Avoiding Federal Income Taxes – Another Tax Loophole
How Many Companies Are Avoiding Federal Income Taxes
In a recent report, a left-leaning Washington think tank looked at how 55 major corporations are avoiding federal taxes. These companies include Nike, FedEx, and Duke Energy. Publicly traded companies are required to file financial reports containing federal income tax expense. The Institute on Taxation and Economic Policy used information provided by companies to identify how the companies were able to avoid paying federal taxes. These companies are often so large that the information they provide is difficult to obtain and fully understand.
Offshoring of profits can provide tax breaks for companies
The federal government is considering a controversial new tax break for offshoring of profits. Companies like Nike and Amazon can get tax breaks in a foreign country by shifting their profits. The rate of foreign corporate income tax can be 0% to 10%, providing companies with an incentive to shift their profits offshore. Nike and Amazon have already shifted their manufacturing operations to low-tax countries, such as India. Basically, what they do is move a large part of their operations to a country with a low tax rate, and as long as they don’t move those profits back to the USA, they aren’t subject to USA income tax.
Companies can outsource tasks because it’s much cheaper to hire workers in a foreign country than to hire people in-house. Apple, for example, uses cheap labor in the Philippines, China, Malaysia, and Vietnam. Companies like Nike and Amazon often offshore their marketing efforts to avoid paying high living costs in the United States. But how do companies like these get these tax breaks? Companies can do both by outsourcing, offshoring, or anchoring, thus avoiding federal income taxes.
Impact of new 15% minimum tax on corporate profits
The impact of the new 15% minimum tax on corporate profits is an important question to ask. Moreover, the tax is likely to be subject to the same nuances as the Tax Cuts and Jobs Act. As the name suggests, the Act aligned the definition of income for Federal income tax purposes with revenue recognition for financial accounting. Although the two terms are used interchangeably, courts haven’t always treated them the same way.
In addition, the global minimum tax is likely to have a negative impact on countries with lower headline rates, as the burden of paying the tax will be shifted to lower-tax jurisdictions. However, the OECD blueprint targets profit shifting that involves intangibles and substance-based incentives. The imposition of the global minimum tax will inevitably have a negative impact on these tax incentives. In the long run, the impact on a country’s tax revenue is likely to be more detrimental than any one country’s.
The proposed 15% minimum tax rate would apply to multinational companies with sales of at least 750 million euros worldwide. This tax rate would apply globally to multinational companies, unless they have a presence in more than one country. However, if companies pay lower rates in one country, home governments could “top up” their taxes to the global minimum tax rate. The new minimum tax rate would end multinational profit-shifting strategies.
Cost of corporate tax breaks to U.S. government
The cost of corporate tax breaks to the U.S. government is rising, and the United States is not doing a very good job of collecting corporate taxes or in closing any type of tax loophole. In fact, the corporate tax rate in the United States is lower than in most developed countries, accounting for less than one percent of GDP in 2019. Since the mid-’60s, the corporate tax rate has fallen steadily, with the current rate less than half that of the 1950s and 1960s. All because large companies are avoiding federal income taxes due to tax loopholes.
The CARES Act was intended to help people during a pandemic, and one of its provisions allowed corporations to carry back losses and offset profits from prior years. In a recent study, many companies reported significant benefits from this act but did not break out the effect of the carryback changes. Still, some of these companies may have benefited from the CARES Act largely because they are small enough not to be impacted by its provisions.
According to the Institute on Taxation and Economic Policy, 55 of the USA largest corporations did not pay any corporation federal income taxes in their most recent fiscal year. These companies enjoyed a combined pretax income of nearly $40 billion in 2020, which would have been $8.5 billion if they had paid their taxes. Interestingly, the companies received tax refunds of $3.5 billion. These companies have received a total of $12 billion in corporate tax breaks in 2020. You can be sure the tax year 2021 will be equal or more. You would think this tax loophole would have been closed a long time ago.
Who pays federal taxes to make up for this shortfall?
It doesn’t take a genius to figure this out. If the wealthy have tax shelters, etc. to lower their tax bill and the poor don’t earn enough to pay much in taxes, who’s left? Right again, we middle class taxpayers are bearing the brunt of this tax loophole and many more.
The Democratic bill that just passed through the Senate, the Inflation Reduction Act, originally contained language to correct the “carried interest tax loophole”, but it was removed because a certain senator from Arizona wouldn’t vote yes unless it was taken out. I wonder if the $2.5 million she received from financial PACs influenced her in any way? No one would do that, would they???
It makes me wonder if large political contributions have influenced the self-serving politicians to leave this tax loophole in place and so many more? I include both parties, none of them is innocent of these charges. A good place to start might be to declare all lobbying illegal. None of them should be able to avoid paying federal taxes.