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  • 21Feb

    How do large companies avoid paying taxes in the U.S.?

    Although members of the general public may not be knowledgeable about technical aspects of tax law, most of us realize large companies are not like the rest of us when it comes to paying taxes. Depending on the organization and how it conducts business, various tax ‘breaks’ are available to large companies. We’ll discuss some factors bearing on taxation issues.

    Company formation and tax decisions

    Where the company is formed, that is, under what jurisdiction it creates its legal structure, has a bearing on how it is taxed. Where the company maintains its assets, onshore or offshore, affects how the assets are taxed. In selecting a country of residence and locations to house assets, companies seek to avoid double taxation. Double taxation occurs when income (or gains) is taxed in the country in which it is realized and in the country in which it is housed in an account or investment. 

    For large companies, the country of residence, or, where the company is legally established, is an option. Many large companies locate a representative headquarters office and legally establish the business (incorporation, licensing or certification) in a country with no taxation requirements or lower tax rates. Monaco, a very small principality on the French Riviera, offers such a tax haven. Similarly, within the United States, companies in certain industries choose certain states to establish a business concern. One example of this is credit card companies that favor establishment in Delaware and South Dakota because those states treat credit card companies with deference.

    Apple Inc. managed to save billions of dollars as a result of its taxation practices.

    Apple Inc. managed to save billions of dollars as a result their its tax practice.

    Regardless of where the company establishes its country of residence, the location of its assets is also an important factor in taxation. Complex structures can be used to combine foundations and trusts (legal entities that provide tax deferral because of their tax statuses), shell companies (companies with no assets that are used as a ‘pass through’ for business transactions), and various bank accounts domestically and internationally to house assets. Tax haven countries are often selected for bank and investment accounts.

    Companies using tax havens

    In 2013, Apple Corporation (Apple) came under fire for tax avoidance on billions of dollars in profits through offshore accounts. The tax loophole, a technical gap in tax laws, allowed Apple to pay just 2% on profits of $74 billion USD through the use of a subsidiary in Ireland that had no established country of residence. The same profits would be taxed at 30% if brought into the US. Following the reports about Apple, similar practices of housing profits in tax havens offshore were identified for some 18 other large companies, including Microsoft and Nike.[1] Apple, in particular, had structured a complex system of offshore subsidiary shells which had no employees and had no country of residence.

    Similarly, in 2012, News Corp., Agilent Technologies, Ventas, MetLife, and Verizon were among nearly 60 large companies paying a tax rate of zero percent, when the high end of federal income tax rates was 35%.[2] For the most part, the tax avoidance was accomplished by conducting offshore financial transactions and taking advantage of loopholes in the U.S. tax code for profits not held domestically.

    Tax loophole issues are typically addressed ‘after the fact,’ that is, after millions or billions of tax dollars have been lost through creative tax structures. Before the loopholes are closed, the tax avoidance is legal.

    [1] http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/

    [2] http://online.wsj.com

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