Corporate Tax Freeloaders

Make lots of money and avoid paying taxes.

That may sound like the promo line for a get-rich-quick scam operation, but it is also the reality for the world's leading multinational corporations.

In each year between 1989 to 1995, nearly one-third of all large corporations operating in the United States paid no U.S. income tax. More than six out of ten large companies paid less than a million dollars in federal income tax in 1995.

Those were the stunning conclusions of a little-noticed report issued by the U.S. General Accounting Office (GAO), a Congressional research arm, in March. The report was commissioned by Senator Byron Dorgan, D-North Dakota.

Taking into account all companies, including small corporations--many of which may not have earned any profits--the GAO found that "in each year between 1989 and 1995, a majority of corporations, both foreign- and U.S.-controlled, paid no U.S. income tax." The GAO defined a company as large if in 1995 it had assets of at least $250 million or sales of at least $50 million.

The GAO report also found that large foreign-owned corporations operating in the United States are doing a much better job of evading taxes than U.S.-owned companies. In 1995, where large U.S. companies paid more than $15 in taxes for each $1,000 in sales, foreign-controlled companies paid barely half that.

The GAO offered some partial explanations for why foreign-controlled companies pay less in taxes on their U.S. operations: many are newer, and they are more concentrated in wholesaling and less concentrated in financial services than U.S. companies.

But those factors do not really explain what is going on.

Robert McIntyre, director of Citizens for Tax Justice, says that the important distinction is not between U.S. companies and foreign companies, but between domestic companies (meaning companies operating only in the United States) and multinationals.

The multinationals, he says, have two key tax-avoidance strategies. The first, and more well known, is called "transfer pricing."

"Paying too much or charging too little in paper transactions with their foreign affiliates is the typical way that multinational companies shift income out of the United States for tax purposes," McIntyre says. "That is likely to explain much of the discrepancy in tax payments found in the GAO report."

Major acquisitions of U.S. companies by foreign corporations--a speeding trend that includes the Daimler buyout of Chrysler, the British Vodaphone's takeover of AirTouch Communications and BP's buyout of Amoco--may worsen transfer pricing abuses, McIntyre says.

"Chrysler reported $879 million in federal income tax payments in 1995 and $963 million in 1996," McIntyre says. "One wonders whether that will fall off sharply now that Chrysler is foreign controlled."

The second important tax escape for big corporations involves a complicated financial shell game in which companies pay interest to non-taxable offshore subsidiaries, and then deduct the interest payments from the U.S. income. The companies, and their accountants and lawyers have become increasingly aggressive in using this tax-avoidance ploy, which McIntyre now rates as a more serious problem than transfer pricing.

While tax policy can always deteriorate into incredibly arcane debates, there are relatively simple solutions available to solve the corporate tax-avoidance plague. Existing law is largely sufficient to handle the problem of intra-company interest payments, McIntyre says, but Congress--heavily influenced by corporate lobbyists--has blocked the Treasury Department from effectively clamping down on corporate tax avoiders who use this scheme.

Dealing with transfer pricing would require new legislation and perhaps international agreements, but the basic principle is clear: corporations should have to pay taxes, in some jurisdiction, somewhere, on 100 percent of their income.

These two maneuvers are of course only two ways that multinationals in particular avoid taxes. There are dozens of other tax loopholes that companies exploit to drive their tax payments down to zero.

The alternative minimum tax is supposed to require that profitable companies pay some federal income tax, to prevent companies from using tax preferences to get to zero tax payments. Unfortunately, Congress has progressively gutted the alternative minimum tax, so that the number of no-tax-paying corporations is on the rise. There is an important fairness issue here--why should corporations get off the tax hook when working people pay their fair share?--but much more than just fairness is at stake.

Corporate tax freeloaders steal from society: either citizens pay more to fill the corporate tax gap, or the resulting shortfall in government income leads to under-investment in health care, education, clean water, public transportation and the many other positive things that government funds or provides for the benefit of all citizens.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators (Monroe, Maine: Common Courage Press; see http://www.corporatepredators.org). To subscribe to weekly corp-focus e-mail service, send an e-mail message to listproc@essential.org with the following all in one line: subscribe corp-focus -your name- (no period).