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I believe a distinction should be drawn between:

(1) stashing income derived in US somewhere offshore

(2) not repatriating income derived outside US back to US

If doing (2) entails additional taxes, why would rational multi-national corporation do that? Because America? The solution is to revise the tax code in such a way that income derived and taxed elsewhere would not be taxed again.

Take Apple for instance; they have a giant pile of cash that sits in bank accounts all over the world. Why should they move it back to US, pay huge taxes and let it sit in bank account back in US? That's irrational.

There are other issues involved: what are the actual tax rates companies are paying (too low!) and tax dodging all over the world (happens all the time! didn't Google just settle with EU?) but they are somewhat orthogonal.

The main issue is that US will tax one's profits again once they are moved back to US. Even if they profits are legally derived in another country and taxed in that country.

Derived is not a simple proposition for multinationals. The IPad I'm writing this on was assembled in China, sold in Ireland, using code developed in the US, where the rights to that code are held in Ireland (I believe).

Each of those countries (and many more I am sure) contributed to the sale. Where was that income derived? Add to that different tax laws in terms of accountability and you have our mess.

IP rights are most likely heals in the Netherlands. Possibly in Belgium or Luxembourg.

> How much did Pfizer pay in US taxes between 2010 and 2012? Zero. What was Apple's US tax rate in 2014? 3.7%.

That would be because Pfizer legally had no profits. Apple has a 15-39% tax rate (almost certainly closer to the latter), not a 3.7% tax rate, because that's the law in the U.S.

> Like most Fortune 100 firms, through legal maneuvering, Pfizer has been offshoring profits for years in order to avoid paying US taxes.

They do this because U.S. corporate taxes are absurdly high. Of course, it's only convenient for large multinationals to avoid taxes in this fashion; those same high rates bite their smaller competitors badly, making them far less profitable (imagine having to pay nearly half of your profits in taxes annually!). The situation works out well enough for the large companies.

There's another angle to consider here as well. How much do EPS and tax profits mean to investors? Very little so long as underlying cash flow is strong.

The new game for corporations has been to minimize their taxable profits while maximizing free cash flow and returning that cash somehow to shareholders. John Malone's cable companies have reported losses or minimal profits for decades, while at the same time beating the S&P500.

Part of that was due to favorable tax breaks on cable companies which purchased and sold cable system assets between one another. This was originally designed to support cable in rural communities, but was quickly co-opted. Competitors would frequently sell assets to each other every couple of years when the tax benefits ran out to re-roll them. One big shell game.

The code is broken and until we fix it the opportunities to game the system are going to multiply. Something about a finger in the dike...

> They do this because U.S. corporate taxes are absurdly high.

Oh really? So places with a sane corporate tax rate, like Ireland's 12%, see less tax avoidance by large multinationals headquartered there, do they?

The reason Pfizer legally have no profits is because they've structured the transactions between their subsidiaries so that all the profits are in a subsidiary in a low-tax country. Their particular method of achieving this is apparently buying their active ingredients from an Irish subsidiary of themselves that is so expensive that the main company actually loses money on them: http://www.reuters.com/article/us-pfizer-tax-insight-idUSKCN... (Except of course they're not actually losing money except for tax purposes, because it all goes to a wholly-owned subsidiary they control.)

Nice cherry picking. According to Pfizer's actual SEC filings, for 2015, 2014, and 2013, the company paid 22%, 25%, and 27% respectively.

http://services.corporate-ir.net/SEC/Document.Service?id=P3V...

And when people talk about how companies skirt taxes, there is rarely any discussion about the major costs to the livelihoods of the people doing this financial work.

It isn’t just about finding creative ways to not pay money, it is about companies practically working their tax accountants to death in order to do it.

I knew someone who worked in taxes for a huge company and it was utterly insane: he worked, nearly literally, all the time: like 6 am to midnight, 7 days a week, for the entire damned quarter. Then the company thinks they’re doing them some kind of favor by giving them like ONE day off before they start feeling pressure to begin work on the next quarter’s numbers. All about the numbers. He described all these tricks used to shuffle things around the world. And those people were suffering mentally as well: I heard about constant screaming matches at work, colleagues on average ending their relationships in divorce, etc.

It's certainly an important issue but it has nothing to do with the matter at hand, but with labour laws and their enforcement. Any employee can be abused if they have no means of protection.

Why was this comment down-voted? Software developers, assembly line workers, cashiers can all be worked to death. It's a function of labour laws, supply and demand, and culture rather than tax laws.

Why not do away with the farce that is corporate taxes, open an annual tax holiday to repatriate the obscene overseas funds, and close the gaps on source of high income (yes this is cat and mouse but let's be real, it can be better)?

Honestly, we're better off bringing the money home rather than letting it fester abroad.

To what end, though? Is there a good argument that shifting that money from a tax haven abroad to a de facto tax haven in the US will actually do something productive? It seems as though even companies that have massive amounts of domestic cash on their balance sheets are just sitting on it right now.

> To what end, though? Is there a good argument that shifting that money from a tax haven abroad to a de facto tax haven in the US will actually do something productive?

The question is whether you can couple it with incentives to either grow operations in the USA, or somehow reinvest in American companies.

Potentially, this could be one of the conditions of the tax holiday, somehow.

I agree. Carl Icahn, activist investor, is trying to change the rules with a show of force but companies only keep it overseas because they believe they'll get their way soon.

If you make it so it isn't an option, then they're forced to reinvest or lose to competitors and/or piss off shareholders with no growth.

I'm all for low corporate taxes but small businesses get hosed and they create jobs and innovation despite their disadvantages.

Want to start an LLC in California? You'll have to pay UPFRONT sales tax and an annual $800/yr license. People on this board complain about SaaS products that are $20/mo. What do you get from the state? Nothing.

The upfront sales tax is completely ridiculous. While it's a credit - you start your company with thousands of dollars in the hole when cash is king. Then you have compliance costs and the state income & sales tax is not competitive. At least other states like Nevada and Texas can capitalize and steal talent to try and keep other states honest. That's refreshing.

I have 2 successful LLCs in California but the current situation irks me. I'm closing another startup because the costs and time involved with keeping it lukewarm until I can free up time from the other 2 is prohibitive. And the cost to start it back up after I close it is prohibitive too (business tax, new sales license, distributor, etc.).

Eventually I'll probably sell the 2, move to Costa Rica and start a new New-Co up. :)

If you have say an LLC as a disregarded tax entity, or an S corp that earns honest buck, say $1m/yr in 2015, prepare to pay $500,000 tax, even if you intend to store money in the corporation to re-invest all of it in 2016. At the end of the calendar/fiscal year, the income will be taxed, regardless of your intent to use it for business development in the later years. Note, it is not taxed when you take it out of the corporation, it is taxed before that.

If you create a C Corp, it will be taxed about $300,000, but then taxed again at about 40% if/when you take it out.

Contast this not even with Pfizer, but simply with say a smallish public company with 1bn market cap that has gross $200m/yr and expenses of say $201m/yr (often deliberately in red, like AMZN, to pay 0 tax). Every several years they would issue $100m worth of new shares to remain cash flow positive (zero tax rate on $100m by the way), and use a large portion of these proceeds towards the executive compensation in options that is taxed at 20% as long term capital gains. I observed this up close, my ex was a corporate lawyer in such a typical company. But this was not all. In the end they split the company into two, (paying hiring bonuses in the shares of the spinoff to all execs), and incorporated the spinoff in Cayman islands, to make it an inversion target! I felt almost nauseus writing my own large tax checks for my domestic LLC!!

My cpa gave me the advice that a c Corp is the best option if you have retained earnings for exactly that reason.

When they give you those options and if you exercise right away they are taxed at whatever the current market value of the stock is, as income. It's only once you exercise and hold that you get the LTCG tax rate on the rise of price of the stock when you sell.

If they are structured as ISO options, then you will hit the AMT tax rate very very quickly and at the minimum pay %28 tax. If you live in CA, there is another %8 CA AMT tax that will apply on top of that I think. And if you start hitting the AMT tax rate, the 'tax credit' you get from paying state taxes starts going away too! So I guess if you play a lot of AMT shenanigans with ISO stock options, you can reduce the tax load to %28-36, which is an improvement I guess. But ISO stock options are golden handcuffs and pretty bad when your in a private company.

If I'm wrong, me and whole bunch of stock compensated engineers would be very interested to learn how we are wrong.

It is absolutely a small business assassination program. I used to run a non-profit in another state to give veterans immediate help (money) when they needed it, which was moderately successful. It was tiny, but helpful. I moved to California. I am no longer able to provide help to veterans because of that tax. "For the privilege to do business in the State of California"...

Why not incorporate in Delaware or Nevada? Both seem to be ideal for startups/personal projects, no tax until you hit $1M revenue (only personal income tax), you pay only yearly sales license or franchise tax, you don't need to reside there (you can even reside outside US, so you can live happily in Costa Rica). What's the benefit of incorporating in CA?

I have my third LLC that I'm going to continue registered in Nevada. However, since myself and partner both live in California so we had to register a "foreign LLC" in California which still has the overhead and costs.

So basically - doing it legit means you are required to register a foreign LLC in Cali if you are operating there.

That's really annoying :(

Ran into this same issue with my Delaware LLC as we have a partner based in Florida which has similar foreign LLC registration requirements.

Why Costa Rica specifically? Lifestyle + lower cost of living, or particularly easy to setup and run businesses?

I agree. The system we have right now is ridiculous. We should harmonize our corporate tax rates and rules with the rest of the G-8 and then tax capital gains more like income.

How much did Pfizer pay in US taxes between 2010 and 2012? Zero.

That's because Pfizer reported a net loss in 2012. I don't know the exact details, but Pfizer is headquartered in NYC and most of it's R&D is US based as well.

And Pfizer had several major settlements with the IRS based on audits from previous years. That's right, the gov't audited Pfizer's returns and gave billions back.[1]

[1]http://www.taxanalysts.com/www/features.nsf/Articles/8A8A34F...

I don't know the US tax system, but I assume you have both VAT and income tax. With that assumption, why should a company pay tax of their profit? As soon as they spend some of that profit some of it is taxed in the form of VAT and income tax.

When you have a system where profit is taxed, you get companies investing the money in the most risk free thing they can, to avoid the profit tax. If profit tax is 0% it's far simpler to keep the money home, and to use it when they want to.

The US does not have VAT.

We don't have VAT. We have sales tax, and it varies per state and locality, and rarely makes any sense.

With sales taxes, the point still stands though.

There is no national sales tax.

> As soon as they spend some of that profit some of it is taxed in the form of VAT and income tax.

VAT-rated companies claim-back VAT again VAT-rated sales. In fact, a VAT-rated company can earn more in VAT rebates than it collects in sales.

The traditional moral reason for taxing profit is that it's excess money for which the company couldn't find a use; they've already paid the staff, invested in R&D and maintained the corporate jet fleet and they still have money left over. The Government can quite easily find a use for that excess cash in providing infrastructure which the company needs in order to operate.

If a company keeps getting more in VAT rebate, it will at some point be denied to get the rebate. At least in Denmark.

In any case, I just cannot wrap my head around that way of thinking "you cannot find a use for it, therefore you must give it to me". The company already generated taxes and probably jobs. It just seems greedy.

I mostly agree with you. We could and probably should eliminate corporate income tax. However, this repeal should only come after many years (I'd say decades) of stable growth in personal income tax rates (going as high as 90% of income above a certain threshold -- I recommend the threshold be at 100x the natuonal minimum wage times two thousand or about $3M annually) and criminal penalties for failure to report income that pushes people above that threshold (I'd recommend a minimum sentencing guideline of 10 years in prison). Here income will include any expenses the "employer" corporation makes for the employee.

The idea is to not affect police officers who make $60k a year and get free lunches worth $2k a year but to affect executives who make $2M and live in a corporate owned home, drive a corporate owned car, take corporate jets and so on.

Sure, the corporation can stash unlimited wealth but you can't spend any for personal reasons without paying your fair share in taxes.

Thoughts?

> The traditional moral reason for taxing profit is that it's excess money for which the company couldn't find a use; they've already paid the staff, invested in R&D and maintained the corporate jet fleet and they still have money left over. The Government can quite easily find a use for that excess cash in providing infrastructure which the company needs in order to operate.

This is complete absurdity. There should be no "moral" reason behind taxes; only logical. Taxes on profit are punitive against small businesses and encourage tax optimization strategies that are not remotely related to any sort of sound business. Assuming any government is going to better spend money than private enterprise is one of the funniest things I've read today.

"Assuming any government is going to better spend money than private enterprise is one of the funniest things I've read today." As someone that works in the same industry as Pfizer (and Valeant), yes it is true that sometimes the government is going to spend money better than private enterprise. The Cost and success rate of R&D in drug devleopment is not sustainable without the significant funding the US government (and to some extent other governments) contributes to basic science. The Valeant CEO (now Ex) has used the phrase "value destroying R&D" and Pfizer is Pfamous in the industry for R&D Pfailures. Both have been serial acquirers where they find much of their post-consolidation synergies in R&D, leading to deep cuts (often total cuts in Valeant's case). While they are acting economically rational way, the long-term consequences are that they are subsidized by the government.

Right, and ignoring Bush-era tax cuts, that money will be taxed well when it is payed out to investors.

One good reason to tax corporate profit is that (large) corporate profit is a market failure (lack of competition) - and a profit tax can help lessen that failure.

Or, just maybe, you could eliminate or lessen whatever regulation exists that enables that lack of competition.

Possibly. For Pfizer that would surely mean eliminating patents on medicine.

Apple for example, that would mean eliminating patents on software and hardware, copyright on software, design-patents etc.

Personally I believe that tax both personal and corporate is justified by the fact that companies and people use the infrastructure of the country they are operating or living in. That includes currency, legal system, implicit and explicit use of the education system, physical security and of course physical infrastructure.

VAT as a tax only taxes their use of the locally available marketplace of goods and services.

That some of that should be taxed by taxing things like fuel, water and electricity.

What if I think they should pay zero taxes? Is that doable?

In some ways this is quite sensible, instead of taxing profits you tax dividends and capital gains like normal income. Shareholders tend to be less mobile than profits.

>For example, I've heard there's a substantial tax savings when investing in US R&D.

Yeah, but not that much savings. The calculation is complicated, but taxpayers usually don't recuperate more than 5-10% of their qualified research expenditures for the tax year. Not to mention the difficulty in evaluating and calculating precisely what business components qualify for the credit. Most firms spend only a fraction of their revenue on qualified research activities, so their profits generally dwarf QREs. Pfizer would have to spend something like a trillion dollars on R&D in order to repatriate all of their current offshore profits without paying any tax on it.

Let's take a concrete example. I'll use the regular research credit calculation since they've been in business long enough and have enough base years. They currently spend around $6.5bn on R&D, that's down from an average of $8bn in the prior five years. Let's assume all of that is qualified, even though it very well might not be due to the large number of exclusions in IRC sections 41 and 174. I'm too lazy to look up Pfizer's aggregate gross receipts in their financial reports, but a quick google search shows their annual revenue at around $50bn, which should be close enough and I'll pretend that's been consistent for the five preceding years. That's $8bn * 5 base years = $40bn aggregate base year QREs. Divided by $250bn base year aggregate gross receipts gives us a fixed based percentage of 16%, which happens to be the maximum allowable amount. We multiply that by the average aggregate gross receipts for the base years, giving us a base amount of $8bn. We then select the greater of the base amount or 50% of current year QREs ($3.25bn), so we pick the base amount. We then can take the credit for 20% of the excess of the current year QREs over the base amount, which in this case is negative $1.5bn, so Pfizer can't claim the credit at all.

Even if we were to fudge the numbers more optimistically in Pfizer's favor, they are looking at a best case tax credit in the range of a few hundred million dollars, when they have a couple hundred billion in profits that they need to repatriate. In order to repatriate that much money without paying taxes, Pfizer would need to incur massive losses. There simply aren't enough tax "loopholes" for Pfzier to deduct or credit its way to a zero tax rate.

Regardless of what they put back into the treasury the idea that they pay any tax is absurd. They collect taxes for the treasury and this is passed on in the cost of every sale and service they make.

About the only method to force payment of a tax on a sale or service is sadly through something similar to a VAT. Then remove any income tax paid.

Still a better solution would be a low, 15% or such, flat tax which has no deductions

Also, there is a lot of people who think that companies would like to change tax laws. Here is another surprise for you: they don't. If the tax laws were a problem for them, they would have changed them already -- after all, solving big corporation problems is all that congress members do. The thing is that big companies want people to think that they pay a lot of taxes when in fact they already know how to legally evade pretty much every tax you can imagine.

Except the biggest one - tax on labor.

Yep. Many companies like Disney are getting cracked down on for hiring lots of contractors to avoid FICA and other implications with employment.

Then they try to hire their contractors (at a discount of course) but the contractors tell them to piss off because they already have benefits with their staffing company and don't want to be employed by Mickey Mouse.

So you have companies that want our talent but don't want to pay for it and obey the system. Something must give...

The corporations will probably win, although I'm not sure yet on the best policy.

This is not accurate.

While many companies avoid taxes, they end up harboring cash overseas which has its limits. Most of them need to bring that money back to their primary market in the US - either to re-invest in more employees, factories, R&D, marketing, whatever.

Carl Icanh is basically threatening Congress with Super PACs.

http://www.wsj.com/articles/carl-icahn-to-invest-150-million...

> How much did Pfizer pay in US taxes between 2010 and 2012? Zero. What was Apple's US tax rate in 2014? 3.7%

Yes but what did employees of these companies pay in taxes?

The same as they would have if Pfizer and Apple were untaxed, I assume.