Tax evasion in the United States is an acute countrywide economic problem. Big and wealthy corporations such as Microsoft, Apple, and Johnson & Johnson ignore their duty to the country and hide their revenues in order to avoid taxation. This tax research paper describes the most widespread methods of tax evasion that US companies use: offshore, overseas companies, outside organizations, etc. The writer uses these statistics to prove the significance of this problem and demonstrate the most egregious examples of fraud. Tax evasion creates imbalance in the state economy and deprives citizens from their social benefits.
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How Do US Corporations Cheat with Tax and Profits?
Every corporation is striving to become successful via increasing profits and gaining recognition from their primary customers as well as fitting in the marketplace. However, they manage to enhance their revenues by cheating on paying taxes and profits. An average American citizen gets the sum of necessities from the taxes that companies pay for the government. This money is then distributed to the country’s needs such as military, healthcare, retirement, and other facilities. There are plenty of methods which were found by U.S corporations to avoid paying taxes entirely or decrease the amount of the sum.
The first method in which companies manage to underpay their taxes is claiming that the main profit is overseas while they use the resources of the United States. Microsoft is one of the companies that have nothing in common with the support of basic human needs. As of the year 2017, they have made more than half of their entire income in the United States and 57% of the long-term benefit in America as well. Nonetheless, as of the year 2016, they had announced a dramatic loss in the United States while having near $20 billion in foreign countries (Buchheit). Satya Nadella, Microsoft’s CEO, ensures their stakeholders that more than $127.9 billion is held by overseas subsidiaries.
Another multinational corporation which specializes in producing chemicals for different branches of operations is The Dow Chemical Company. In 2016 they had declared 63 percent of assets and 35 percent of deals in the United States. Along with this, they have indicated 11% of their revenues in the territories of the United States (Buchheit). By cheating on taxes and revenues, the corporation not only harms the government but also decreases the chances for native citizens to get their support on basic needs.
Holding money offshore is a method of eliminating the paying of taxes for these companies. As the tax rate in the United States is 35%, companies strive to secure their incomes in other places (Martin, Patrick). Therefore, more than $1.4 trillion of revenues are in foreign accounts to underpay incredibly high taxes in the United States of America. The most common tax havens are Cayman, Panama, and Bermuda Islands. It is considered that these places are the most convenient and adequate for companies to keep their profits.
In March 2012 the Wall Street Journal declared that more than sixty large-scale American companies have increased their profits by $166 billion by having outside organizations. Approximately 40% of the annual incomes of these corporations were deducted from taxation in the United States of America. These funds remain unavailable for dividend payments, share repurchases, or investments in the United States (Chew). Shareholders had a long debate with Apple Inc. to devote a portion of their enormous money reserves for dividends. In 2013 they did not return the money to the United States as they would have been forced to pay taxes. Therefore, Apple has issued stock worth $17 billion.
Most of the companies who save their funds in offshore accounts are high tech companies and organizations in the field of health treatment. They keep the most prominent part of their financial resources there or even have their entire sum of money offshore (Campbell, Alexia). For instance, the well-known corporation Johnson & Johnson has $14.8 billion out of $14.9 billion. According to the report of the subcommittee, companies transfer their assets following several approaches: through licensing, and cost-sharing agreements.
The primary challenge in valuing intangible assets allows corporations to artificially inflate incomes in low-tax jurisdictions by using aggressive methods of transfer pricing. According to the tax laws in the United States, the offshore structure of a company must pay for an asset at an adequate market price. Moreover, quite often the rights to intellectual property associated with an invention or a new product are transferred, making it virtually impossible to determine the cost that an unrelated third party could pay for them.
Apple corporation has over $181 billion in offshore accounts. The company is considered the biggest tax evader in the world (Campbell). Other companies such as Microsoft, Exxon Mobil, and Cisco Systems hold from $108 to $119 billion in offshore accounts on different islands and countries. They not only underpay their taxes but also contribute to the sustainability of the corporation.
As the taxes in the United States are considered some of the highest in the world, which come to approximately 35%, companies have plenty of approaches on how to avoid paying at all or underpaying them. Multinational enterprises receive a deferral on the payment of tax “active business profits” of their foreign entities until this profit is returned to the United States. As a result, many corporations are striving to transfer their incomes to the jurisdictions that are tax free or with low taxes to avoid US taxes. Moreover, by conducting such operations, they increase their after-tax profits and become more beneficial.
Hewlett-Packard (HP) has managed a method of not only transferring their incomes offshore but also they have found that they can return that money to the United States in the form of loans (Novack). According to US tax policy, when an overseas corporation gives a loan to the related organization in America, these funds are also taxed. Companies have found this method as one of the easiest and they provide loans to their own corporations abroad.
Referring to the report in 2003, HP had introduced a program that enabled it to use their loans from its overseas companies to feel the financial support in the United States organization. The two most significant sources of funds for HP are the Belgian Coordination Center and Cayman Holding Corporation. The performance of the companies which were operating in the United States was supported by the loans from those enterprises. HP also spent this money on the salary, internal expenses, and the back purchase of the company’s shares.
It is interesting that by doing it this way, companies act legally and do not break the law established by the United States government. They perform according to the deadline of the agreement, which is 45 working days for the loan (Novack). The HP CEO also ensured the U.S government that these financial funds are crucial for some particular operations and that they lack the appropriate amount of money in America to cover the expenses. An average loan of the HP corporation is around six to nine billion dollars which proves that American companies are not locked in their own offshore traps.
Small-scale organizations which do not own the assets that remain prominent to build elaborate duty evasion plans end up paying nearer to the full assessment rate. This implies they wind up paying a more significant offer of the bill for administrations, for instance, streets, human services, and training.
For the government of the United States, it is important to note that companies will not get rattled or will return their money from the overseas companies to the United States. Organizations prefer to stop informing the government concerning the existence of the daughter companies in the foreign markets (Chew). In 2008 the congressional control department announced that only 83 out of 100 of the largest companies in America marked the daughter companies in tax havens. In the recent years, they have noticed that the number of such companies has decreased. But recently the number of such structures in the reporting has suspiciously reduced. There were counted approximately 200 subsidiaries overseas from the largest companies in the United States, while the number has decreased dramatically to eight.
All in all, tax evasion in the United States has become dramatically popular for the companies which are striving to avoid the extremely high rate of taxes in their home country. The most massive openly traded corporations such as Apple, Microsoft, and HP transfer their money to offshore accounts and they do it mostly in a legal way. As the rate of tax in the United States is 35%, companies establish daughter companies overseas to avoid the extreme amount of money that they would be forced to pay in America. Organizations also take loans from their companies abroad which is even allowed according to the tax policies in the United States. Based on the official data, approximately $1.4 trillion is held offshore, mostly on the Cayman, Bahama, and Bermuda Islands. The U.S corporations also set up a daughter business in Ireland as the rate of taxes there is either low or entirely absent.
Buchheit, Paul. “3 Greedy Ways Corporations Are Cheating America.” Alternet, 2017, https://www.alternet.org/economy/3-greedy-ways-corporations-are-cheating-america.
Campbell, Alexia. “American Companies Like Offshore Tax Havens Too.” The Atlantic, 2016, https://www.theatlantic.com/business/archive/2016/04/corporate-tax-avoidance/478293/.
Chew, Jonathan. “Here Are Some Companies Accused of Dodging Taxes in Europe.” Fortune, 2016, http://fortune.com/2016/03/11/apple-google-taxes-eu/.
Martin, Patrick. “US Corporate Tax Cheats Hiding $1.4 Trillion in Profits in Offshore Accounts.” wsws.org, 2016, https://www.wsws.org/en/articles/2016/04/15/oxfa-a15.html.
Novack, Janet. “Senate Report Details HP & Microsoft Offshore Tax Ploys.” Forbes, 2012, https://www.forbes.com/sites/janetnovack/2012/09/20/senate-report-hits-hp-microsoft-for-offshore-ploys-saving-billions-in-tax/#6977c6eb229e.