How big corporations pay—or don’t pay—their taxes isn’t a subject that gets a lot of quality explanatory coverage, though it should. And with momentum quietly building in the House, the Senate, and the White House to fix a clearly flawed system, now would be a good time to start. Fortunately, some publications are digging in.
We begin with The Wall Street Journal, which explained on Monday that—as the two top tax writers in Congress try to rush through comprehensive corporate tax reform before the end of the year—not all big corporations want the same outcomes. That makes balancing the interests of different powerful corporations a bit tricky for politicians.
As Journal reporters Damian Paletta and Kate Linebaugh explain,
The stakes are particularly high for multinational companies because the White House and Congress are considering changes that would dramatically alter the way foreign income is treated.
Democrats and Republicans have taken aim at the corporate practice of shifting profits abroad to places that impose little or no tax. How to address this issue is dividing large businesses that would be affected differently by various proposed tax-code changes.
One big split: Companies that pay hefty royalties to offshore subsidiaries for their intellectual property—patents, manufacturing processes, chemical formulas and even corporate logos—do not necessarily want the same tax rules as companies eager to expand manufacturing operations abroad. Think Microsoft vs. General Electric.
And, Paletta and Linebaugh note, “some multinationals want Congress to end the U.S. practice of taxing their income earned abroad altogether.” Some corporations already have arranged their books to profit off taxes by building up untaxed profits offshore and investing the money, as I showed here, using Apple as the example.
The Journal piece tees off of the announcements Friday and Saturday from Moscow, where the G-20 finance ministers said they would work together to keep multinational companies from gaming the system. This is the only indication that tax avoidance is not a uniquely American problem, but one common to all advanced economies. The reporters could have given us more on that.
The Journal piece also falls short in not quoting any critics of the varied multinational corporate arguments, instead relying on vague counterpoints such as “the companies defend the practice….” But it’s a good start.
Meanwhile, Fortune’s Lynnley Browning took aim on Monday at another issue central to any overhaul of corporate taxes, one that has gotten little attention outside of tax journals. People typically think of income taxes as objective. You fill in the boxes on tax forms and the software computes the same number for everyone. But as Browing explained, for big multinational corporations, taxes can be largely negotiable.
Multinationals privately negotiate agreements with the IRS that largely determine their taxes, by establishing how much they charge themselves for goods and services made in one country but sold in another.
The pacts, known as advance pricing agreements, effectively lock the IRS into agreeing with a company’s tax planning over many years, both future and past. Despite costing companies up to millions of dollars in fees to prepare and taking up to four years to seal, the agreements are nonetheless worth it to an elite group of big corporations that have them, including Google (GOOG), Apple (AAPL), and Amazon (AMZN).
To understand this, imagine you build widgets in a low tax country, say Vietnam. Your cost when the widgets are loaded onto a ship in Hanoi is $1 per widget including shipping to the Port of Los Angeles. While the widgets cross the Pacific, your Vietnam manufacturing arm sells the widgets to a sister “sales company” in the Cayman Islands for $40, which then resells them to your US marketing subsidiary for $45, which in turn sells them for $50 to retailers (who charge consumers $100).