Friday, April 15, 2011

Tax Havens and the Criminal Elite

Bailed-Out Firms Use Offshore Tax Havens
by Ken Thomas

Eighty-three of the nation's 100 largest corporations, including Citigroup, Bank of America and News Corp., had subsidiaries in offshore tax havens in 2007, and some of the companies received federal bailout funding, a government watchdog said.

The Government Accountability Office released a report that said Bank of America Inc., Citigroup Inc. and Morgan Stanley all had more than 100 units in countries that maintain low or no taxes. The three financial institutions were included in the $700 billion financial bailout approved by Congress.

Insurance giant American International Group Inc., which has received about $150 billion in bailout money, had 18 subsidiaries. JPMorgan Chase & Co. had 50 units and Wells Fargo & Co. had 18; both financial institutions received government bailout money.

Sens. Carl Levin, D-Mich., and Byron Dorgan, D-N.D., who requested the report, have pushed for tougher laws to fight offshore tax havens around the globe. Levin, who leads the Senate Permanent Subcommittee on Investigations, has estimated abusive tax havens and offshore accounts cost the U.S. government at least $100 billion a year in lost taxes.

"I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that," Dorgan said.

General Motors Corp., which received $13.4 billion from the federal rescue package, had 11 offshore subsidiaries while GM's financing arm, GMAC LLC, had two offshore units. GMAC, whose majority owner is private equity firm Cerberus Capital Management LP, received $5 billion from the Treasury Department in late December.

Citigroup said in a statement that it has more than 4,000 subsidiaries around the globe "which enables us to serve hundreds of millions of individuals and institutions in more than 100 countries." A News Corp. spokeswoman declined comment. Messages were left with several of the companies identified in the report.

Separately, the GAO said 63 of the 100 largest federal contractors maintain subsidiaries in 50 tax havens.

href="">A look at the world's new corporate tax havens
Lesley Stahl explains how U.S. corporations are cutting their tax bills by moving business overseas

Our government is in knots over ways to lower the federal budget deficit. Well, what if we told you we found a pot of money - over $60 billion a year - that could be used to help out?

That bundle is tax money not coming in to the IRS from American corporations. One major way they avoid paying the tax man is by parking their profits overseas. They'll tell you they're forced to do that because the corporate 35 percent tax rate is high in relation to other countries, and indeed it seems the tax code actually encourages companies to move their businesses out of the country.

Tax havens: Do companies pay their fair share?
"60 Minutes" correspondent Lesley Stahl talks tax havens and the new ways American companies are stashing their profits abroad.

Companies searching out tax havens is nothing new: in the 80s and 90s there was an exodus to Bermuda and the Cayman Islands, where there are no taxes at all.

When President Obama threatened to clamp down on tax dodging, many companies decided to leave the Caribbean. But instead of coming back home, they went to safer havens like Switzerland.

Several of these companies came to a small, quaint medieval town in Switzerland call Zug.

Hans Marti, who heads Zug's economic development office, showed off the nearby snow-covered mountains. But Zug's main selling point isn't a view of the Alps: he told Stahl the taxes are somewhere between 15 and 16 percent.

"And in the United States it's 35 percent," Stahl pointed out.

"I know. It's half price," Marti said.

Marti told Stahl that Zug most probably has the lowest tax rates in Switzerland.

"So you're kind of a tax haven within a tax haven?" she remarked.

"Maybe, yes," he acknowledged.

The population of the town of Zug is 26,000; the number of companies in the area is 30,000 and growing at an average rate of 800 a year. But many are no more than mailboxes.

Texas Democratic Congressman Lloyd Doggett questions whether the recent moves of several companies are legit. "A good example is one of my Texas companies that's been in the news lately, Transocean," Rep. Doggett told Stahl.

Transocean owned the drilling rig involved in the giant BP oil spill. They moved to Zug two years ago.

Another Texas company that moved to Zug is Weatherford, a $10 billion oil field services firm. It still has 2,800 workers in Houston. But according to official documents, they are incorporated in Zug, in a small building. But there was no Weatherford on the sign outside.

"Finally found it," Stahl said, searching over a row of mail boxes in the foyer of the building. "Listed in this thing: Weatherford International, here's the mailbox. But we don't know even where to go, because there's no listing for the international headquarters of Weatherford."

So Stahl started knocking on doors.

"We're looking for Weatherford. Are they in this building?" Stahl asked one woman working in an accounting office.

"Yes," she replied. "Just a moment let me check."

Stahl was shown to a conference room they said Weatherford rents for board meetings, but Weatherford's Houston office told us they never go there. So are these big companies pulling a fast one? Apparently not: under both Zug and U.S. tax laws, it's perfectly legal to get the low tax rate even without a real presence in Zug. But Rep. Doggett wants to change that.

"You have a proposed legislation that a company will be taxed not based on where they file some pieces of paper, but where their decision makers and management actually resides and makes decisions," Stahl remarked.

"Let them pay the same way that other Houston-based companies pay. And so if they have their management and control are there, they ought to be paying here in the United States. I think it's fair," Doggett argued.

We found that faced with the mere threat of Doggett's legislation, Transocean and Weatherford both recently packed up their top brass and shipped them to Geneva.

We were told Transocean's top ten executives live in the Geneva area, and work on the top two floors of a Geneva office building - everyone from the CEO to the chief financial officer, to the vice president of taxes.

They wouldn't talk to us on camera, and neither would Weatherford. They also moved their CEO and CFO to Geneva. And so now we're beginning to see a jobs exodus from the U.S. of top management.

"We can't write a law their lawyers can't get around. That's the whole problem here," Doggett explained.

"You're in Congress. Why did Congress write these laws that allowed this to happen?" Stahl asked.

"There's been a lot of arm twisting, a lot of effective lobbying here, and some really smart tax lawyers figuring out how to game the system with one shenanigan after the other," the congressman replied.

"But are they shenanigans or is it the law?" Stahl asked.

"I think it was a shenanigan when some of these companies felt so strongly about America that they renounced their American citizenship and began saluting a foreign flag. They exploited a provision in our tax laws and moved offshore," Doggett said.

Congress tried to put a stop to that with a law passed in 2004, mandating that any company that wanted to move offshore would still have to pay the 35 percent. But because of loopholes in the tax code, companies can substantially lower their taxes by moving chunks of their businesses to their foreign subsidiaries.

"I think when people hear that all these companies are moving overseas because of taxes, they think that doesn't smell right," Stahl said to Swiss tax attorney Thierry Boitelle.

"Yeah, the question is, 'Does a company have a moral obligation to pay its fair share?'" he replied.

"I think many companies in the U.S. would like to keep the jobs in the U.S. if they could, but they also need to keep their shareholders happy. And they are in the U.S. in a corporate tax nightmare because it's the highest tax rate in the world," Boitelle explained.

With Japan slated to lower its rate in April, the U.S. will soon have the highest corporate tax rate in the developed world.

"We are dealing with a tax system that is a dinosaur," Cisco CEO John Chambers told Stahl.

One CEO who would talk to us was Chambers. Cisco is the giant high tech company headquartered in San Jose, Calif. He says our tax rate is insane. It's forcing companies into these maneuvers, especially when many other industrialized countries including Canada are busy lowering their tax rates in order to lure our companies and our jobs away.

"Every other government in the world has realized that the U.S. has it wrong. They're saying, 'I'm going to have lower taxes, period.' That's what you see all across Western Europe, that's what you see in Asia in the developed countries," Chambers said.

When asked if he's judged as a CEO on issues like taxes, Chambers said, "Absolutely."

He's been expanding Cisco overseas because of growing demand abroad, but also to lower the company's taxes: their average rate over the last three years was just 20 percent.

Economist Martin Sullivan says it's standard operating procedure for companies like Cisco. "U.S. multinationals are shifting their research facilities, shifting their manufacturing facilities, and shifting some regional headquarters into Switzerland and into Ireland. And those are massive numbers of jobs," he told Stahl.

Sullivan says Ireland taxes corporations at just a third of the U.S. rate, so no wonder the outskirts of Dublin look like Silicon Valley. Many well-known companies are all but obliged to go abroad.

"Well, if you have a 35 percent rate in the United States and, for example, a 12.5 percent rate in Ireland, there's a incentive to move your factory to Ireland," he explained.

"Six hundred American companies are in Ireland and they employ 100,000 people," Stahl pointed out. "Those are jobs that aren't here. And they moved to Ireland because of taxes."

"The U.S. Treasury in effect is subsidizing investment in Ireland," Sullivan said.

"Why isn't everybody in Ireland if it's that great?" Stahl asked.

"Almost everybody is in Ireland," Sullivan said. "All the pharmaceutical companies, all the high tech companies. You're stupid if you're not in Ireland," he replied.

"We notice that you have an awful lotta companies in Ireland," Stahl told Cisco's John Chambers.

"Yes we do," he acknowledged.

By Stahl's count, Cisco has eight companies in Ireland.

"We do what makes sense to the shareholders," Chambers said. "We go where there are incentives in countries that say, 'We want you here, we're going to give you tax advantages, and we want you to add jobs here, etc.' We can no longer in America say, 'This is how we do it, therefore you must do it.' We've gotta change, or we're going to be left behind."

An increasingly popular way, particularly pharmaceutical and hi-tech companies like Google avoid paying the 35 percent is to shift their patents, computer code, pill formulas, even logos from their U.S. bases to their outposts in low-tax countries.

"A hundred years ago, if a company would want to relocate, you know, you'd have to pick up a factory, machinery and move everything. Today, a company can move predominantly all of its assets just on paper," Swiss tax attorney Thierry Boitelle explained.

"Or Coca-Cola could take the recipe out of the vault, put it in a Swiss vault," he said.

"And then it's Swiss?" Stahl asked.

"Yeah," he replied.

When a formula or a computer code is registered abroad - say in Zug - a U.S. company is allowed to claim a lot of its taxable profits are there, even if most of its sales are in the U.S.

Economist Martin Sullivan told Congress these patent and profit transfers are accounting tricks that have allowed companies to chip away at the 35 percent and save tens of billions of dollars. He says that from 2007 to 2009 these maneuvers helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.

"It's really remarkable, as I review the data, is the consistency with which you see this phenomenon. The taxes are going down, the profits are shifting offshore at an accelerated rate over the last few years," Sullivan said.

So now these companies have profits accumulating overseas in places like Zug.

If they bring the money home, it's taxed the full 35 percent. If they leave it overseas, the IRS can't touch it. In other words, the tax law all but forces companies to keep their money out of the country, indefinitely.

"We leave the money over there. I create jobs overseas; I acquire companies overseas; I build plants overseas; and I badly want to bring that money back," John Chambers told Stahl.

Chambers told Stahl Cisco has almost $40 billion overseas that could be brought back to the U.S.

The total amount of money U.S. companies have trapped overseas is $1.2 trillion. Chambers is advocating for a one-time tax break to allow them to bring that money home at a rate of, say five percent. That would, he says, stimulate the economy and create jobs.

"What is your downside for money that isn't going to come back anyhow? I'd say your downside is zero," he told Stahl.

But the Obama administration opposed this idea. When it was tried in 2005, the Treasury did rake in billions of dollars, though very few jobs were created.

"What if tomorrow Congress passed a quickie law and the tax rate was 20 percent? Would that solve everything?" Stahl asked.

"I think it is the most important ingredient that we have to think about being competitive," Chambers replied.

"You lower the rate from 35 percent to 20 percent. You lose something like $2 trillion in taxes. We have a horrible deficit crisis, debt crisis. That's almost too much money to lose. What's your answer to that?" Stahl asked.

"My answer's very simple: every other developed country in the world has already done this. I'm not asking to give me a favor, or a hand out," Chambers replied.

"You know what: it sounds it," Stahl remarked.

Chambers replied, "All we're asking is: Give us a level playing field. Get us close."

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