Credit: Traveling Otter/Flickr

Of course the top US firms have trillions in tax havens

Oxfam reveals that the top 50 American firms have 1608 offshore subsidiaries holding $1.4tn between them.

by Adam Gale
Last Updated: 14 Apr 2016

Now is not a good time to be in Bermuda. The sun may be shining, but there’s a political hurricane raging over tax havens that, because of the sheer scale of the Panama Papers leak, is unlikely to calm for some time. Oxfam isn’t helping. The charity’s Broken at the Top report, headed by a split picture of a tropical island paradise and (presumably) a child from a poor country, has some rather staggering, rather damning numbers.

The top fifty American companies hold $1.4tn (£1tn) between them in 1608 ‘offshore’ subsidiaries, led by Apple with $181bn, General Electric with $119bn and Microsoft with $108bn. The average overall tax rate was 26.5%, compared to the US statutory corporate tax rate of 35%. Oxfam calculates that ‘tax dodging’ costs the US federal government $111bn a year, and developing countries $100bn. One of the ways they achieved this was by spending a cool $2.6bn on lobbyists, between 2008 and 2014.

With a picture like that, corporate tax accountants don't stand a chance... Source: Oxfam

That really doesn’t look great. But it’s not surprising. Where did people think Apple kept its humungous cash pile - under Tim Cook’s bed? At its local branch of NatWest? Companies will play within the rules they are given. Currently those rules allow them to minimise their tax through structures like ‘permanently reinvesting’ their profits abroad (only ‘repatriated’ profits are taxed in the US), earnings stripping (taking huge loans at extortionate interest from your own low-tax subsidiary) and, indeed, tax inversion (incorporating in a low tax country, without meaningfully transferring your operations).

These structures are clearly not defensible, though the Oxfam figures perhaps make the situation look worse than it is. All that lobbying, for instance, actually amounts to a mean of around $7m per company per year, which is high but a lot easier to swallow than $2.6bn.

More importantly, there are sometimes legitimate reasons for tax to be lower. Boeing told the charity quite reasonably that R&D and manufacturing tax credits were the reason its effective tax rate was only 27.7%. Operating in dozens of countries all with different (but huge) tax codes will also result in some complicated accounting, producing results that appear odd at face value. Of course the firm will choose the option that keeps tax lower than the option that makes it higher, but it doesn’t mean it’s part of some grand Machiavellian scheme.

Indeed, it's hard to imagine the likes of Apple actually wants to keep its cash mouldering in some offshore account where it can't do anything productive with it. Repatriation, after all, means a colossal tax bill that would leave shareholders heaving. 

Nonetheless, the current situation really doesn't help the reputation of business as a whole. Ultimately, this is where reports like Oxfam’s are useful. After all, there are only two ways to ensure a fair tax system on a global scale, a tighter legal framework, involving greater co-operation between countries on the issue, and public naming-and-shaming of companies. The latter is probably the easiest way of bringing about meaningful change, but we should be careful not to tar everyone with the same brush. 


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