Timed to our delayed tax day, the Greenlining Institute has released a report called: “UNTAXED: Tax Avoidance in Silicon Valley and How America’s Richest Company Pays a Lower Tax Rate than You Do.” (PDF) The report focuses on the 30 largest tech companies in the Fortune 500, and discovers to no one’s surprise that the effective tax rate they’re paying has continued to decline.
Before I continue, a note: Greenlining acknowledges that its data is imprecise. Greenling uses a company’s “cash taxes paid,” which includes money paid from taxes for past years but also doesn’t include taxes that might be owed but are deferred from the current year. As Greenlining says:
“While imperfect, this is the best estimate of how much a company actually pays in taxes in a given year. Until the government or the Financial Accounting Standards Board requires companies to report more, this is the best figure available.”
With that in mind, the Greenlining report notes:
- “The tax rate paid by these companies has plunged – from 23.6 percent in 2009 to 19.9 percent in 2010 and 16 percent in 2011. The hypothetical top corporate tax rate of 35 percent is almost entirely a fiction.”
- “The amount of cash held overseas by these companies shot up by 21 percent from 2010 to 2011,
to just under $430 billion. Apple and Microsoft had the biggest increases in cash held offshore.” - Regarding Apple: “With profits soaring
past $34 billion last year, the company’s tax rate fell from 24.8 percent in 2009 to 14.7 percent in
2010 and 9.8 percent in 2011.”
So how are they cutting their tax bills?
According to the report, the companies are using a combination of tactics. Primarily, they are keeping more and more cash overseas, as noted above. And that means they’re not paying U.S. taxes on it. And second, they are creating more and more foreign subsidiaries in various tax havens:
“These 30 tech companies added a net total of 51 foreign subsidiaries from 2010 to 2011.
Nineteen of these were in tax haven jurisdictions as identified by the GAO. Sixteen of the
companies had 10 or more subsidiaries in tax haven countries.”
Greenlining said it focused on tech because of its growing economic and political importance. Not only is it one of the biggest sources of job creation the last four years, but the industry collectively is now the fourth largest source of lobbying dollars on capitol hill.
The report in particular takes Apple to task, an obvious target given its rapid growth, its valuation, but also its apparent declining tax rate. Even in Apple’s annual report, it notes its “effective” tax rate has declined the last three years: ”The Company’s effective tax rates were approximately 24.2%, 24.4% and 31.8% for 2011, 2010 and 2009, respectively.”
Those are higher than Greenlining’s number, and not declining as fast, but it’s still noteworthy that in either case, the company has managed to lower its tax rate at a time when growth was exploding.
The bigger question, of course, is whether we should be outraged by this? Overall, the percentage that corporations pay toward the federal budget has declined by a shocking rate. Greenlining says: “Since the mid-1950s, corporations’ share of the federal budget has plummeted, from 27 percent to nine percent in 2010.”
Clearly, this is unsustainable, given our current deficits and the radical budget cuts being enacted at all levels of government.
Companies have tried to deflect criticism by noting that the U.S. now has the highest corporate tax rates in the world, though it doesn’t seem likely that most companies are paying them. Still, there are moves afoot to “reform” taxes and lower that rate while closing loopholes. And they’ve also been pushing for another Repatriation Act to give them a heavy cash discount for bringing back its overseas cash (which Greenlining opposes).
As for me, I think there’s a simple place to start with this: More transparency. Companies will no doubt insist that the report, and others like it, distort their actual tax burden. Fine. But the SEC should respond by requiring more transparency. Give us an actual figure that says: “Here’s what Company X paid in federal taxes.”
If we’re going to have a rational discussion about tax reform and repatriation, we need clear data as a starting point.
8 comments
brian
funny……they are also making more of their money overseas in case you hadn’t noticed…..2006 to 2011 almost every company accelerated its layoffs in the USA and hired in Asia at an alarming rate. In the past 30 yrs, all semiconductor manufacturers left the Silicon Vallley!The departure continues and many companies declared themselves foreign entities too….which also will continue. Why not eliminate corporate taxes and bring foreign Cos here? It works.
Apr 17, 2012
Chris O'Brien
I would agree somewhat, but also have a nuanced view there. Yes, most semiconductor companies have moved manufacturing out of the valley. But in some cases, they have more jobs and more sales overseas because those markets have developed and they simply want bodies closer to the customers. That strikes me as a legitimate. In between, however, are companies that play games by setting up shell foreign subsidiaries, and “transferring” assets or IP to these entities, allowing them to claim sales in places like Ireland or the Carribean, when in fact all they did was change the address on a patent. Thanks to the lack of transparency, it’s hard to know where each of these companies falls.
Apr 17, 2012
ltlJohn
On the other hand….
Thousands of Silocon Valley high tech employees pay sales tax, gas tax, state income tax, federal income tax – they go to eat and play and those companies also pay taxes and their employees pay taxes.
I’d rather have all the tech companies with little taxes then no tech companies.
ltlJohn
Apr 17, 2012
Chris O'Brien
Yes, though more of the tax burden is falling on them, rather than their employers, because those companies are keeping more of their cash stashed overseas.
Apr 17, 2012
Scott Wharton
Chris,
Don’t blame the companies for playing the game with the rules they are dealt by government. Blame our convoluted tax system that encourages companies shifting money around to lower their rates.
Their will always be ways for companies to lower their taxes but a simpler system with fewer corporate tax breaks and loopholes will at least make it less advantages to do so. Also, some companies will take more advantage of the system leaving other less savvy (read: mostly smaller companies) to pay the much higher rates.
One other thing to consider is that corporate taxes are double taxed – once at the corporate level and another time at the consumer level through dividends, capital gains etc. so it’s not always the case that low corporate tax payments = no taxes – just shifting them around.
The larger issue we face is the yawning gap between what our governments spends and what it collects increasingly have no correlation.
Apr 18, 2012
Chris O'Brien
@Scott: The problem with this argument is twofold. First, the companies are hardly innocents here. This convoluted tax system and assorted loopholes did not happen by accident. The are the result of billions of dollars worth of lobbying by these companies. They have twisted the tax code beyond understanding, and to their advantage. As such, as current “reforms” are being floated, we should rightfully be suspicious of them. Which brings me to the other problem: The result of these breaks and loopholes and is that companies are contributing a far lower percentage of tax revenue to the federal budget than never before. Yes, I’m sure government spending needs to be controlled in some respects. Two military misadventures have not helped in that regard. But we shouldn’t kid ourselves that corporations have managed to shift the tax burden to you and me.
Apr 18, 2012
rgrace
Apple, Cisco and other companies are being disingenuous when they claim these huge-sounding amounts that they’re paying in taxes. It’s not the dollar amounts, it’s the percentages, which are at historic lows. Further: Apple sitting on $110B of extra cash is a significant harm to the economy, because that money is doing nothing whatsoever except to fatten the pockets of the company through passive interest-earning and investment income through bond purchases. None of this would matter much if the budget hadn’t been blown up through two foreign wars – you’re right, Chris – and reckless tax cutting. This is established fact. Apple creates no jobs in this country. Almost everyone they hire in the U.S. is a contractor, who can be let go at any time and who receive lower salaries and no benefits. I know people who have worked there as such and it is almost impossible to get hired there. So much for the $110B in ca$h.
Apr 30, 2012
bobc
Until the corporate rate of 35% is paid-in-full for taxes, all government services should be withheld from these firms. All corporate copyrights, and patents owned by these companies should be refused to be protected by any justice department, and maybe even be auctioned off to any other firm that would pay the due taxes.
Jul 11, 2012