We continually hear that the U.S. has the highest corporate tax rate, and regularly entertain public proposals for "tax holidays" where corporations should be allowed to "repatriate" trillions of foreign profits at minimal tax rates like 5%. (BTW: I love the pseudo-patriotrism suggested by the word "repatriate.")
The thing is that we are largely taking about regular ole' U.S. profits, not "foreign profits." Let me explain the sham simply.
A fictional company - let's call it "Ah-pull" - sets up two wholly owned companies: Ah-pull (U.S.) and Ah-pull (Caymans). Ah-pull (U.S.) does all the things we consumers ordinarily associate with Ah-pull: retail stores, sales and profits. Ah-pull (Caymans), however, is a shell company set up in the low tax Cayman Islands that holds all the trademarks, etc. associated with the products sold by Ah-pull (U.S.). And at the end of the year, Ah-pull (Caymans) charges Ah-pull (U.S.) a "licensing fee" to use these trademarks which, coincidentally, amounts to close to all the profits made by Ah-pull (U.S.). - - Get it? This is virtually money-laundering.
After paying such licensing fees - to itself by the way; this is moving money from the left pocket to the right pocket - Ah-pull (U.S.) reports little to no (or whatever amount it decides) as income, and the rest of its profits flow to low tax Ah-pull (Caymans).
This is a transparent sham. Explained another way: I am a lawyer and make, let's say, a $100k this year. But, per the above, what if I set up my own corporation in the Caymans, transferred my law license to my own Cayman corporation, and then charged myself $75k for the right to use my own law license. Well, then, I only made $25k in the U.S. and $75k in the low-tax Caymans. Or, maybe the next year I only want $10k in US income, so I increase the law license fee to $90k. What a wonderful world. I can finely tune all my income and taxes.
The whole thing is an absurdly obvious tax fraud. Yet that is what we have as a corporate tax scheme.
Don't believe me?
Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.Does that sound complicated? It isn't. It is the simple sham of transferring intellectual property to off-shore, low-tax, shell companies, and then having those same off-shore companies "charge" the profitable, operating U.S. company with faux licensing "fees" to siphon/launder the money to these tax havens. But all of these companies - their earnings, payments, licensing, foreign status , domestic status, whatever - are all owned and controlled by the same parent company. Without exaggeration, it is a shell game on paper.
Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. http://www.nytimes.com/...
It is so simple and fraudulent, that it is brazen.
But here is the thing. Currently, companies can't "square the circle." For reasons I won't dwell on now, these companies also can't get any of this off-shore money back into the U.S. (through dividends, etc.) without hitting the U.S. corporate tax rate. That is the "bottle neck" you frequently hear about leading to cries of "tax holidays" or "corporate tax reform."
Don't listen to these cries, or to seemingly calm apologists on the Sunday morning shows. All or most of the "off-shore money" is U.S. revenue artificially parked in a Caymans account - - NY branch, by the way. The money doesn't need to be "repatriated" to the U.S. because it was never made outside the U.S. in the first place. To bring this money (held in NY, LA, Boston, Chicago, etc. bank accounts) "back into the U.S." under the guise of a "tax holiday," or some "smart, centrist policy," is no different than negotiating with Al Capone for a "tax holiday."
What I am saying is not sensational. It is mundane. All reasonably large corporations have been doing it for years.
But, again, here is the thing. Under current law, they can't get the money "back into the U.S." without paying the taxes that they originally sought to evade. It is the sole reason you hear about "tax holidays" or "repatriating foreign profits" -- even from Dems like NY Chuck Schumer. Understand that. There are a couple of trillion dollars in untaxed U.S. profits that a lot of people are getting nervous about. There is no reason to give them a "tax holiday" to let them pay themselves at a 5% tax. It is a swindle. And it is not even that complicated or creative of a swindle.