The $1.95 trillion offshore elephant

George Blacksell

In 2013 US corporations accumulated a total of $1.95 trillion outside the US. That is up 11.8 percent from the previous year. Corporation tax has been a hot topic of late, not least for the likes of Google, Starbucks and Amazon. They came under significant scrutiny for their tax avoidance practices. What’s more is that a new trend is emerging, as tech companies are rivaling the financial industry as the main stockpilers of these offshore cash reserves. Microsoft, Apple, and IBM account for over 18 percent of the total increase in reserves.

Crucially, the direct result of these increasingly large stockpiles means that ‘Uncle Sam’ is missing out on huge potential corporate tax revenues. Loopholes in the US tax code mean that companies can make it look as though they earn their profits offshore. Consequently, they avoid taxation by the US Federal Reserve Bank. In the case of tech companies, they often move their patents and intellectual property to offshore areas of low taxation.

In order for the money to re-enter the US economy, for the purposes of an acquisition or to pay shareholder dividends, the company’s cash would be liable to a 35 percent corporate tax rate. A 2013 US Congressional Research Service Report cites that academic estimates of the resulting missed revenue range from $30billion to $90billion, equal to roughly one quarter of total revenue from corporate taxation last year. However, Congress is deadlocked as to how to approach this increasingly prominent issue.

Many of those within the technology industry are arguing for lower domestic corporate tax rates in order to incentivize companies to bring profits the back home. Obama already proposed in February 2012 to reduce the top corporate tax rate to 28%. Others have argued for a more robust approach to closing the loopholes. Senator Carl Levin has been a particularly vocal critic of US corporate tax avoidance, where offshore subsidiaries amount to ‘nothing more than a post office box’.  As a result, Levin co-sponsored a bill called the ‘Stop Tax Haven Abuse Act’ in September 2013.

Stockpiling cash can help ensure a company has a high credit rating. It also enables it to pay off debt in the event of volatility in capital markets. Keeping these stockpiles offshore, however, means that these companies are unable to use the money to invest in business expansion. Not only does the Fed miss out on tax revenue, the growing stockpiles of cash means that business investment is falling short of the profits companies are reaping – particularly in the technology sector. While these companies are not short of money, it would appear they are short on ideas. For an industry that prides itself on relentless innovation and R&D, an ever increasing stockpile to ‘save for a rainy day’ appears disingenuous.

The debate on corporate taxation is often one of fairness. How ethical is the ever growing tax avoidance by corporations in this era of austerity? Corporate Citizenship writes on tax as a CR issue and the implications for multinationals here. Corporates will increasingly find the need to communicate and justify the reasons for their cash stockpiles to reassure customers and investors alike. The larger the offshore elephant becomes, the harder it is to ignore.

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