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End Deferred Taxes on Foreign Corporate Profits

David Callahan

A new report out by the Citizens for Tax Justice offers further evidence of just how screwed up and porous our corporate tax system has become.

Big companies are making boatloads of money overseas and then often piling it up in tax havens. Which means that not only are they not paying U.S. taxes on these profits -- since taxes can be deferred until cash is brought home -- but nor are they paying taxes to foreign governments.

How much money are we talking about? A lot.

The CTJ analysis focused on Fortune 500 companies and found "that 285 of these corporations had accumulated more than $1.5 trillion in overseas profits by the end of 2011. . . " The analysis also found that much of these profits were untaxed because they were in tax havens -- representing several hundred billion dollars in lost revenue to the U.S. Treasury.

No big surprises there. But where things really get disturbing is that CTJ suggests that corporations couldn't have piled up so many profits in tax havens unless they were engaged in artificially (and illegally) shifting profits made in the U.S. or other countries with normal tax rates to tax havens. After all, a corporate susidiary based in Bermuda or the Cayman Islands is not going to be doing much real business in those places. The only way such a subsidiary shows big profits is if money made elsewhere is attributed to the subsidiary through shady accounting.

And here's another disturbing thing: U.S. authorities don't know how much shady accounting is going on:

For hundreds of other companies with overseas cash holdings, Congress currently has little information at its disposal that could tell policymakers how much of these companies’ unrepatriated profits are, in fact, anything more than earnings artificially shifted into tax havens.

The CTJ report calls for better disclosure, so that Congress knows what's going on and how much money corporations really have stashed in offshore tax havens.

Of course, though, there is a bigger solution, which CTJ also advocates: Ending deferral of taxes on foreign corporate profits and taxing those profits worldwide. If corporations had to pay U.S. taxes on profits made worldwide (minus any taxes paid to foreign governments) and paid those taxes immediately, they would no longer have an incentive to pile up money overseas, much less locate subsidiaries in tax havens.

That's the big and obvious solution here. And with Washington desperate for new revenue to help close the deficit, it's a solution that couldn't be more timely.