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<H1>How corporations avoid paying income taxes</H1></DIV>
<P class="byline author vcard"><SPAN class=fn><A
title="mailto:kpender@sfchronicle.com
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href="mailto:kpender@sfchronicle.com">Kathleen Pender</A></SPAN></P><SPAN
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Francisco Chronicle</SPAN></SPAN> <SPAN style="DISPLAY: none" class=updated
title=2011-04-20T04:00:00-07:00>April 20, 2011 04:00 AM</SPAN> <A
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<P class=date>Thursday, April 21, 2011</P></DIV></DIV><!--/.articleheadings --><!-- types/article/articletools.tmpl -->
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<P>With all the talk about how companies like General Electric and Cisco pay no
or very low U.S. taxes, reader Hal Helfan of Oakland wants to know why can't
there be an alternative minimum tax for corporations like there is for
individuals, to make sure that companies can't use loopholes to wipe out their
tax burden. </P>
<P>"If the AMT rate were set appropriately, it would probably be easier to lower
the corporate tax rate and would definitely be a boon to small corporations that
don't get much benefit from tax credits," he writes.</P>
<P>In fact there is a corporate AMT, and it works very much like the individual
AMT.</P>
<P>Corporations figure their tax under the regular system, which taxes corporate
profits at a top rate of 35 percent. Then they figure it under the AMT system,
which tosses out some deductions allowed under the regular system, and taxes the
resulting profit at 20 percent. The corporation then pays whichever tax is
higher. </P>
<P>Many large corporations are subject to AMT, especially capital-intensive
companies that lose depreciation and other deductions under AMT.</P>
<P>But there are two problems with the AMT. Although it's extremely complex to
comply with, it's not all that tough. </P>
<P>"It's more than anything a nuisance revenue raiser," says Martin Sullivan, a
contributing editor to Tax Analysts.</P>
<P>More important, it does not apply to the profits that U.S. companies earn or
purport to earn abroad. U.S. multinationals have found myriad ways to shift
profits to foreign tax havens. </P>
<P>These companies do most of their business in the United States and other
moderate-tax countries such as Germany, England and Spain.</P>
<P>But they often put their intellectual property - such as trademarks or
patents - into subsidiaries in low-tax countries such as Switzerland, Ireland,
Bermuda or the Cayman Islands.</P>
<P>When one of the company's subsidiaries in a higher-tax country sells a
product, it pays a royalty to the subsidiary in the tax haven. That shifts
profits to the low-tax country, while the subsidiary in the high-tax country
gets a tax deduction for the royalty payment.</P>
<P>"The income is taxed at a lower rate, and the deductions are enjoyed at a
higher rate," says Robert Willens, a Wall Street accounting expert.</P>
<H3 class=subhead>Cutting overseas tax rates</H3>
<P>There are other ways companies can reduce or avoid tax on foreign profits.
Bloomberg Businessweek reported that Google used a convoluted process known as
the "double Irish" and the "Dutch sandwich" to cut its overseas tax rate to just
2.4 percent between 2007 and 2009. </P>
<P>General Electric, according to the New York Times, paid no U.S. taxes for
2010 despite reporting worldwide profits of $14.2 billion, including $5.1
billion in the United States. It used a variety of tax beaks including an
"active financing exclusion" that lets it defer U.S. tax on foreign lending
income.</P>
<P>U.S. companies generally pay no tax on their foreign profits until they
repatriate them or bring them back home.</P>
<P>Rather than pay the tax, most U.S. multinationals let their overseas profits
accumulate offshore until they can persuade Congress to give them a tax holiday
on repatriated profits.</P>
<P>In 2004, Congress passed a law that gave U.S. companies a one-time chance to
repatriate their foreign profits at an effective tax rate of 5.25 percent. (The
actual rate was closer to 3.7 percent after foreign tax credits.)</P>
<P>Congress bought the companies' argument that they would use the profits to
increase spending and hiring domestically and that getting 5 percent in tax
would be better than getting nothing if the companies never brought their
earnings home.</P>
<P>Companies were supposed to develop a plan for how they would use the money.
Approved uses included hiring and training U.S. workers and investing in
research, development and infrastructure. Prohibited uses included executive
compensation, shareholder dividends or stock buybacks.</P>
<P>However, they were not required to submit their plans to any government
agency nor to trace or segregate the repatriated funds.</P>
<H3 class=subhead>Repatriations, then layoffs</H3>
<P>According to the Internal Revenue Services, 843 corporations took advantage
of the holiday to repatriate $362 billion, of which $312 billion qualified for
the tax break. </P>
<P>Although companies say they used the money as Congress intended, several
studies found they did not.</P>
<P>A study published last year by the National Bureau of Economic Research found
that repatriations "did not lead to an increase in domestic investment,
employment or R&D - even for the firms that lobbied for the tax holiday
stating these intentions and for firms that appeared to be financially
constrained. Instead, a $1 increase in repatriations was associated with an
increase of almost $1 in payouts to shareholders."</P>
<P>A report by the Center on Budget and Policy Priorities said that companies
including Hewlett-Packard, Pfizer, Ford, Merck and Honeywell announced large
layoffs shortly after repatriating funds.</P>
<P>Now companies such as Cisco, Oracle and Google are lobbying for another
repatriation holiday, saying it could bring back up to $1 trillion in foreign
earnings.</P>
<P>In a blog post, Cisco chief John Chambers said that $1 trillion is "an amount
larger than the original stimulus. Imagine what an injection of hundreds of
billions of dollars in capital could do for the country."</P>
<P>But the Center on Budget and Policy Priorities says "a second holiday would
send a powerful message to corporations to shift investment and jobs overseas
and hold the profits there - until yet another tax holiday is declared. Indeed,
enactment of another such holiday would further embed the shifting of
investment, jobs and profits overseas as a major tax avoidance strategy for many
U.S. multinational corporations."</P>
<P class=dtlcomment>Net Worth runs Tuesdays, Thursdays and Sundays. E-mail
Kathleen Pender at <A
href="mailto:kpender@sfchronicle.com">kpender@sfchronicle.com</A>.</P>
<P id=pageno>This article appeared on page <STRONG>D - 1</STRONG> of the
San Francisco Chronicle</P></DIV></DIV></DIV><BR><BR>Read more: <A
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