Global Policy Forum

By Lynnley Browning

America's biggest corporations are increasingly funneling profits earned in the United States to tax havens around the globe, depriving the United States Treasury of anywhere from $10 billion to $20 billion in lost tax revenue each year, according to a new study. The study, to be published today in the trade journal Tax Notes, says that United States multinational corporations shifted $75 billion in domestic profits last year to no-tax and low-tax foreign havens like Bermuda and Ireland.

The study's author, Martin A. Sullivan, said that legal loopholes and tax credits could mean in theory that no taxes are owed to the United States government on the shifted income. But he wrote that the shifting is more likely to result in annual tax losses to federal coffers of $10 billion to $20 billion. He said yesterday that at least some of the transfer probably occurred through questionable tax shelters.

In a related study, published by Tax Notes earlier this month, Mr. Sullivan concluded that that profits reported by American multinational companies from their foreign subsidiaries, and not from their operations based in the United States, soared 68 percent since 1999, to $149 billion last year. The earlier study said that the rise in foreign earnings was not accompanied by any gain in real economic activity in the tax havens, suggesting that multinationals were increasingly using offshore tax shelters to shield earnings.

Mr. Sullivan is a former Treasury Department economist who specialized in international taxation. His study is based on Commerce Department data. His estimates of domestic profit-shifting and the corresponding tax losses are for earnings generated by the United States-based operations of American multinational companies, and not for earnings generated by their foreign subsidiaries in low-tax countries. Under current United States tax laws, American companies can defer taxes on profits earned offshore as long as those profits are not returned to the United States. An updated study by J. P. Morgan Chase in June 2003 said that $650 billion held offshore by American corporations like Exxon Mobil and General Electric was waiting in accounts to be repatriated to the United States if proposed legislation enacting a highly reduced rate is enacted.

Christopher Edwards, a tax specialist at the Cato Institute, a libertarian policy research organization in Washington, said that while he had not seen Mr. Sullivan's study, "corporations are more able than ever to move both their paper profits as well as general investments overseas." Mr. Sullivan's new study did not mention any companies by name. He has previously cited the pharmaceutical industry as a leading shifter of domestic profits to overseas havens, but he said in his current study that other industries were doing the same thing. The J. P. Morgan Chase study said that the United States manufacturing sector accounted for 41 percent of unrepatriated earnings.

In their public filings, companies are often unclear about what percentage of their profits comes from domestic operations as opposed to foreign operations, and they almost never discuss profit-shifting. For example, Pfizer, the pharmaceutical giant, said in its 2003 annual report that as of the end of last year, it had not made a United States tax provision on what it called $38 billion of unremitted earnings at its international subsidiaries. It was not clear whether that money was actually earned by the international subsidiaries or by Pfizer's operations in the United States and later shifted to those subsidiaries for tax purposes, and a Pfizer spokesman declined last Friday to provide any details or comments. Some American corporations argue that United States corporate taxes are too high and that some profits held overseas are legitimately channeled into operations there, improving financial strength and providing value to shareholders. Mr. Sullivan said yesterday that it was not clear what portion of the $75 billion in the current study was included in the $149 billion cited in the earlier study.