By Clark Mindock and David Sirota From IBT Times

With the recent release of millions of secret documents from a Panama law firm that helps corporations and wealthy individuals reduce their tax liability, the spotlight is trained anew on tax avoidance. Companies with offshore outposts typically argue that those subsidiaries serve a legitimate business purpose. But now, on the heels of the global Panama Papers scandal, a new report suggests that in many cases the primary goal must be tax avoidance.

According to a review of the most recent IRS data by the watchdog group Citizens for Tax Justice, American corporations in 2012 housed more than a half-trillion dollars’ worth of profits in just 10 small nations. The group said the smoking-gun proof that the schemes are about tax avoidance comes from Bermuda, the Cayman Islands, the Bahamas and Luxembourg, where the profits reported by U.S. corporations were larger than the entire reported gross domestic product of those countries.

“It is obviously impossible for American corporations to earn profits in a given country that exceed that country’s total output of goods and services,” the report concluded. “Clearly, American corporations are using various tax gimmicks to shift profits earned in the U.S. and other countries where they do the bulk of their business into their subsidiaries in these tiny countries that impose little or no tax on corporate profits.”

The way this process works is fairly simple on a macro level. Corporations set up affiliated shell companies in countries where taxes are low or nonexistent and reroute payments and liabilities to serve their needs. For instance, the car service Uber processes payments outside of the United States through its shell corporation in Bermuda, a tax haven with a 0 percent tax rate, where it then posts its profits. That leaves less than 2 percent of its net revenue taxable by the United States, according to Bloomberg.

American companies’ shift of their profits to their offshore subsidiaries has occurred even though the United States’ effective corporate tax rate is among the lowest in the industrialized world. A related report issued last week by CTJ found that the United States is the fourth-least taxed nation in the Organization for Economic Cooperation and Development, at 25.7 percent of its annual GDP.

While on paper, the U.S. statutory tax rate is among the highest in the developed nations — topped out at a combined state and federal rate of 39.1 percent in 2014 — tax credits, exemptions and other tax avoidance techniques can bring that rate much lower, according to a Congressional Research Service analysis released in 2014. For instance, pharmaceutical company Pfizer managed to pay just 7.5 percent in taxes in 2014.

Tax avoidance isn’t going unnoticed by the federal government. Last week the Obama administration’s Treasury Department moved to try to stem some of the shift of cash offshore. (Pfizer recently dropped plans to merge with Allergan based in Ireland, where it could have paid little or no taxes). Calling inversions one of the “most insidious tax loopholes out there,” the president and his administration released far-reaching rules to stop corporate inversions, which are transactions in which U.S. companies take foreign addresses by merging with a smaller company overseas where they can more easily avoid paying American taxes.

US Corporate Inversions Since 1996 | Graphiq
However, that move was preceded by the same Treasury Department moving against European regulators who have been simultaneously trying to crack down on tax evasion. Earlier this year, Treasury Secretary Jack Lew wrote a letter to European Commission officials asking them to back off their probe into U.S. corporations such as Apple that have kept, collectively, $1.1 trillion in offshore cash piles. Apple alone could lose $8 billion if the European Commission succeeds in bringing back taxes from offshore havens, according to the Financial Times.

“The problem here isn’t America versus Europe — it’s giant multinational firms versus small domestic businesses,” Anneliese Dodds, the European parliament’s rapporteur on corporate tax, said in response to the Treasury’s assertion that the EU was unfairly targeting American companies. “No government should be cooking up a sweetheart tax deal for any company — be they American, British or Martian — that they don’t then offer to everyone else.”

Under current U.S. law, when companies move their profits to offshore subsidiaries, they are permitted to defer domestic taxes on those profits. CTJ and other left-leaning groups have been calling for a new law preventing that maneuver.

“Congress could end this corporate tax avoidance in a straightforward way by ending the rule allowing American corporations to defer paying U.S. taxes on their offshore subsidiary profits,” CTJ concluded. “They would still be allowed to reduce their U.S. income tax bill by whatever amount of tax was paid to foreign governments, in order to avoid double taxation. But there would no longer be any reason to artificially shift profits into tax havens because all profits of American corporations, whether earned in the U.S. or in any other country, would be taxed at least at the U.S. corporate tax rate in the year they are earned.”

IMAGES:
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George Town pictured in Grand Cayman, Cayman Islands, in 2008.
PHOTO: DAVID ROGERS/GETTY IMAGES
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Skyscrapers in Panama City on April 4, 2016.
PHOTO: RODRIGO ARANGUA/AFP/GETTY IMAGES

For more on this story go to: http://www.ibtimes.com/panama-papers-corporations-shifted-half-trillion-dollars-offshore-tax-havens-2012-2351814