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Apple Inc., Goldman Sachs, and Disney: How These Mega-Corporations and Others Evaded $93 Billion in Federal Taxes

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82 of the 100 biggest publicly traded companies have created 2,686 tax haven subsidiaries and stored a total of $1.17 trillion overseas.

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Twenty-one of the top 100 publicly traded US corporations – including such big names as Goldman Sachs (NYSE:GS), Apple (NASDAQ:AAPL), Walt Disney (NYSE:DIS), Microsoft (NASDAQ:MSFT), and Safeway (NYSE:SWY) – avoided paying $93 billion per year in federal taxes by parking their cash in a far-flung network of overseas tax havens, according to a comprehensive new study that examines how corporate America has gamed the US tax code.

The report issued Wednesday by the US Public Interest Research Group documents how relatively commonplace this practice has become. It pulled the data on those 21 companies from filings with the Securities and Exchange Commission.

Based on its research, 82 of the 100 biggest publicly traded companies have created 2,686 tax haven subsidiaries. Not all of those firms documented how much this practice whittled down their obligations to the Internal Revenue Service. However, these companies have stored a total of $1.17 trillion overseas. In many cases, shareholders put pressure on these companies to maximize their profit margins by reducing their tax liabilities.



Some - such as Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) - depended heavily on taxpayer support during the 2008 financial meltdown. Bank of America kept $17.2 billion in 316 different offshore subsidiaries, reducing its tax bill by $4.5 billion. Morgan Stanley shaved its tax obligations by $1.7 billion using foreign subsidiaries that are entirely legal under US law.

On Tuesday, President Obama proposed a corporate tax reform that would generate billions of dollars in new infrastructure and other spending by giving a one-time tax holiday to companies with their funds stashed overseas.

All of this comes as Rep. Dave Camp (R-MI) and Democratic Sen. Max Baucus of Montana attempt to overhaul the entire tax code with an eye toward preventing dependence on overseas dodges. The general framework would lower the top marginal tax rates by eliminating deductions and credits that have yet to be publicly disclosed.

"There is widespread agreement amongst academics, economists and lawmakers that these practices are both unfair to taxpayers who aren't able to engage in these strategies and harmful to the US economy," Camp, chairman of the House Ways and Means Committee, said in June before hearings on the issue.

To limit the use of tax havens, Camp has proposed a 15% tax on any earnings from patents and trademarks regardless of where the subsidiary controlling them has been incorporated. General Electric (NYSE:GE) is willing to trade a loss of tax breaks for lower overall US rates, while firms such as Microsoft and Amgen (NASDAQ:AMGN) oppose the measure.



Eliminating loopholes will not be enough unless the reform changes the incentives that cause companies to rely on foreign subsidiaries, said Dan Smith, the tax and budget advocate who authored the PIRG report.

"You might close one loophole," Smith said. "A company like GE has 1,000 lawyers at its disposal in their tax department - they're going to find another one."

This is not a case where these companies are serving the needs of international customers, the report notes. Many tax havens are island nations such as Bermuda and the Cayman Islands where these companies have few workers or local customers. A 2008 report by the Government Accountability Office estimated that 43% of all of multinational earnings came from just five countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.

A Senate subcommittee highlighted this practice in May with a report showing that even as Apple became the most profitable US technology company in history, it avoided paying billions of dollars in taxes in the United States and around the world with an unprecedented international web of subsidiaries and shell organizations.

In some cases, Apple's subsidiaries had no employees and were largely run by senior officials from the company's headquarters in Cupertino, California. By setting up subsidiaries in Ireland and other countries, Apple was able to render those entities stateless – and exempt from taxes.

Apple has placed $82.6 billion in three subsidiaries that have no "tax residency" in Ireland, where they are incorporated, or in the United States, where company executives manage those companies. An Apple subsidiary that controls Apple's retail stores in Europe has not paid any corporate income tax in the last five years.

General Electric, the giant manufacturers of appliances, light bulbs, jet plane engines and high-tech industrial equipment, is holding $108 billion in 18 overseas subsidiaries.

Pfizer (NYSE:PFE), the mega pharmaceutical corporation, set up 174 separate tax haven accounts containing $73 billion. Software giant Microsoft has five overseas tax haven subsidiaries containing $60.8 billion. The grocery store chain Safeway has operations in Mexico and Canada, but it has eight tax haven subsidiaries as well.

Tax havens are jurisdictions with very low or nonexistent taxes, places where profits on intellectual property can be stashed in holding companies. Simply by registering subsidiaries in a jurisdiction such as the Cayman Islands, these companies can use legal accounting gimmicks to make much of their US-earned profits appear to be earned in the Caribbean territory. While the top statutory US corporate tax rate is 35%, the 21 companies that provided more detailed information to the SEC paid an average rate of only 6.9% on revenues kept overseas.

"The only business they're doing is tax avoidance business in the United States," said Kent Conrad, the former North Dakota senator at a Tuesday panel hosted by the Bipartisan Policy Center. "Does anyone seriously think that's a tax increase if those folks start paying what the rest of us are paying?"

Tim Cook, Apple Inc.'s chief executive, strongly defended his company's tax practices at the May Senate hearing that focused on the technology giant's use of Irish subsidiaries to shelter billions of dollars of income from US taxes.

"We pay all the taxes we owe - every single dollar," Cook told the Senate's Permanent Subcommittee on Investigations. "We not only comply with the laws but we comply with the spirit of the laws," he said. "We don't depend on tax gimmicks." But the PIRG report argued that – regardless of whether the practice is legal -- it is grossly unfair to other taxpayers who meet their obligations.

"Loopholes in the tax code make it legal to book profits offshore, but tax haven abusers force other Americans to shoulder their tax burden," the PIRG report said. "Every dollar in taxes that corporations avoid by using tax havens must be balanced by other Americans paying higher taxes, coping with cuts to government programs, or increasing the federal debt."

Viewed another way, Congress and the Obama administration could cancel the next round of deep, across the board cuts in defense and domestic discretionary spending under sequestration if the Treasury were able to collect the $93 billion of tax revenue now sheltered by overseas tax havens.

The report also said that Congress should reject the idea of a "territorial" tax system, which would exclude any foreign earnings from US taxes. Adopting this system could only further accelerate the use of tax havens.

Instead, the PIRG report urges lawmakers to reform the corporate tax code to end the incentives that encourage the creation of these tax havens. The most comprehensive solution to ending tax haven abuse would be to no longer permit US multinational corporations to defer indefinitely paying U.S. taxes on the profits they attribute to their foreign entities.

Editor's Note: This article by Eric Pianin and Josh Boak originally appeared on The Fiscal Times.

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No positions in stocks mentioned.
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