Smart TaxesSmart Taxes

Why corporations pay less taxes than you

Corporations are living the island life -- or at least their shadowy shell companies are -- and saving a bundle on taxes as a result.

By MSN Money Partner Jul 24, 2014 11:30AM

This post comes from Maryalene LaPonsie at partner site Money Talks News.
 

Money Talks News on MSN MoneyWhile you may be dutifully sending off 25 percent or more of your income to the federal government each year, corporations are sharing a whole lot less with Uncle Sam.


According to a 2013 report from the U.S. Government Accountability Office, profitable corporations paid a mere 13 percent in federal income taxes in 2010. For comparison, the statutory tax rate -- that's the one set forth in law -- is 35 percent.


So how do corporations get away with paying only 13 percent of their income in taxes when they should be paying 35 percent?


One word: loopholes.


Or, if you're feeling generous, let's call it creative accounting.


Corporations taking money on a permanent vacation

It might surprise you to hear that a single building in the Cayman Islands serves as the address for nearly 19,000 businesses. At least that's according to a report (.pdf file)  issued by advocacy groups U.S. Public Interest Research Group and Citizens for Tax Justice.


Using offshore tax havens appears to be the No. 1 way corporations avoid paying U.S. income tax. They (legally) set up subsidiaries in foreign countries -- usually ones that charge no or low taxes -- and then credit profits to those shell companies.


U.S. PIRG and Citizens for Tax Justice say Apple is the biggest offender, having booked more than $111 billion offshore in 2013. Of course, Apple says it pays every penny it owes and, technically, that's correct.


However, when the company CEO testified to Congress in 2013 and said the company's federal tax rate was 30.5 percent, some said it wasn't the full picture. According to research cited by Bloomberg, Apple pays a tax rate of just 14 percent worldwide. "Apple has attributed $30 billion in income since 2009 to an affiliate that is incorporated in Ireland, where it has no employees," Bloomberg said. That affiliate pays a tax rate of 2 percent.


Staying one step ahead of the game

It should be stressed that all of this is perfectly legal. We can debate the ethics, but the law says it's OK. Not that the government hasn't tried to curtail some of these practices. It's just that the companies are staying one step ahead of the game.


Taxes © Thinkstock/SuperStockWhen Congress cut off tax benefits for profits made by businesses in Puerto Rico, companies simply transferred those profits to the Cayman Islands instead. Other firms have taken to acquiring foreign companies and then moving their headquarters to the foreign site in an increasingly popular tactic known as tax inversion.


President Barack Obama has called for an end to tax inversion and legislation is being drafted, but it remains to be seen whether it will pass and whether it would have the desired effect. It may simply send businesses back to the books to find other creative ways to lower their tax burden.


Other ways corporations avoid taxes

While offshore tax havens may have the highest profile when it comes to corporate tax avoidance, they aren’t the only way businesses save money.


Another way is accelerated depreciation. Under IRS rules, in some cases businesses can accelerate the depreciation of equipment and similar assets. Using this method, companies may be able to double their tax deduction in the first year after some new purchases. Businesses with corporate jets also benefit from a loophole that allows them to depreciate their planes on a five-year schedule compared with the seven-year schedule followed by airlines.


Then there's the "excess stock option" tax break, which Citizens for Tax Justice said  saved 280 Fortune 500 companies a total of $27 billion in federal and state income taxes in a recent three-year period. The group said Facebook used that tax break "to avoid paying even a dime of federal and state income taxes in 2012."


Finally, while not a corporate loophole per se, business executives get their own special perks. For example, hedge fund managers can claim their income as capital gains, which means they pay only 20 percent rather than the up to 39.6 percent marginal tax rate they may otherwise be on the hook for.


The world of corporate tax avoidance is wide and deep. For more reading, Bloomberg has a series of articles on the subject. You might want to take some antacid first because what you read could give you indigestion.


Some argue that corporate tax loopholes encourage business growth and job creation. Others say it's an unfair manipulation of the tax code.


What say you?


More from Money Talks News

VIDEO ON MSN MONEY

204Comments
Jul 24, 2014 5:31PM
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Flat tax. No credits. No deductions.  The tax code should be two sentences long.
Jul 24, 2014 3:37PM
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I do not think anyone wants the rich to pay a higher tax, they just want the people that make big money to pay the same percentage on the dollar as those that make less. What is wrong with that?
Jul 24, 2014 2:37PM
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It's bunk when corporations complain about the excessively high tax rates they're subjected to.  We've all read about companies (GE, PG&E, Verizon, Wells Fargo, Boeing, etc.) who through many loopholes effectively pay no federal income taxes.


All the more reason why everyone in America, be it the individual taxpayer, or corporations should pay a flat federal income tax rate with minimal deductions.

Jul 24, 2014 3:13PM
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I don't care for loopholes either, or subsidies provided through the tax code for anyone. However, you should know that COMPANIES DON'T PAY TAXES, THEIR CUSTOMERS PAY THEM. Taxes are just another expense to a company, which has to be passed through to customers through pricing eventually. So in essence corporate taxes are just sales taxes on consumers. But worse, it makes US companies less competitive with other companies (in Hong Kong for instance) that don't have these taxes. So high corporate taxes are just another incentive to send jobs overseas.
Jul 24, 2014 9:01PM
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Yes, so what do corporations  do with money they get?? It is paid out in dividends to people who have to list it as "income" and -------- Pay taxes on it. They pay it out in salary's to employees who in turn----Pay taxes on the income. They purchase goods for company use (taxes collected again). They invest in research, which can take more employees (that pay taxes) and the company pays out employee benefits which can be taxed. So it is NOT the same as you and I.
Jul 24, 2014 6:13PM
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"Corporations are people too, my friend"-Mitt Romney. And people complain about Obama.
Jul 24, 2014 3:57PM
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Corporations don't pay any taxes, they collect them from their customers.   They are nothing more than hidden sales taxes. 


Corporations react to government mandates (taxes and regulations) that increase costs in one of two ways.  The first is to raise prices.  If competitive pressure prevents that, then they cut costs with layoffs, salary freezes, and other cut backs.


Democrats love corporate taxes, cause they can rail against evil corporations and at the same time tax the very people they want help more.  Cynical...

Jul 25, 2014 6:17AM
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The myth of "corporate taxes" just won't die.  Every dime a corporation pays in taxes comes from the consumers of its products.  You want corporations to pay more taxes?  Where do you think the money will come from?  Does anyone really believe that the U.S. govenment collects insufficient taxes to provide essential services?  3.7 billion dollars to take care of the most recent onslaught of illegal immigrants.  trilllions of dollars for the ACA.  billions of dollars in fraud and waste for a failed welfare system.  Yep-- let's collect more taxes to squander.  Let's put our children and grandchildren further into debt.   
Jul 24, 2014 7:32PM
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Eliminate the corporate income tax completely. Then get rid of capital gains tax rate. All corporate profits would then pass to the stockholders who would pay the full tax rate. Companies would not need to leave the US to lower tax rates. Stock holders pay tax to the country where the company is located regardless of their citizenship.
Jul 25, 2014 10:12AM
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Corporations don't pay taxes.  Only consumers.  This is a stupid article and issue.  If you raise taxes on corporations, they just raise their prices and you pay more for stuff. 
Jul 25, 2014 3:10AM
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What they didn't talk about was how those loopholes came to be.


In a word, lobbying.


The problem is that small businesses cannot afford lobbyists, so the big companies get the 13% tax rate and the small companies get the 35% tax rate. This hurts the small business and benefits the large business.


So how do we level the playing field and make it attractive to both large and small businesses?


We eliminate the corporate income tax completely.


This sounds like a bad idea that will drastically reduce tax revenue, but the corporate income tax only brings in about $300B annually due to those pesky loopholes. The corporate tax also encourages companies to set their headquarters in places like Bermuda so that income from overseas sales don't enter the US at all. SO if a company does 50% of its business overseas and has a total profits of $100B, the US will only have a shot at $50B. That means that US employees are only able to earn the income off of the 50% of business done in the US and individual tax revenue falls.

However, if you eliminate the corporate income tax, there is no incentive to lobby for a lower tax rate, no need for expensive tax lawyers to find and utilize those loopholes and no incentive to locate any of the business overseas for tax purposes. This leads to more businesses in the US and more people  working for those businesses. That also means more individual tax revenue from those employees and lower welfare and unemployment payments from the government.

All in all, eliminating the corporate income tax would be a good thing for everyone.


Jul 25, 2014 12:11AM
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I'll take 13% of ANY corporations' money over 25% of ANY individual earner's money any day, any time, any where. Corporations are leaving the US because of the high taxes they pay in comparison to foreign companies.
Jul 25, 2014 8:58AM
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Here's a little secret for you:  Corporations, and for that matter, any other business, do not pay taxes...none.  They build the cost of whatever taxes they do pay into the cost of the product you buy.  The ONLY person who pays taxes is the end user.   All others pass the costs of their taxes onto the final buyer.  Corporate taxes only serve to drive the final cost of the product or service up, and is a hidden tax on the end user.  Because of the tax code, the business has to hire accountants and lawyers and spend money on computers and equipment to keep all of the records.  You end up paying for all of that personnel and infrastructure in the form of higher prices.   This principle of economics is one of the first things you'll learn in just about any college level econ. 101 class.

 

 

 

 

 

Jul 24, 2014 11:35PM
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From what I have read. Corporations like Wal Mart pay higher taxes then Corporations like Berkshire Hathaway and Microsoft. Buffett uses the tax system to hide their profits. While companies uses of shore companies to hide profits. A lot off these limousine liberals. Hide taxes from US taxes even though they these use the to US as a basis of there innovations.
Jul 24, 2014 5:33PM
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Without the loopholes, we have the highest corporate tax rate in the world...no one would do business here and you'd have a bigger problem than worrying about other peoples money.


Jul 24, 2014 6:14PM
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13% Corporate tax rate being paid............

I'm ok with that............Being that IT'S WE THE PEOPLE who ACTUALLY pay those taxes when we purchase their products........13%-18% is on par with the REST OF THE WORLD..........


But I'm sure........the LIBERALS WILL SCREAM for MORE TAXES....."YOUR FAIR SHARE" blah, blah, blah,.........and the SAME LIBS biotch & whine about "Things being Soooooooo Expensive"......

Jul 24, 2014 6:52PM
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Three things to consider about corporation income taxes.  First in the U.S. we have the highest corporation tax in the world, among the highest wage rates, and relatively high environmental standards.  Those are three reasons corporations do business overseas.

Second, corporations print no money of their own. All the money they pay for payroll taxes (SS, Medicare, Workman's Comp., unemployment ),  property tax,  state income tax, and federal income tax is money that we the consumers of their products and services pay to them.

Third, consider what corporations can do with any profit they make,  Obviously they can pay taxes.  Pay higher salaries and wages to employees, invest in more plant and/or equipment, hire more employees, pay dividends to stockholders, all of which will result In more tax income to the government.  They can also make charitable or political contributions if the stockholders don't object.  So, there is actually no economic reason to have corporations pay income taxes, it is just politically expedient since  the people providing the money for their income taxes don't think about where the money comes from!

Jul 24, 2014 6:46PM
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FUNNY THING--CORPORATIONS PAY AN AVERAGE 23% RATE--WE ALL KNOW THAT 47% OF ALL WAGE EARNERS PAY NO INCOME TAX AT ALL--IRS SAYS SO-- AND AS I'M SURE SOMEONE SHOULD POINT OUT TAXING THE CORPORATIONS IS DONE TO HIDE THE FACT IT COVERS THAT THE CUSTOMERS REALLY ARE GETTING HIT WITH A FAT TAX HIKE WHEN THEY BUY ANYTHING SINCE THE TAXES ARE IN THE COST OF DOING BUSINESS. IT WOULD BE MUCH MORE HONEST OF THE POLITICOS TO RAISE THE RATES ON INDIVIDUALS AND DO AWAY WITH CORPORATE TAXES ALTOGETHER---THIS IS JUST ANOTHER POLITICIANS SCAM!!!!!
Jul 28, 2014 7:47PM
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Democrat, Libertarian, Republican..........Upper class, Middle Class, Corporate, Whatever.  15%, 25% or 35% doesn't matter.  The GOVERNMENT is stealing your money!  Divide and Conquer!  People need to stick together.  The Governmnet should work for the people not the other way around!
Jul 28, 2014 6:58PM
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Barry is a dick and the media are distracting you from his inept management of an entity that is much more significant than his ego.  Corporations are not the problem - Obamaville's administration is the problem.
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