Wednesday, February 20, 2013

Ain't capitalism grand?: Corporate tax avoidance edition

Let's see, Microsoft exists as an American company, headquartered in Redmond, Washington. Nevertheless, they can transfer patents for their intellectual property oversea to notorious tax havens to avoid US taxes.  By intellectual property, think software.  So Microsoft can benefit from all protections of laws in the us, laws such as against copyright infringement, then keep all the cash oversea and avoid taxes.

Ain't capitalism grand?

[Last week, the investor David Einhorn sued Apple, in which his hedge fund has a large stake, over how the company can issue preferred stock. At the heart of the dispute is the $137 billion pile of cash that Apple has accumulated, and whether it could be used to better reward shareholders....

Such tax-avoidance techniques, while legal, have come under increasing political attack. On Thursday, Senator Bernie Sanders of Vermont introduced legislation to end deferral and force multinational companies to pay taxes on their foreign-source income.Mr. Einhorn’s action highlights a growing problem: many corporations are holding vast amounts of cash and other liquid assets, using them neither for investment nor to benefit shareholders. These assets are largely earned and held overseas, and not subject to American taxes until the money is brought home.

According to the Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in the United States held $1.7 trillion of liquid assets – cash and securities that could easily be converted to cash.

By any measure, corporate cash holdings appear to be high and rising.The major role of R.&D. in large cash holdings may reflect the greater opportunities for tax avoidance among businesses that can easily transfer intangible property abroad without having to move production operations or jobs to other countries. It is a simple matter for companies holding patents, copyrights or trademarks to transfer them to foreign subsidiaries and realize the profits accruing to them in lower-taxed jurisdictions.

I had an experience with this phenomenon just recently. I needed a copy of Microsoft Word for a new computer and went to to buy it. But when I tried to pay for it, my credit card was rejected. When I checked with my credit-card company I was told that the charge appeared suspicious because it went to a company based in Luxembourg – a well-known tax haven.

This technique is used by many technology-based companies. For example, The Wall Street Journal reported on Feb. 7 that the patent for the hepatitis C medication produced by California-based Gilead Sciences is domiciled in Ireland, another common tax haven. The home company thus pays royalties to its Irish subsidiary on sales of the drug in the United States, transferring profits from the United States to Ireland.

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