Fact Sheet on Kerry Plan to Crack Down on Tax Breaks That Encourage Corporations to go Offshore

September 13, 2004: Leading Journal Tax Notes Finds that Profits Sheltered by Subsidiaries of U.S. Companies in Tax Havens Jumped 69 Percent Under Bush

September 13, 2004: Leading Journal Tax Notes Finds that Profits Sheltered by Subsidiaries of U.S. Companies in Tax Havens Jumped 69 Percent Under Bush

Profits of Sheltered in Major Tax Havens

1999: $88,408

2002: $148,687

Percent Increase: 69 percent

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Profits of Sheltered in BERMUDA

1999: $8,529

2002: $26,835

Percent Increase: 214 percent

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Independent Studies Confirm That This Explosion in Overseas Tax Avoidance Is Costing the US at Least $40 Billion Annually in Lost Revenue.

-- Another Tax Notes Study from, September 27, 2004: "Conservatively estimate(s) revenue losses as being at least $10 billion and perhaps as much as $20 billion annually" from the increased off-shoring of income. This is additional to the Government Accountability Office analysis that shows that $20 to $40 billion is lost annually to "abusive offshore schemes."

The Bush Administration Has Consistently Pushed for MORE Overseas Tax Breaks

-- The Bush administration has defended tax breaks for companies that ship jobs overseas and called efforts to reduce them "stupid."

-- The Bush Treasury Department (news - web sites) proposed more tax breaks for companies that export jobs, paid for by raising taxes on companies that export products.

-- Halliburton opened up 20 Cayman Islands subsidiaries under Dick Cheney (news - web sites).

John Kerry has a Three-part Plan To End Incentives For Outsourcing and Collect the Taxes Companies Owe

1. Create a new Office of Offshore Tax Enforcement

2. Close the Bermuda Loophole and Other International Loopholes

3. End Tax Breaks that Encourage Companies to Outsource Jobs

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NEW STUDIES FIND THAT COMPANIES ARE DODGING TAXES BY MOVING JOBS AND PROFITS OFFSHORE

Companies are shipping jobs overseas to avoid paying U.S. taxes at record rates. And they're engaging in paper transactions to reduce their taxes even further. Finally, companies and individuals are hiding even more money overseas illegally. This is one of the major reasons that 45 percent of large companies paid no taxes in recent years. In total, overseas tax avoidance costs $40 billion annually.

-- New study by tax expert Martin Sullivan, September 13, 2004. American corporations are shifting profits to overseas tax havens at record rates. A recent study in the independent journal Tax Notes found that the profits of foreign subsidiaries of US corporations in major tax havens soared from $88 billion in 1999 to $149 billion in 2002 - a 69 percent increase. (Martin Sullivan, "Data Show a Dramatic Shift of Profits to Tax Havens," Tax Notes, 9/13/04)

o Profits of U.S. multinationals in Bermuda have tripled from $8.5 billion in 1999 to $25.2 billion. American profits booked in Bermuda now exceed profits booked in the United Kingdom, Canada, or Mexico.

o Meanwhile, U.S. companies are shifting profits away from countries where they actually conduct business. Although Canada, France, Germany, Italy, and the United Kingdom accounted for 44 percent of U.S. multinationals companies' foreign sales and 56 percent of foreign employee compensation in 2002, they accounted for only 21 percent of reported foreign profits.

-- Independent studies confirm the United States loses at least $40 billion in annual revenue

o Increased off-shoring of profits under Bush is costing an additional $10 to $20 billion annually. Martin Sullivan "conservatively estimate(s) revenue losses as being at least $10 billion and perhaps as much as $20 billion annually" from the increased off-shoring of income. (Martin Sullivan, "Shifting of Profits Offshore Costs U.S. Treasury $10 Billion or More," Tax Notes, 9/27/04)

o GAO estimates that $20 to $40 billion is lost to "abusive offshore schemes." A GAO report documented $20 to $40 billion annually is lost to abusive offshore schemes that are illegal yet barely addressed by the Internal Revenue Service (news - web sites). (GAO, "Enhanced Efforts to Combat Abusive Tax Schemes - Challenges Remain," 4/11/02)

-- According to GAO, 45 percent of large companies paid zero corporate income taxes in recent years - and many companies get money back from the government. A recent GAO study found that 45 percent of large companies (or 63 percent of all companies) - paid no taxes in 2000. According to a study by Citizens for Tax Justice, "Twenty-eight corporations enjoyed negative federal income tax rates over the entire 2001-03 period." (GAO, "Comparison of the Reported Tax Liabilities of Foreign- and U.S.- Controlled Corporations, 1996-2000," February 2004 and CTJ, "Bush Policies Drive Surge in Corporate Tax Freeloading," 2004)

o Timken paid negative taxes in 2003. In 2003, Timken made $52 million in profits, but instead of paying taxes it got a check from the government for $1 million. Then this year, they cut 1,300 jobs. (CTJ, "Bush Policies Drive Surge in Corporate Tax Freeloading," 2004 and AP, "Canton Employer Cutting 1,300 Jobs," 5/15/04)

-- Drug companies have more than doubled their overseas profits in tax havens. The overseas profits of drug companies in tax havens have more than doubled, from $7.9 billion in 1999 to $19.7 billion in 2003. According to leading international tax analyst John Almond and Martin Sullivan, "U.S. pharmaceutical companies' share of worldwide profits derived from low-tax foreign jurisdictions increased dramatically from 1994 through 2003. Over the same period, there was no corresponding increase in the physical presence of pharmaceutical companies in those countries, which suggests increased use of aggressive tax- motivated income-shifting practices." (John Almond and Martin Sullivan, "Drug Firms Park Increasing Share of Profits in Low-tax Countries," 9/20/04)

-- Halliburton set up more than 20 offshore affiliates in the Cayman Islands while Dick Cheney was CEO - and Harken Energy set up one under Bush. According to the Washington Post, "The White House confirmed that Harken Energy Corp., a Texas oil company where Bush was a director from 1986 to 1993, set up a subsidiary in the Cayman Islands, a popular tax haven, in 1989. Halliburton Co., a Dallas-based energy services firm, registered at least 20 subsidiaries in the Cayman Islands when Cheney was chief executive from 1995 to 2000, according to Securities and Exchange Commission (news - web sites) records." Halliburton itself admitted that they are not intending to ever pay U.S. taxes on much of their foreign profits: "While these additional earnings could become subject to additional tax if repatriated, repatriation is not anticipated." (Washington Post, 8/1/02 and Halliburton Annual Report, 2003)

-- Companies increasingly use "deferral" rules to ship jobs overseas and avoid paying any taxes at all. Companies do not pay taxes on income until they bring it back to the United States. International tax experts say companies are increasingly using deferral to avoid paying U.S. taxes:

o Leading Expert Martin Sullivan: "Deferral is key to understanding international tax avoidance. Often, US corporations permanently defer taxes on foreign profits generated in low-tax jurisdictions. If a corporate tax director and an outside tax advisor can pull that off for a corporation, they can directly increase the profits reported to shareholders." (Martin Sullivan, "Data Show a Dramatic Shift of Profits to Tax Havens," Tax Notes, 9/13/04)

o Former Reagan Treasury senior international tax official Stephen Shay: After four decades of intense lobbying and innovative avoidance schemes, the anti-deferral laws on the books are "easily avoided by the well advised." (Stephen Shays, "Exploring Alternatives to Subpart F," Taxes, March 2004)

GEORGE BUSH HAS PUSHED FOR MORE OVERSEAS TAX BREAKS

George Bush has consistently defended tax breaks for companies that ship jobs and profits overseas, resisting bipartisan Senate legislation to close the Bermuda loophole that allows companies to move their headquarters overseas to avoid paying taxes. And Bush has even pushed for more tax breaks for companies that export our jobs - to be paid for by raising taxes on companies that export our products and create jobs in America.

-- Treasury Secretary John Snow defended companies that use tax breaks to create jobs and shield profits overseas. "It is not the Administration's view that every time a company goes offshore, that that is an abusive tax shelter. Clearly that is not the case. Sometimes companies go offshore because of the effects of our own Tax Code on them vis-`-vis the tax regime of competitors they have." (John Snow Testimony, House Ways and Means Committee, 2/3/2004)

-- Assistant Treasury Secretary Pamela Olson went as far as to compare the anti-inversion bill to East Germany's construction of the Berlin Wall. "We don't think you can erect a Berlin Wall and keep companies in the US." (Pamela Olson, Testimony, House Ways and Means Committee, 6/6/2002) -- The Bush administration has defended tax breaks for companies that ship jobs overseas and called efforts to reduce them "stupid." Commerce Undersecretary Grant Aldonas said that Kerry's proposal to end tax breaks for companies that shift jobs overseas: "It's a tax system that's calculated to drive manufacturers offshore, rather than to keep (them) here... It's the single stupidest idea since the Smoot-Hawley tariffs in terms of penalizing our manufacturing sector." (National Journal's Congress Daily, 4/13/04)

-- George Bush pulled the United States out of a multilateral OECD process to crack down on tax havens. One of the first actions of the Bush administration was to pull the United States out of a successful process to crack down on tax havens around the world. Here is how the New York Times described this action, "the Bush administration is backing away from a three-year effort by the Organization for Economic Cooperation and Development to crack down on tax havens. The administration's decision to withdraw American support for essential elements of the effort undermines what had been a successful international campaign." (New York Times, 5/26/04)

-- The Bush Treasury Department proposed more tax breaks for companies that export jobs, paid for by raising taxes on companies that export products. George Bush proposed repealing a WTO-illegal export subsidy (FSC/ETI) and suggested that the money should be used to widen the tax loopholes and tax breaks that allow companies to use deferral and cross-crediting to avoid paying U.S. taxes. (Treasury, "General Explanations of the Administration's Fiscal Year 2004 Revenue Proposals.")

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THE KERRY-EDWARDS PLAN TO END TAX BREAKS FOR COMPANIES THAT OUTSOURCE JOBS AND PROFITS

John Kerry and John Edwards (news - web sites) have a three-part plan to crack down on companies that outsource jobs and offshore their profits to avoid paying taxes. Very conservatively, these changes would bring in an additional $12 billion annually that would be used for incentives to create jobs in America, including cutting corporate taxes by 5 percent, a tax cut for 99 percent of taxpaying companies. It is likely that substantially more money would be raised, ensuring billions of additional dollars to reduce the budget deficit.

1. Establish a new Office of Offshore Tax Enforcement at Treasury. The new office would investigate offshore corporate tax avoidance, help develop new regulations, and ensure compliance with these regulations.

2. Close the Bermuda loophole and other international loopholes. Kerry will immediately call for ending abuses that allow American companies to escape taxes by taking advantage of complicated international tax rules. These abuses include "corporate inversion" where an American company moves its headquarters to a tax haven like Bermuda to avoid taxes, certain types of cross-crediting that encourage companies to shift income and jobs to low-tax havens, restricting tax avoidance through hybrid structures, and other abuses.

3. Eliminate special breaks so companies are taxed the same whether they invest abroad or at home. John Kerry will eliminate all the rules that allow companies to "defer" paying taxes until they bring the profits back to the United States. This will ensure that American companies will be taxed on their foreign subsidiaries' profits just like they are taxed on their domestic profits. The new system will apply to profits earned in future years - it will not be applied retroactively to profits already earned abroad.

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