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Tax Holidays

Posted by: Nanette Byrnes on August 12, 2008

It’s August, so you may be on vacation. But for an awful lot of corporations operating in the US, every day is a tax holiday. So says a report out today by the US General Accounting Office highlighting the number of US- and Foreign-controlled companies that have claimed zero tax liability in recent years.

The GAO’s study was ordered up by Senator Carl Levin, Democrat from Michigan and chairman of the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Government Affairs. Its conclusions focus on the fact that large foreign corporations are more likely to avoid taxes than US companies.

Like most of these studies, the GAO’s report looks at taxes as accounted for on the corporate income statement, not the cash taxes actually paid. (By that measure, 42 of the companies in the S&P500 had an actual tax rate of less than 10% over the past 5 years, another 58 paid less than 16%, and neither group paid anything like the statutory corporate tax rate of 35%).

According to the GAO, in recent years the gap in the number of US and foreign companies enjoying a tax free year has significantly narrowed. Though the authors didn’t go into exactly how both groups are sidestepping the tax man, they did indicate that transfer pricing looks to be a culprit. Transfer pricing is how much one part of a company charges another for something.

In a 2003 story on corporate taxes, we dug up and example of how this worked for hotel chain Hyatt.:

In one U.S. tax court case that is still pending, the IRS accused hotelier Hyatt International of paying too little for the Hyatt brand and other services provided by its U.S. parent. The IRS alleges that from 1976 to 1988, various Hyatt companies underreported income by $100 million because of those lowball fees. In an October, 1999, ruling on some aspects of the case, U.S. Tax Court Judge Joel Gerber ruled that the $10,000 one-time fee International had paid for each hotel bearing the Hyatt name was far too low. Hyatt declined to comment because the broad case is ongoing.

Tax economist Martin Sullivan, thinks half of the sharp drop in the foreign tax rates of U.S. multinationals — from 49.6% in 1983 to 22.2% in 1999 – is the result of similar shifting of income from foreign countries with a higher tax rate to those with lower rates.

Beyond shedding some light on the impact of transfer pricing, the report also shows:

• Fewer large foreign-controlled companies are paying no taxes today than in the past. That figure has declined since its 2001 peak of more than 50%.
• More US companies (large and small) reported zero tax liability in 2005 (the most recent year included) than foreign-controlled companies.
• 72% of foreign-controlled companies reported no tax liability some time between 1998 and 2005, while 55% of US-controlled companies did so.
• The biggest tax breaks come from deductions for salary and wages, and from a category called “other” that includes travel expenses, legal fees, and insurance, as well as dividends paid on stock owned by employee stock ownership plans.

Reader Comments


August 12, 2008 2:04 PM

Considering the number of possible tax credits, exemptions and deductions there are in the tax code to get corporations to change their behavior, it is not a surprise. In the 1956 movie "Giant", Texas oil men talk about the oil depletion allowance. Sounds like the tax code has been abused by Congress since income taxes became part of the law. Maybe what should be more surprising is that any corporations pay income tax.


August 12, 2008 4:46 PM

why is it only poor people pay all the taxes?i dont want to hear that the more taxes on corporations means less dividends for the supporting stockholders.bury your savings somewhere because tommorrow is not promised to a society we can only help each other

Roy Skinner

August 12, 2008 4:54 PM

Getting something you did not earn is not really OK.
How is it that the majority of middle class working America is so concerned with the $100 someone at the bottom of the economic ladder is taking that they can totally ignore the $100,000,000 that the top of the ladder is taking. Could it be that they have dreams of being at the top and getting that free lunch themselves?


August 12, 2008 5:47 PM

I think we should tax any money being wired out of the country. Corporations could avoid this tax by sending goods instead of cash. That would at least put Americans back to work.


August 12, 2008 7:21 PM

Taxes are ultimately paid by people, either directly, or by companies passing it on through higher prices. It's a sham to think companies pay taxes at all. Better to not tax them at all. Then companies will want to stay here, and employ Americans. This is kinda like the idea that your employer pays half of your social security. Wages would be higher if they didn't.


August 12, 2008 9:13 PM

Here is the fallacy behind the Republicans' demand to reduce corporate taxes. Corporations don't even pay the taxes that are due now, how will reducing them further result in more tax being collected? All it will due is put more money in the pockets of the super-rich and shift even more of the burden onto the ordinary taxpayer-you know, the guy who can't afford the expensive Washington lobbyist or who doesn't make a huge campaign contribution to his or her congressional lapdog.

Susan Price

August 14, 2008 6:57 PM

These are complicated issues. Here is a short article with a two-minute video. IRS data suggests that raising the corporate tax rate would push businesses into taking non-corporate forms.

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January 18, 2010 7:45 AM

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