Offshore Tax Loophole Leaves Small Businesses Behind

Dave Johnson

You’re a small business. You struggle to compete against the giants like the Walmarts, the Caterpillars, the Apples… On top of the advantages they have with their economies of scale, their nearly unlimited financing and ability to attract the top talent, their size also lets them purchase (and/or extort) special favors from our government.

One such special favor is the offshore “deferral” tax break. Giant multinationals can set up subsidiaries in tax havens, and shift profits to those subsidiaries. Our government lets them do this, and doesn’t make them pay taxes until they “bring the money home.”

Thanks to this loophole, the big multinational corporations have stashed more than $2.2 trillion of profits into tax havens. They now owe us about $700 billion in taxes on those profits. Congress, even as they complain about “deficits” — they won’t even fund the effort to fight the Zika virus!!! — refuses to end this loophole and make these companies pay their taxes.

Apple got caught engaging in one such tax avoidance game in a way that violated the rules of the European Union (EU), and the EU is telling them they have to pay $14 billion (plus interest) in back taxes. Instead of applauding and joining this crackdown, our own administration is complaining.

Smaller Businesses Left Behind

Think about what this means to smaller American businesses. Taking advantage of this loophole requires teams of high-priced accountants and lawyers — something small business owners could never afford to do, even if they wanted to. So the big companies pay lower or no taxes while smaller companies, already struggling to compete, have to pay the full rate. (And good for them.)

An organization called The Main Street Allianceworks to provide small businesses a voice on the most pressing public policy issues across the nation. Our advocacy promotes vibrant businesses and healthy communities, and fosters leadership development of socially responsible business leaders.

One Main Street Alliance member had a letter published in The New York Times this week, talking about how the tax break that Apple and others get will “incentivize bad business behavior and reward companies that extract wealth from communities with a deep discount and a clean conscience.”

Ending Apple’s Offshore Tax Dodge – The New York Times

To the Editor:

Re “Apple, Congress and the Missing Taxes” (editorial, Aug. 31):

While the editorial is spot on in calling for an end to the deferral process, it sorely missed the mark in characterizing President Obama’s proposed repatriation rate as “reasonable.” Tax holidays incentivize bad business behavior and reward companies that extract wealth from communities with a deep discount and a clean conscience.

A 14 percent rate on repatriated funds previously held offshore is a handout to large multinational corporations at the expense of small-business owners and our customers. Far from reasonable, it’s been estimated by the Main Street Alliance that the proposed holiday rate would be a $20 billion gift to Apple.

With their nearly unlimited access to capital and ability to buy in bulk, industry giants like Apple already hold a competitive edge over small to mid-sized businesses, which can’t afford to hire high-priced tax accountants and lawyers to devise tax avoidance schemes.

To level the playing field for Main Street businesses, Congress must act to end deferral, stop incentivizing offshoring of revenues with tax holidays, and hold all companies accountable to pay what they owe when they owe it.

Portland, Ore.
The writer, a small-business owner and former accountant, is a member of the Main Street Alliance.

Senator Elizabeth Warren also weighed in at The New York Times with an op-ed, Elizabeth Warren: What Apple Teaches Us About Taxes. Warren proposes not just ending this loophole, but also restoring the share of the overall tax burden that is paid by corporations.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to take three crucial steps to repair our broken corporate tax code.

First, Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10, despite their reliance on federal investments to start and expand their businesses.

… Second, Congress should encourage investment in jobs here in the United States. Giant corporations are pushing corporate tax reform proposals that offer a lower permanent tax rate for earnings generated abroad than earnings generated at home. That is nuts.

… Third, Congress should level the playing field for small businesses. Small companies in Massachusetts don’t stash profits in the Netherlands. They can’t hire a team of accountants to set up a “reverse hybrid mismatch” to slash their taxes. This puts small businesses at a competitive disadvantage as they end up shouldering more of the burden of paying for education, infrastructure, research, the military and everything else our nation relies on to succeed.

Make Them Pay And End The Corruption

We must end this loophole and make these companies pay up in full. On top of that, any tax rate for future offshore profits that is lower than the tax rate for onshore encourages the big corporations to move production and profit centers — our jobs and wages — offshore, and gives them another advantage over smaller businesses.

There is a larger concern than just the $700 billion in uncollected taxes and the things we can do with that money. There is no other word for what our government is doing by letting the giant corporations off the hook on their taxes than ‘corruption’. These corporations are just paying for breaks and favors and everyone understands this is what is going on.

When a government allows corruption like this, it gives the corrupt an unfair advantage over the honest. The giant corporations pay low (or no) taxes while the hard-working smaller companies pay what they owe. The system necessarily spirals into deeper and deeper corruption. It’s just a question of how deep we are and whether we can dig ourselves out.

Get updates in your inbox