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US Multinational Profits Drawn To Low-Tax Territories

by Mike Godfrey, Tax-News.com, Washington

06 February 2013


A new study from the US Congressional Research Service shows that over the past decade, US multinationals have declared greater shares of their profits in low-tax jurisdictions.

The study compares the contribution of US multinational companies (MNCs) in tax and economic terms in five low-tax territories, including Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland, and five high-tax territories, including Australia, Canada, Germany, Mexico, and the United Kingdom, during 1999-2008.

The report notes that during that nine-year period, profits reported in the aforementioned low-tax territories had increased by roughly 60% without a marked increase in employment or investment in these businesses' operations.

It points out that in 2008, American companies reported earning 43% of overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland while these operations accounted for around 4% of their foreign workforce and 7% of their foreign investment. The ratio of profits reported in these five territories rose markedly between 2000 and 2002, from 24% of total foreign profits to 40%.

In comparison, the traditional economies of Australia, Canada, Germany, Mexico and the United Kingdom accounted for 14% of American MNCs' overseas profits, but 40% of foreign hired labor and 34% of foreign investment.

In addition, MNCs' profits as a share of gross domestic product (GDP) in the traditional economies averaged from 1% to 2% between 1999 and 2008, while their profits in the low-tax countries averaged in at 33% of GDP in 2008, up from 27% in 1999. Profits reported in Bermuda increased from 260% of that country's GDP in 1999 to over 1,000% in 2008. In Luxembourg, American business profits went from 19% of that country's GDP in 1999 to 208% of GDP in 2008.

The report's author, Mark P. Keightley observed that: "By all indicators examined in this report, profit shifting has generally trended upward overtime."

Keightley noted that the proportional decline in profits declared in the sample of five high-tax economies relative to low-tax countries is in part due to American companies' decisions to curtail employment and investment in high-tax economies since the early 2000s. "Employment in these countries as a share of hiring abroad has fallen from 48% to 40%, as has investment, which has decreased from 49% to 34%."

He continued: "Because American companies appear to be reducing their real business presence in the traditional country group (relative to the rest of the world), it is perhaps not surprising that profits reported in these countries are also falling. It is not possible, however, to say how much of the reduction in profits reported is due to declining real activity and how much is due to profit shifting."

The report is likely to give further ammunition to the anti-offshore faction in Congress who believe that more legislation is needed to make it harder for US MNCs to structure their operations to reduce their exposure to US tax. On the other hand, the report also emphasizes the need for an overhaul of US corporate taxation, notably by reducing the combined corporate tax rate - which at approximately 40% is the highest in the OECD - and thus reduce incentives for MNCs to shift profits offshore.

TAGS: tax | investment | business | offshore confidentiality | Ireland | Netherlands | law | gross domestic product (GDP) | corporation tax | Australia | Bermuda | Luxembourg | Mexico | United Kingdom | offshore | multinationals | controlled foreign corporations (CFC) | Canada | Germany | Switzerland | United States | corporate responsibility

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