inc.'s annual financial statements for 2018, the foreign tax payable is stated as $4bn.
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