Silicon Valley Firms Shelter Assets Overseas, Avoid Billions in U.S. Taxes

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    FILE - In this Oct. 19, 2009 file photo, the Apple logo is seen on an Apple store in San Francisco. (AP Photo/Russel A. Daniels, File)

    The largest tech companies in the Bay Area have avoided paying federal taxes on more than $225 billion they have accumulated through foreign subsidiaries, documents filed with the Securities and Exchange Commission show. 

    By sheltering their assets overseas, Silicon Valley companies such as Apple, Google, eBay and Hewlett-Packard are able to reduce their annual taxes in some cases by billions of dollars, according to a Center for Investigative Reporting analysis of the50 largest firms’ financial statements filed in 2012.
    Widespread tax avoidance by some of California’s most prominent companies has contributed to federal revenue shortfalls as President Barack Obama and Congress consider whether to cut government programs. Some lawmakers say the tax code disproportionately favors powerful companies at the expense of other taxpayers.
    “What it demonstrates is that tech firms in particular have very low worldwide rates, and their demands for a more competitive U.S. tax system ring hollow,” said Edward Kleinbard, a tax law professor at the University of Southern California and former chief of staff for the congressional Joint Committee on Taxation. “In fact, the U.S. tax system subsidizes them, and a more neutral tax system would require tech firms to pay substantially more taxes.”
    The U.S. tax code allows companies to reduce their tax burden by accumulating assets overseas, and some of the biggest names in the tech industry have perfected the tactic. Instead of paying the top U.S. corporate tax rate of 35 percent, dozens of Silicon Valley giants maintain global tax rates below 15 percent, the Center for Investigative Reporting’s review of annual financial statements found.
    Among the 50 firms, 47 reported having assets overseas that were “permanently reinvested,” a designation that allows them to avoid recording the money as taxable U.S. income, thereby deferring payment of federal and state taxes indefinitely. Many companies designate their holdings overseas even though much of the money is invested in the United States.
     
    Five companies – Cisco Systems, Apple, Hewlett-Packard, Google and Oracle – accounted for more than two-thirds of the $225 billion in accumulated foreign earnings as of Dec. 31, 2012. 
    Tech companies that relied on foreign income to reduce their taxes include:
     
    • Apple, which reported $40.4 billion in holdings overseas and had an effective global tax rate of 12.6 percent over the past three years
    • eBay, which reported $10 billion overseas and had an effective tax rate of 15.3 percent over the past three years
    • Google, which reported $24.8 billion overseas and had an effective tax rate of 17.6 percent over the past three years
    • Yahoo, which reported $3.2 billion overseas and had an effective tax rate of 17.9 percent over the past three years
    • Cisco, which reported $41.3 billion overseas and had an effective tax rate of 20.9 percent over the past three years
     
    The companies declined to comment on their offshore holdings or the amount of taxes they paid.The effective tax rate is based on the Center for Investigative Reporting’s calculation using the firm’s publicly available information; companies are not required to make public how much they paid the Internal Revenue Service.
    Many of Silicon Valley’s biggest firms will benefit from a two-year extension of a tax provision – included in the January fiscal cliff deal – allowing them to defer taxes on royalties earned by their foreign subsidiaries. The Joint Committee on Taxation estimates this will cost the U.S. government more than $1.5 billion in the next two years.
     
    Sen. Carl Levin, D-Mich., chairman of the investigations subcommittee of the Senate Committee on Homeland Security and Governmental Affairs, charged at a hearing in September that U.S. companies have stockpiled $1.7 trillion in earnings overseas, all of which has gone untaxed by the U.S. Treasury.
    “The bottom line of our investigation is that some multinationals use our current tax system toengage in shams and gimmicks to avoid paying the taxes they owe,” Levin said at the hearing. “It is a system that multinationals have used to shift billions of dollars of profit offshore and avoid billions of dollars in U.S. taxes, to their enormous benefit.”
    On Feb. 7, Sen. Bernie Sanders, I-Vermont, introduced a bill that would eliminate companies’ ability to defer taxes on income deemed permanently reinvested.
    Levin’s subcommittee is examining Silicon Valley companies thathave become efficient at avoiding taxes in part by transferring money among foreign subsidiaries in countries designated by the U.S. as tax havens.
     
    Kimberly Clausing, an economics professor at Reed College in Portland, Ore., estimates that the federal government is losing more than $90 billion in tax revenue annually from U.S. businesses that transfer earnings overseas.
    That amounts to nearly half the corporate tax paid by all U.S. companies in 2011. It would be enough to fund public schools and higher education in California for more than two years or cover 206 days of military operations in Iraq and Afghanistan, according to state and federal budget data.
    For many multinational corporations based in the United States, Clausing said, the top corporate income tax rate of 35 percent is a myth.
    I think our system’s stated intention and its actual practice have diverged to a point where it’s bordering on ridiculous,” she said. “If you look at the firms in question, they aren’t paying anywhere near that rate.”
    Of the 50 largest Bay Area tech companies, 17 estimated the U.S. taxes they owed on overseas earnings. If these companies were taxed on that money today, they would owe the U.S. Treasury $25.9 billion, according to their own estimates. The other companies avoided disclosure by citing an exception that estimating their tax burden was impractical.
    “It’s a disgrace,” said Kleinbard, the USC professor. “It’s entirely optional whether companies provide U.S. tax estimates on offshore earnings.”
     
    Most of the companies analyzed by the Center for Investigative Reportingsupport a lobbying effort in Washington for a one-time tax holiday that would allow them to transfer foreign earnings to the United States at rates as low as 5 percent. An industry group, which calls itself the WIN America Campaign, has spent $760,000 on lobbying since it was formed in 2011, federal records show. Its backers include the Silicon Valley Tax Directors Group, made up of representatives from dozens of tech companies.
    A similar amnesty was offered in 2004. A 2009 study by the National Bureau of Economic Research found that 92 percent of the $300 billion that companies transferred to the U.S. under that amnesty ended up with shareholders.
    Kleinbard said it’s a common misconception that assets held by foreign subsidiaries of U.S. companies remain outside the country. In reality, much of the money is invested here in the form of U.S. Treasury bonds and government-backed securities. The difference, he said, is that the investments go untaxed.
    “The money is not sitting in a strongbox buried in the sand,” he said.

    A study of Apple, Google and about two dozen other companies by Levin’s Senate subcommittee in 2011 found that 46 percent of the money the firms held “overseas” actually was invested in U.S. Treasury bonds and other government-backed assets, such as mutual funds and stocks.
     
    “The data shows that, in many cases, the funds that corporations identify as being offshore are really onshore,” the report said. “The presence of those funds in the United States undermines the argument that undistributed accumulated foreign earnings are ‘trapped’ abroad, because nearly half of those funds are already located right here in the United States.”

    This story was edited by Richard C. Paddock and copy edited by Nikki Frick and Christine Lee.
    The independent, nonprofit Center for Investigative Reporting is the country’s largest investigative reporting team. For more, visit www.cironline.org. Contact the reporter at mdrange@cironline.org.