Ignoring shipping costs, your company made a $49 gross profit ($50 sale to retailers minus $1 in costs), but took $44 of that profit tax-free in the Caymans ($45-$1)—and thus in the US reported only $5 profit ($50-$45). Only the $5 in the U.S. is currently taxable. Meawhile, though, the $44 profit in the Cayman Islands can be loaned to your US parent for limited periods of time, and becomes taxable profit only if permanently moved to America.
Browning (disclosure: she was a colleague at two news organizations) explains that these deals “effectively lock the IRS into agreeing with a company’s tax planning over many years, both future and past” and then observes that:
some experts wonder if advance pricing agreements, perfectly legal under U.S. law and growing in number, sometimes play a major role in helping to shift some of those profits and drive down corporate tax bills. “There’s a lot of confidential information in these deals, because it’s where companies make their profits,” said Patricia Lewis, a tax lawyer at Caplin & Drysdale who helps companies negotiate the pacts.
Ending these secret and company-specific agreements has, so far, not shown up as part of tax overhaul being promoted by Senator Max Baucus, the retiring Montana Democrat who chairs the Senate Finance Committee, and Representative Dave Camp, the Michigan Republican who chairs the House Ways and Means Committee.
Meanwhile, Baucus and Camp call their largely unknown plans “reform”—a word that journalists should be careful to use only with attribution to advocates. (Paletta and Linebaugh demonstrated such care in their their Monday WSJ piece, referring in the lede to “the congressional effort to overhaul the tax code,” rather than tax code “reform.”)
In the coming weeks and months, journalists should expect to get a lot of spin from lobbyists and flacks for companies that hope tax reform will ease their burdens. An initial primer on the flak we can expect from flacks appeared Monday in the Tax Analysts blog of Martin Sullivan, a former Treasury economist. (Disclosure: I am a Tax Analysts columnist).
Sullivan offered six initial examples of arguments likely to confuse the debate over corporate tax overhaul. Many of these arguments relate to the advance pricing agreements that Browning wrote about, because they have to do with corporations making contracts between parent company and offshore subsidiaries—essentially between sibling subsidiaries.
The prime motivation is to enjoy the benefits of being in a market like the US or Europe without bearing the burden of the taxes that the support the systems that make these markets valuable.
Also good to remember: Any tax overhaul proposals will likely have little to no affect on the vast majority of corporations, at least based on the limited and often vague information Baucus and Camp have made available so far. Here are some telling details, pulled from the 2010 IRS Statistics of Income report on corporate taxes—Corporate Tax Table 4 if you want to look it up—to keep in mind when you are writing about efforts to revise tax policy via Congress, where major corporations hold the most sway through lobbying and donations:
• Two thirds of the 5.8 million corporations in America have between a dollar and $500,000 of assets; another 17.2 percent have no assets.
• More than 99 percent have less than $25 million in assets.
• Just 0.048 percent—one in 2,100 corporations—has more than $2.5 billion in assets; they average $23.4 billion.
• These 2,772 biggest corporations own 81 percent of corporate assets, and they paid an average tax rate of 16.7 percent.
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