Half of US foreign profits booked in tax havens – paper

Tuesday, September 11, 2018

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Washington, United States (AFP) — About half of all the foreign profits of US multinationals are booked in tax havens, with Ireland topping the charts as the favourite, according to a new economic study on Monday.

And the benefits for the increase in profits have gone to shareholders, the paper showed.

US companies are by far the biggest users of tax havens, where they face effective tax rates of just seven per cent, according to the study by economists Thomas Wright and Gabriel Zucman.

“Ireland solidifies its position as the number one tax haven,” Zucman said on Twitter. “US firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined. Irish tax rate: 5.7 percent.”

The research was made possible by the US tax cut in December 2017 that contained a mandatory repatriation of profits, which allowed researchers to calculate the final tax bill for the companies.

Because the 2017 law “allows these firms to repatriate their foreign earnings at a low rate...we now know that US multinationals have really had a high after-tax profitability on their foreign operations over the last decades”.

This is phenomenon referred to as the “exorbitant tax privilege”, and as a result “it has redistributed income to the benefit of their shareholders, some of which are foreigners”.

No other developed economy — except tax havens — has as high a share of foreign profits booked in tax havens as the United States, most prominently in Ireland (18 percent), Switzerland, and Bermuda plus Caribbean tax havens (eight per cent to nine percent each).

The report shows non-oil multinationals have seen their tax rates on foreign earnings fall from about 35 per cent in the first half of the 1990s, close to the statutory US federal corporate tax rate, to about 20 per cent in recent years.

The tax reform dropped the top US corporate rate to 21 per cent from 35 per cent, taxing only profits earned on US territory.

Businesses have to make a one-time payment of eight per cent or 15.5 per cent on repatriated foreign profits, depending on whether the assets are cash or investments.

US corporations, notably in the tech and pharmaceutical sectors, have for years accumulated profits offshore to avoid the comparatively high, nominal US tax rates.

The stockpile of cash hit about US$2.5 trillion at the time the tax Bill was passed, according to the Congressional Joint Committee on Taxation.

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