The Most Outrageous Way the US Government Allows Corporations to Dodge Taxes.
Congress could act tomorrow to shut down tax haven abuse by revoking laws that enable and encourage the practice of shifting money into offshore tax havens.” - Richard Phillips, Institute on Taxation
Democrats are in a seemingly Catch-22 situation. Excessive amounts of money give the moneyed class political power. Taking that money away, especially by tax, requires political power.
But there is a way. Strategy teaches us to look for the opponent’s weaknesses. Citizens United is its strength. That will not be changed until the Democrats can appoint a majority of judges on the Supreme Court. Ranting about it only creates a feeling of helplessness among the Democrats. But reformers can identify outrageous behaviour that cannot be justified and that can be the focus of individual campaigns to take away some of the methods the elite use to accumulate this wealth.
One of the most outrageous ways is how the US government allows international corporations to pretend that sales made in high tax countries like the US are made and taxed in tax havens such as Luxembourg or the Cayman Islands. If those sales made in the US were taxed in the US, it could add billions to the tax revenue.
However, most voters are completely unaware of the issue. So in this set of posts, I will explain:
● How the corporations are doing it and getting away with it.
● How the reforms proposed and supported, by Democrats and Republicans, confuse the situation while preserving the tax dodge.
● How there are simple, easy to understand reforms that could end this dodge.
The Tax Dodging Is Big
In 2023, an Institute of Taxation and Economic Policy report put some numbers on some of this tax avoidance – avoidance because this is permitted. It is not tax evasion. this what is happening in the top 2 of 15 tax havens listed:
● “American corporations, as a group, reported to the IRS that they earned $60 billion in the Cayman Islands in 2019. This is impossible, because the entire economic output of that tiny nation was just $6 billion that year”.
● “American corporations reported that they earned $31 billion in Bermuda, even though that country’s economic output was just $7 billion” (ITEP, Feb 14, 2023)
The ITEP report contained another equally incredible statistic. Those American corporations’ amazing local employees were responsible for each producing amazing profits. For example, each Cayman Island employee produced a value of $9,970,110 that year. - Indeed, amazing!
Closing this loophole would bring $70 billion every year into government revenue according to economist Gabriel Zucman (NYT, Nov 10, 2017).
But instead of making these corporations pay tax on sales made in America to reduce the national debt, Trump Republicans are focussing on reducing the programs that help the struggling classes such as universal medical care and Social Security.
It’s Legal
The US government is permitting a tax dodge that only multinational corporations can take advantage of. It works this way. They can:
● Pretend that sales made in a high tax country, such as the US, are made in a low tax country.
● Transfer intellectual property rights such as patents, from a high tax jurisdiction to a related corporation in a low tax one where royalties are not, or are minimally, taxed.
● Pretend the corporation has expenses in a foreign country (which it does not) that are set off against that income.
● Deduct depreciation of multi billion dollar assets in one jurisdiction and then move the assets to another jurisdiction and claim depreciation against income again for the same assets (eroding the tax base).
These schemes are called profit shifting and they erode a country's tax base. Hence you may see the opaque term ‘base erosion profit shifting’ (BEPS).
How We Got to Know of It
Corporations keep their tax dodging information as secret as Coca-Cola protects its formula. We only know about this technique for tax avoidance because of two revelations in 2012.
Guardian investigative journalist Ian Griffith dug through US Security and Exchange Commission filings. He found that, surprisingly, although Amazon was the leading bookseller in the UK, selling one in four books, it had paid no tax in the UK that year. He discovered that Amazon reported sales in Britain of $213 million while its sales in Luxembourg were supposedly $11 billion (Guardian, Ap 04, 2012).
What? Where? Luxembourg? It’s the last Grand Duchy of Europe. With a population under 500,000, it’s a country smaller than the average American city. It’s also one of the world’s leading financial centers and recognized as being in the big leagues with New York, London, and Hong Kong.
The second revelation, also In 2012, came from a former Luxembourg PricewaterhouseCooper (PwC) auditor, Antoine Deltour. He grew upset at what he saw internally. He felt he had to do something.
His disclosure was analyzed and published by the International Consortium of Investigative Journalists as the LuxLeaks. Deltour described the immense extent of corporate tax avoidance using Luxembourg including evidence of tiny office buildings with a long list of large multinationals (MNCs) with addresses on their doors. On one building entrance, there were 340 MNCs listed on the brass plate. (LuxLeaks, Nov 25, 2024)
Think of the names of all the big corporations you know until you are too tired to continue: Microsoft, Amazon, Koch Industries and so on and so on. Most will be a brass plate company in Luxembourg. As one would expect, the name “Disney” appears in this fairyland of dreamy tax rates too!
How can little Luxembourg be so amazing? It sells something every corporation wants — ‘legal’ tax dodging at a very affordable price.
The Way Amazon Does It
What’s the trick? Amazon established its European headquarters in Luxembourg. It so arranged its business model that a Brit buying a book in the UK is ordering from and paying to Amazon Luxembourg not Amazon UK. However, not a single book came from Luxembourg. The books were stored and delivered from Amazon UK’s warehouse.
Only a few Amazon employees are needed to keep up the façade of running a business in Luxembourg. Without Amazon’s tax, the average taxpayers of the UK are on the hook to provide the thousands of Amazon employees with healthcare, education for their children, etc. etc. Relieved of this burden, Luxembourg can give Amazon a very special tax deal and still reap a huge gain.
The EU Commission ruled the Amazon/Luxembourg tax scheme illegal, but the EU Court of Appeal said the tax dodging was all good according to the law (Reuters, Dec 14, 2023).
Charging Itself for Using Its Own IP
Amazon has another method to avoid tax in the US.
● It transferred all its intellectual property rights from Amazon US to Amazon Luxembourg.
● Amazon US then pays royalties to Amazon Luxembourg to use Amazon IP.
Because Luxembourg does not tax income from intellectual property rights, that subsidiary can collect royalties tax-free on international sales. Amazon US can deduct those fees from its US tax.
This winning scheme is called Goldcrest in honor of Luxembourg’s national bird.
Although the Senate had recommended changes to the US tax code long ago in 2013 to prevent such transfers of IP rights, nothing was done about it. Thus, in 2017, a US court upheld the Goldcrest scheme shifting of IP rights to Luxembourg as it was in accordance with the present US tax law—which continues to provide this loophole years later (Reuters, Mar 23, 2017).
So, is Amazon’s ability to squeeze out small retail stores due to its superior business system or is it the superior ways to dodge taxes not available to locals?
International brick and motor stores can use other schemes to take advantage of low rate tax havens, all protected by the Trump executive order, explained next.
Acknowledgement: World map image by pixabay