Depending on who you ask, paying taxes contributes to the commonwealth of a nation. But if you can avoid it, it contributes to the company’s bottom line, its ability to become more of a global powerhouse, and makes shareholders, large and small, happy. It might even make them rich.
Most of the companies in the S&P 500 pay less than 15% in taxes, according to a study published by Tax Notes this week. It is subscriber only.
We’ve all read Warren Buffet saying that he should pay more in taxes, in percentage terms, than his secretary. He is talking about income tax. But if his company, Berkshire Hathaway BRK.B , is any indicator as to how companies really think about taxes — it’s this: they hate them. They want to avoid them like its SARS-CoV-2 on a crowded subway train.
Berkshire Hathaway’s federal tax rate for 2019 was just 5.2%. That’s huge, actually, compared to Citigroup C . Citi paid just 1.5% of its profits to the IRS.
Jeff Bezos’ Amazon AMZN paid 4.3% and Disney, the guys who just filmed Mulan in Xinjiang, the Chinese province the U.S. House of Representatives recently passed (with only three dissenters) a bill on that would ban all commerce with them for issues related to the Uyghur Muslim population, paid a whopping 0.1% to the IRS.
By comparison, Apple AAPL looks like a bunch of woke capitalists. They paid nearly 10% of their profits to the IRS. That’s more money for state subsidies to things like affordable housing, healthcare, and schools, or basically the federal funding of things that promote equality, and not income disparity.
The Tax Notes article stemmed from proprietary research by the Coalition for a Prosperous America (CPA), led by economist Jeff Ferry.
The percentage rates listed above are not the effective tax rate that companies are charged. It is what they end up paying after some fancy footwork, write-downs and exemptions. It is what the government actually ends up collecting off their profits.
CPA looked at all of the 500 companies listed in the S&P 500 Index. Some 402 of them paid under 15% in taxes.
“How can you stop it? The easiest way is you say to companies like AbbVie ABBV (1.2% paid to the feds) that if 65% of your sales are from the U.S., then we are going to consider that 65% of your profits are from the U.S., so instead of claiming you lost $2.6 billion because you’re paying royalties on your own drugs from your Bermuda headquarters at a loss, then you would have shown a profit and will be taxed on that,” says co-author Bill Parks.
Parks advocates for a graduated corporate tax rate, something we had back in the 1980s. The higher the profit, the higher the tax rate. As it is now, highly profitable companies like Intel INTC (5.8% federal tax rate based on their 10-K files with the SEC) are burdened less by taxes than small and mid-sized businesses.
In an ideal world, or one with a fairer tax system, big multinationals wouldn’t necessarily end up paying 15%; they might just pay 10%. But that’s better than Disney’s half percent. That leaves room for governments to cut taxes on small and mid-sized firms that are more glued to the domestic economy, and don’t have the money to burn on tax accountants and attorneys skilled at finding legal loopholes.
S&P 500: 0.2% of Corporate Tax Returns
According to the study, the S&P 500 companies accounted for just 0.02% of the corporate tax returns filed with the IRS for 2019 but 59.4% of the $230 billion in total corporate tax receipts. That shows how important they are, even while paying so little.
Looking closely at the S&P 500 companies provides useful insight into the majority of federal corporate tax receipts. The S&P 500’s federal tax payment rate for 2019 of just 8.7% on average shows that large U.S. companies pay far less than the 21% C-Corp rate, which was reduced by the Republicans in President Trump’s first year in office.
The effective tax rates (ETR) are often quoted by corporations and the media as an indicator of the tax they have to pay, but not what they really paid.
Critics of the current system generally favor tougher measures to stem profit shifting. But profit shifting continues in what Ferry and Parks call a “race to the bottom” phenomenon that drives more corporations to intensify their tax-minimization strategies in order to compete with their global rivals and be attractive to portfolio investors who still look at things like after tax profit margins.
Profit shifting is sometimes thought to be the preserve of intellectual-property-intensive industries — namely technology and pharmaceuticals who create subsidiaries that hold their IP, and then charge themselves royalties to use it. The late University of Southern California law professor, Edward Kleinbard, a respected tax expert, showed in a 2013 study how Starbucks SBUX successfully used profit shifting to avoid paying corporate taxes in the U.K. for many years despite being profitable.
It used subsidiaries in Switzerland and the Netherlands to effectively zero out its U.K. tax liability by claiming the value all came from Starbucks’s recipes, ostensibly located in the other two countries. They were like “renting” their own intellectual property from those low-tax jurisdictions and declaring that rent cost as a loss against profits, Kleinbard wrote.
Nations continue to woo multinationals by promising them low taxes, and offering the biggest amount of end-arounds taxation to the point where taxes become a non-issue to the truly savvy CFO.
When the U.S. corporate tax rate went from 35% to 21%, on par with China’s, many firms saw themselves catching up with lower cost emerging markets. Some famously gave their workers a raise.
The problem is, other countries followed suit.
The U.K. cut its corporate tax rate from 19% to 17% in April. They’re trying to keep companies there as Brexit kicks in. But they are also trying to keep companies there instead of going to countries with enough tax loopholes to make them bona fide tax havens like Ireland and the Netherlands, which offer low tax rates along with the ability to locate operations within the European Union.
The United States has to compete with both “pure” zero tax havens — Cayman Islands — and advanced economies for corporate location decisions and the related tax implications.
CPA report authors said that a system of “sales factor apportionment” would bring greater fairness and transparency to corporate taxation and generate more revenue for the federal government.
Their analysis suggested that such a system, with a tax rate at 21% would generate an additional $97.8 billion for the U.S. Treasury, or a 42.5% uplift in corporate tax revenue.
It would also enable Congress to maintain current tax revenue levels while slashing the headline rate to 15% under such a system.
A progressive tax schedule, in addition to that, could discourage companies from growing too large through M&A.
In a sales factor apportionment scenario, say the CPA authors of the Tax Notes article, it could increase the total corporate tax revenue base while ensuring that the majority of companies pay either the same or less tax than they do today.
“The current corporate tax system is so easily exploited that if your tax director hasn’t figured out a way to shift profits then you’re CEO is going to start looking for a new CFO,” says Ferry.
“The beauty of sales factor apportionment is we don’t care where you build it; your profits are taxed in the country where you’ve made it, so if 50% of your profit comes from the U.S., you’re just taxed here on that,” says Ferry. “Ultimately, the world’s going to get there. The question is for how long can the multinationals put this off and deny the arrival of the inevitable because today’s system is just completely indefensible.”