July 01, 2014
Eileen Appelbaum
US News & World Report, July 1, 2014
Last month, Medtronic, a leading U.S. medical device maker, announced plans to merge with its smaller Irish rival Covidien and move its headquarters to Ireland. The reason? Medtronic wants to make Ireland its tax home and avoid paying U.S. taxes It comes close on the heels of U.S. pharmaceutical company Pfizer’s recent, aborted hostile attempt to take over AstraZeneca in order to move its headquarters to the U.K. The Medtronic merger is just the latest example of a wave that began in the 1980s, but is now a tsunami of measures taken by leading American corporations to exploit loopholes in the tax code and avoid paying U.S. taxes.
Gabriel Zucman – a student of Thomas Piketty – analyzed data on U.S. international transactions from the Bureau of Economic Analysis to document just how extensive tax avoidance by U.S. companies has become. He finds that U.S. multinationals attribute 55 percent of their foreign profits to six tax havens. Today, close to 20 percent of all U.S. corporate profits – domestic as well as foreign – are squirreled away in these countries, up from about 2 percent in 1984. This is a tenfold increase in the use of tax havens over the last three decades. The effective tax rate on U.S. multinationals has fallen dramatically as a result, saving them a total of $200 billion in 2013 alone in avoided tax payments to the governments of the U.S. and other countries.
Central to this strategy is the transfer of rights to intellectual property developed the U.S. to a subsidiary in a low tax country. Reducing the U.S. corporate tax rate is not likely to halt efforts by U.S. multinationals to sock away profits in low- or no-tax jurisdictions. Ireland’s corporate tax rate is just a third of the U.S. rate. Yet some American multinationals have figured out how to avoid paying taxes to Ireland as well, using a technique known as the ‘double Irish Dutch sandwich to render profits stateless so that no taxes are owed to any government. Consider the example of Google.
In the “double Irish,” Google establishes two subsidiaries in Ireland. Google Ireland Holdings, managed from Bermuda, licenses the rights to intellectual property developed in the U.S. to Google Ireland Limited, which sells advertising rights in Europe, Africa and the Middle East and collects the advertising revenue. At this stage, much of Google’s foreign profits end up in Ireland, where the corporate tax rate is 12.5 percent. However Google Ireland Limited avoids these taxes by, ultimately, paying out these profits as royalties to Google Ireland Holdings which, under Irish tax law, is a Bermuda company. No taxes are paid on these royalties because Bermuda has no corporate tax. Because Ireland withholds taxes on royalty payments to Bermuda, Google has established a Dutch subsidiary, Google Netherlands Holdings, ‘sandwiched’ between the two Irish subsidiaries. Google Ireland Limited actually pays the royalties to the Dutch subsidiary, which then pays the royalties to Google Ireland Holdings. Irish law exempts this type of royalty payment to companies in other EU countries from the withholding tax.
IT companies like Apple and Microsoft, pharmaceutical companies like Pfizer and Eli Lilly, and medical device companies like Medtronic and GE hold numerous patents on intellectual property developed in the U.S., often with taxpayer dollars. They are especially well-positioned to take advantage of loopholes in the tax codes of various countries to minimize, if not avoid entirely, taxes paid to any government. Medtronic failed to mention the tax benefits of the merger with Covidien in its press release announcing the merger, but these were quickly noted by financial analysts viewing the 50 percent premium over Covidien’s share price prior to the announcement that Medtronic will pay Covidien shareholders.
It’s unclear where this will end if Congress doesn’t act soon to close the loopholes that enable multinational corporations to avoid paying profits taxes in the U.S. Covidien was a U.S. company until it moved its headquarters to Ireland five years ago while maintaining most of its operations in Massachusetts.
The share of corporate profits in national income has increased dramatically in recent years, but the share of corporate taxes in national income remains at 3 percent. The shortfall has to be made up through higher taxes on smaller businesses and individuals not wealthy enough to avail themselves of tax havens, and through cuts in vital government services that, wealthy as the U.S. is, our representatives in Congress maintain we are no longer able to afford. It is past time for Congress to take up tax reform and assure that every person, every business, and every corporation pays its fair share of taxes. A political system in which only the ‘little people’ pay taxes invites corruption, undermines the principle of shared civic responsibility, and puts our democracy at risk.
