By Mark Nestmann
U.S. Congressional blowhards are using a recent report from the Government Accountability Office to push for even harsher sanctions against low-tax jurisdictions, and the U.S. companies that use them.
In doing so, they're ignoring the report's recommendations, along with comments from high-level Treasury officials that actually seem to defend the role of low-tax jurisdictions in the world economy. But for the likes of Sen. Carl Levin (D-Mich.) and Sen. Byron Dorgan (D-N.D.), what the report actually says isn't important. It's that the conclusion of the report - minus its context - makes for an attractive newsbyte the mainstream media is only too happy to uncritically lap up.
The GAO report - commissioned last year by Messrs. Levin and Dorgan - concludes that 83 of America's 100 largest corporations have subsidiaries in low-tax jurisdictions. Upon release of the report, Sen. Levin stated, "We need to put an end to the use of offshore secrecy jurisdictions as tax havens.". Naturally, Sen. Dorgan agrees: "I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that."
Dorgan and Levin assert, without any proof, that the U.S. Treasury loses US$100 billion annually in tax revenue as a result of U.S. companies shipping their income offshore. And backed up by the supposed conclusions of the GAO report, along with President Obama's promise to "shut down tax havens," legislation greatly increasing the tax burden on U.S. companies with offshore subsidiaries is almost certain to pass in 2009.
It's a shame neither of these gentlemen actually read the GAO report, or if they did, shamelessly ignored it. First, as the report quite properly points out:
"Since subsidiaries may be established in listed jurisdictions for a variety of non-tax business reasons, the existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden."
Moreover, none other than a Deputy Assistant Secretary of the Treasury cautioned that "the list of jurisdictions in our report could be regarded as a blacklist and may be used as the basis for the imposition of sanctions or other negative measures." That list includes such "tax havens" as Montserrat (virtually depopulated by a series of volcanic eruptions culminating in 1997) and Nauru (which shut down most of its offshore financial sector in 2003). It also includes the U.S. Virgin Islands, which I suspect might just be exempted from any financial sanctions that might be coming.
Now, neither the tax-and-spenders, nor the mainstream media, have said much about the non-tax reasons U.S. corporations form offshore subsidiaries. So, what are they?
First, consider that the United States is the world's most litigious country. U.S. individuals often move their assets offshore for asset protection reasons. Not surprisingly, so do U.S. corporations.
Second, consider that state and federal regulations are a real and growing burden on U.S. corporations. Operating out of an offshore jurisdiction with more predictable and streamlined regulations can reduce those costs.
Third, it's often easier to raise money offshore than it is in the United States. Imagine that you're the CEO of a giant money-center bank in New York. You want to raise a few billion dollars. How easy will it be to raise it through the parent company, with a balance sheet riddled with sub-prime loans and other financial detritus? Not very.
But, what if you form a subsidiary with a clean balance sheet in a low-tax jurisdiction? Given adequate capital and guarantees, it should be a lot easier to raise the necessary funds there than in the U.S. market. Not to mention the fact as a consequence of laws like the USA PATRIOT Act, many global investors avoid the U.S. market like the plague.
Fourth, U.S. corporations that do business outside the United States must often form subsidiaries in target markets. Imagine that you're the CEO of a natural resource company. You want to set up mining operations outside the United States. Not surprisingly, the host countries want you to set up local companies to do business there. In addition, since many countries no longer permit U.S. residents or companies access to their financial system (again because of laws like the USA PATRIOT Act) using a foreign subsidiary may be the only way for a U.S. corporation to get its foot in the door.
It's true that a U.S. corporation can choose to retain the earnings of a foreign subsidiary offshore. Under current U.S. law, it's generally not taxed on that income until the money is repatriated. (There are exceptions for certain categories of income, generally relating to passive investments). This is the "loophole" that President Obama and the anti-offshore tax-and-spenders say is costing the U.S. Treasury US$100 billion annually.
So, what's wrong with forcing U.S. corporations to pay tax on profits from their foreign subsidiaries?
Let's begin with the fact that the U.S. corporate tax rate, at 34%, is one of the world's highest. Given this fact, is it any surprise that U.S. corporations are seeking to reduce this burden? Not according to Messrs. Obama, Levin, Dorgan and their blowhard brethren in Congress.
Let's continue with competition. If a U.S. company doing business offshore has to pay tax on profits from its subsidiaries, and a company based in another country doesn't, which company will be more successful? Certainly not the one with a higher tax burden!
Then there are jobs, which the U.S. economy is losing at the rate of about 500,000 each month. Do they believe that taxing the un-repatriated profits of U.S. corporations' offshore subsidiaries will result in more jobs back home? On the contrary! To pay the tax bill, U.S. multinationals are far more likely to shed more jobs domestically. Therefore, this proposal is likely to lead to even higher U.S. unemployment.
It's a crying shame that the mainstream media isn't defending the right of U.S. corporations to do business through offshore subsidiaries. And if they don't start doing so very soon, the disastrous agenda of the Obama-Levin-Dorgan axis could well become law.