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2018 | OriginalPaper | Chapter

11. Exposing Corporate Tax Dodgers

Author : Elise J. Bean

Published in: Financial Exposure

Publisher: Springer International Publishing

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Abstract

This chapter describes landmark Levin-led investigations into how major U.S. corporations used complex tax gimmicks and offshore tax havens to dodge payment of U.S. taxes. The case studies detail deceptive conduct by Apple, Caterpillar, Hewlett-Packard, and Microsoft, leading to billions of dollars in unpaid taxes. The chapter traces how those investigative findings inspired international outrage and sparked a variety of reforms to clamp down on multinational corporate profit-shifting.

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previous chapter Combating Money Laundering: Round Two

next chapter Beaching the London Whale

The Hidden Wealth of Nations: The Scourge of Tax Havens, Gabriel Zucman (University of Chicago Press 2015), http://gabriel-zucman.eu/hidden-wealth/. The chart is used with permission from “Corporate Tax Chartbook: How Corporations Rig the Rules to Dodge the Taxes They Owe,” Economic Policy Institute and Americans for Tax Fairness, Frank Clemente, Hunter Blair, and Nick Trokel (9/19/2016), Chart 7, at 10, http://bit.ly/2d0NRau.

See “American Corporations Tell IRS the Majority of Their Offshore Profits Are in 12 Tax Havens,” Citizens for Tax Justice Report (5/27/2014), at 1, chart entitled, “The Dozen Most Obvious Corporate Tax Havens,” citing data from the IRS and World Bank (hereinafter “CTJ Chart”), http://ctj.org/pdf/corporateoffshoreprofitsirs.pdf. See also “The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond,” Professor Kimberly A. Clausing (6/17/2016), at 4, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685442.

CTJ Chart.

In the debates leading up to enactment of Subpart F, President Kennedy stated in 1961:

The undesirability of continuing deferral is underscored where deferral has served as a shelter for tax escape through the unjustifiable use of tax havens such as Switzerland. Recently more and more enterprises organized abroad by American firms have arranged their corporate structures aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees, and similar practices which maximize the accumulation of profits in the tax haven as to exploit the multiplicity of foreign tax systems and international agreements in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.

“President’s Recommendations on Tax Revision: Hearings Before the House Ways and Means Committee,” 87th Congress, Session 1 (1961), reprinted in Tax Havens and Their Use by United States Taxpayers—An Overview, report to the IRS Commissioner and others by Richard A. Gordon, IRS Special Counsel for International Taxation (1/12/1981), at 44, https://archive.org/details/taxhavenstheirus01gord.

See, for example, 26 U.S.C. § 952 (defining Subpart F income).

26 C.F.R. 301.7701-1 through 301.7701-3 (1997).

See Notice 98-11 (2/9/1998) and proposed regulations (3/26/1998).

See Notice 98-35 (7/6/1998), withdrawing Notice 98-11 and the proposed regulations.

See 26 U.S.C. § 954(c)(6).

See 26 U.S.C. § 482.

“Corporate Taxpayers & Corporate Tax Dodgers 2008–10,” Citizens for Tax Justice Report (11/2011), at 3–4, http://bit.ly/2jAVhZ7.

“The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond,” Professor Kimberly A. Clausing (6/17/2016), at Figure 4, papers.ssrn.com/sol3/papers.cfm?abstract_id=2685442. The chart is used with permission from “Corporate tax Chartbook: How Corporations Rig the Rules to Dodge the Taxes They Owe,” Economic Policy Institute and Americans for Tax Fairness, Frank Clemente, Hunter Blair, and Nick Trokel (9/19/2016), Chart 16, at 19, http://bit.ly/2d0NRau.

“Revenue Statistics 2015—United States,” OECD (12/3/2015), http://www.oecd.org/tax/revenue-statistics-united-states.pdf; “Reasons for the Decline in the Corporate Tax Revenues,” Congressional Research Service, Mark P. Keightley, Report No. R42113 (12/8/2011), at 1, http://bit.ly/2zO3i3l; “The Corporate Income Tax System: Overview and Options for Reform,” Congressional Research Service, Mark P. Keightley and Molly F. Sherlock, Report No. R42726 (12/1/2014), at 11, http://bit.ly/1behTOJ. See also The Hidden Wealth of Nations: The Scourge of Tax Havens, Gabriel Zucman, chart entitled, “The Effective Rate Paid by US Corporations has been Reduced by 1/3 since late 1990s,” http://gabriel-zucman.eu/files/Zucman2015SlidesShort.pdf.

“The Corporate Income Tax System: Overview and Options for Reform,” Congressional Research Service Report, at 11, http://bit.ly/1behTOJ.

The information in this section is based on “Offshore Profit Shifting and the U.S. Tax Code—Part 1 (Microsoft and Hewlett-Packard),” S. Hrg. 112-781 (9/20/2012) (hereinafter “2012 Microsoft-HP Hearing”), https://www.gpo.gov/fdsys/pkg/CHRG-112shrg76071/pdf/CHRG-112shrg76071.pdf.

Section 26 U.S.C. § 956(c)(1)(C); Treas. Reg. 1.956-2T(d)(2).

Section 26 U.S.C. § 956(c)(2); IRS Notice 88-108; General Legal Advisory Memorandum 2007-016. In addition, to be excluded from tax, all of the loans made by an offshore entity throughout the year must be outstanding for less than 60 days in total for that year.

2012 Microsoft-HP Hearing, at 362, 615.

Jacobs Engineering Group, 79 AFTR 97-674 (C.C. Calif. 1997) (finding 12 serial short-term loans from a foreign controlled corporation to its U.S. parent should be treated as a single loan triggering tax under Section 956).

See 2012 Microsoft-HP Hearing, at 223.

The information in this section is based on “Offshore Profit Shifting and the U.S. Tax Code—Part 2 (Apple Inc.),” S. Hrg. 113-90 (5/21/2013) (hereinafter “2013 Apple Hearing”), https://www.gpo.gov/fdsys/pkg/CHRG-113shrg81657/pdf/CHRG-113shrg81657.pdf.

See 2013 Apple Hearing, at 203–204, “Amended & Restated Cost Sharing Agreement between Apple Inc., Apple Operations Europe & Apple Sales International” (5/2008).

Id. See also Paul statement, at 31–33.

See, for example, “Apple CEO Consulted Bill Clinton before Testimony,” The Hill, David McCabe (8/15/2016), http://bit.ly/2ASFvfz.

The information in this section is based on “Caterpillar’s Offshore Tax Strategy,” S. Hrg. 113-408 (4/1/2014) (hereinafter “2014 Caterpillar Hearing”), https://www.gpo.gov/fdsys/pkg/CHRG-113shrg89523/pdf/CHRG-113shrg89523.pdf.

See, for example, “What State Needs to Do to Compete,” opinion editorial by Doug Oberhelman, The State Journal-Register (2/14/2012), http://bit.ly/2mGumfo; “Caterpillar’s Doug Oberhelman: Manufacturing’s Mouthpiece,” Bloomberg Businessweek, Mina Kimes (5/16/2013), https://bloom.bg/2jBKwG7.

See, for example, “Caterpillar Dealer Push May Drive Some Out, Levenick Says,” Reuters, James B. Kelleher (3/6/2014), http://reut.rs/2ARj0HN.

2014 Caterpillar Hearing, at 68.

See 5/30/2014 letter from Caterpillar to the SEC, reprinted in the 2014 Caterpillar Hearing, at 639–648, in particular the passage at 645.

2014 Caterpillar Hearing, at 633–635.

See, for example, “Tax Avoidance—Google,” London: House of Commons, Committee on Public Accounts, 9th Report 2013–2014, http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdf; “Special Report: How Starbucks Avoids UK Taxes,” UK Parliament Committee on Public Accounts, Minutes of Evidence, HC 716, Session 2012–2013, Tom Bergin, (10/15/2012), http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/121112.htm.

See, for example, “Tough Debate with Multinational Companies on Corporate Tax Practices,” European Parliament Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE) Press Release, (11/17/2015) (discussing committee’s final hearing on tax dodging with witnesses that included 11 multinationals), http://bit.ly/2yXlMuC. The EU Parliament has since created two successor investigative committees, sometimes referred to as TAXE2 and TAXE3, to continue its examination of corporate tax dodging.

See, for example, “Corporate Tax Avoidance,” Report by Australian Senate Committee on Economics References, No. ISBN 978-1-76010-274-6 (8/18/2015), http://bit.ly/1fFXLNX; “Chevron Hits Out at ‘tax dodger’ Claims at Fiery Senate Inquiry,” Sydney Morning Herald, Heath Aston (11/18/2015), http://bit.ly/29LoKYL.

See, for example, “Judge Orders Microsoft to Give IRS What It Wants,” Seattle Times, Matt Day (11/23/2015), http://bit.ly/2AZYmGa.

See, for example, United States v. Microsoft, Case No. 2:15-cv-00102-RSM (USDC WD Washington), Petition to Enforce IRS Summons (12/11/2014), http://bit.ly/2hAoqzh, and Order Granting Enforcement of Summons (11/20/2015), http://bit.ly/2zO3QpV; Microsoft v. IRS, Case No. 2:15-cv-00850-RSM (USDC WD Washington), Complaint for Declaratory and Injunctive Relief (5/29/2015), http://bit.ly/2hIg8Jv.

See, for example, “How Microsoft Moves Profits Offshore to Cut Its Tax Bill,” Seattle Times, Matt Day (12/12/2015), http://bit.ly/1Z5qSfy. See also “Microsoft’s Bermuda Subsidiaries Subject To Tax Inquiry, Documents Show,” Huffington Post, Ryan Grim, Zach Carter, and Christina Wilkie (1/31/2014), http://bit.ly/2jBFtp4.

Caterpillar Form 10-K for the year ended December 31, 2014, filed with the SEC (2/17/2015), at 22 and A-30, http://www.caterpillar.com/en/investors/sec-filings.html.

Caterpillar Inc. 10-K filing with the SEC (2/15/2017), at 101, http://www.caterpillar.com/en/investors/sec-filings.html.

See, for example, Search and Seizure Warrants, Case Nos. 17-MJ-7038, 7039 and 7040 (C.D. IL 2/24/2017), http://bit.ly/2zVaU1B; “Caterpillar Goes from White House Kudos to Multi-Agency Raid,” Bloomberg, Joe Deaux, Mario Parker, and David Voreacos (3/2/2017), https://bloom.bg/2mKc4Gd.

“Short Term Loan Exclusion from United States Property,” IRS LB&I International Practice Service Transaction Unit, Document No. RPA/9414.01_01 (2015), at 8, https://www.irs.gov/pub/int_practice_units/RPA9414_01_01.pdf.

See, for example, “EU’s Apple Tax Case Prompted by Senate Tip Off, Vestager Says,” Bloomberg, Peter Chapman (9/9/2016), https://bloom.bg/2cuTnTa.

“State Aid: Ireland Gave Illegal Tax Benefits to Apple Worth Up to €13 billion,” European Commission Press Release (8/30/2016), http://europa.eu/rapid/press-release_IP-16-2923_en.htm.

See, for example, “Europe’s Bite Out of Apple Shows the Need for U.S. Tax Reform,” Wall Street Journal, opinion editorial by Treasury Secretary Jacob Lew (9/12/2016), http://on.wsj.com/2ck7LMg.

See, for example, testimony of Apple CEO Tim Cook, 2013 Apple Hearing, at 60–61.

See, for example, “Communication on Further Measures to Enhance Transparency and the Fight Against Tax Evasion and Avoidance,” Communication from European Commission to European Parliament and the Council, No. COM (2016) 451 Final (7/6/2016), http://data.consilium.europa.eu/doc/document/ST-10977-2016-INIT/en/pdf.

“Action Plan on Base Erosion and Profit Shifting,” OECD (2013), http://bit.ly/1ecYiXB.

See, for example, “OECD/G20 Base Erosion and Profit Shifting Project Explanatory Statement: 2015 Final Reports,” OECD, http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf.

See, for example, “OECD/G20 Base Erosion and Profit Shifting Project Action 13: Country-by-Country Reporting Implementation Package,” OECD (2015), http://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf.

“Country-by-Country Reporting,” Treasury Final Rule, 81 Fed.Reg. 126 (6/30/2016), at 42482.

Title: Exposing Corporate Tax Dodgers
Author: Elise J. Bean
Publisher: Springer International Publishing
Book: Financial Exposure
Print ISBN: 978-3-319-94387-9

Electronic ISBN: 978-3-319-94388-6

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-3-319-94388-6_11