Make Lots of Money and Avoid Paying Taxes

[Robert Weissman <rob@essential.org>]

Make lots of money and avoid paying taxes.

That may sound like the promo line for a get-rich-quick scam operation,
but it is also the reality for the world's leading multinational
corporations.

In each year between 1989 to 1995, nearly one-third of all large
corporations operating in the United States paid no U.S. income tax. More
than six out of 10 large companies paid less than a million dollars in
federal income tax in 1995.

Those were the stunning conclusion of a little-noticed report issued by
the U.S. General Accounting Office (GAO), a Congressional research arm, in
March. The report was commissioned by Senator Byron Dorgan, D-North
Dakota.

Taking into account all companies, including small corporations --  many
of which may not have earned any profits -- the GAO found that "in each
year between 1989 and 1995, a majority of corporations, both foreign- and
U.S.-controlled, paid no U.S. income tax." The GAO defined a company as
large if in 1995 it had assets of at least $250 million or sales of at
least $50 million.

The GAO report also found that large foreign-owned corporations operating
in the United States are doing a much better job of evading taxes than
U.S.-owned companies. In 1995, where large U.S. companies paid more than
$15 in taxes for each $1,000 in sales, foreign-controlled companies paid
barely half that.

The GAO offered some partial explanations for why foreign-controlled
companies pay less in taxes on their U.S. operations: many are newer, and
they are more concentrated in wholesaling and less concentrated in
financial services than U.S. companies.

But those factors do not really explain what is going on.

Robert McIntyre, director of Citizens for Tax Justice, says that the
important distinction is not between U.S. companies and foreign companies,
but between domestic companies (meaning companies operating only in the
United States) and multinationals.

The multinationals, he says, have two key tax-avoidance strategies. The
first, and more well known, is called "transfer pricing."

"Paying too much or charging too little in paper transactions with their
foreign affiliates is the typical way that multinational companies shift
income out of the United States for tax purposes," McIntyre says. "That is
likely to explain much of the discrepancy in tax payments found in the GAO
report." 

Major acquisitions of U.S. companies by foreign corporations -- a speeding
trend that includes the Daimler buyout of Chrysler, the British
Vodaphone's takeover of AirTouch Communications and BP's buyout of Amoco
-- may worsen transfer pricing abuses, McIntyre says.

"Chrysler reported $879 million in federal income tax payments in 1995 and
$963 million in 1996," McIntyre says. "One wonders whether that will fall
off sharply now that Chrysler is foreign controlled."

The second important tax escape for big corporations involves a
complicated financial shell game in which companies pay interest to
non-taxable offshore subsidiaries, and then deduct the interest payments
from the U.S. income.

The companies, and their accountants and lawyers have become increasingly
aggressive in using this tax-avoidance ploy, which McIntyre now rates as a
more serious problem than transfer pricing.

While tax policy can always devolve into incredibly arcane debates, there
are relatively simple solutions available to solve the corporate
tax-avoidance plague. 

Existing law is largely sufficient to handle the problem of intra-company
interest payments, McIntyre says, but Congress -- heavily influenced by
corporate lobbyists -- has blocked the Treasury Department from
effectively clamping down on corporate tax avoiders using this scheme.

Dealing with transfer pricing would require new legislation and perhaps
international agreements, but the basic principle is clear: corporations
should have to pay taxes, in some jurisdiction, somewhere, on 100 percent
of their income. 

These two maneuvers are of course only two ways that multinationals in
particular avoid taxes. There are dozens of other tax loopholes that
companies exploit to drive their tax payments down to zero. 

The alternative minimum tax is supposed to require that profitable
companies pay some federal income tax, to prevent companies from using tax
preferences to get to zero tax payments. Unfortunately, Congress has
progressively gutted the alternative minimum tax, so that the number of
no-tax-paying corporations is on the rise. 
There is an important fairness issue here -- why should corporations get
off the tax hook when working people pay their fair share? -- but much
more than just fairness is at stake. 

Corporate tax freeloaders steal from society: either citizens pay more to
fill the corporate tax gap, or the resulting shortfall in government
income leads to underinvestment in health care, education, clean water,
public transportation  and the many other positive things that government
funds or provides for the benefit of all citizens. 

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor. They are co-authors of Corporate Predators: The
Hunt for MegaProfits and the Attack on Democracy (Common Courage Press,
1999; http://www.corporatepredators.org).

(c) Russell Mokhiber and Robert Weissman

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