U.S. companies hiding revenue offshore

Introduction

With the growth of global capital, rising numbers of U.S. corporations are offshoring their revenue to hide from the taxman, and for the past eight years, the Bush administration has taken scant action to stem that tide. While corporations use many tactics, the basic principle involves shuffling their U.S. profits or activities through any number of overseas subsidiaries or shell companies — some which consist of little more than a mail slot in a low-tax foreign locale. From 1999 to 2003 alone, for example, the profits reported by foreign subsidiaries of U.S. multinational companies soared by 68 percent, an increase not accompanied by any gain in real economic activity in popular tax havens. Yet the ability of the Internal Revenue Service (IRS) to provide oversight of these practices has failed to keep pace with their growth. While in the mid-1990s, the IRS had a $4.43 billion enforcement budget, by 2006, that budget had risen by less than five percent, even as the size of the economy grew nearly eight times that amount. The IRS has also reduced audits of offshore taxpayers, which take an average two-and-a-half years to complete (the deadline for completion of an audit is three years). Today, according to Congress, the use of offshore tax abuses costs the U.S. government over $100 billion in lost revenue a year. That’s nearly three times the annual budget of the Department of Homeland Security. Even the nation’s top Iraq war contractor, Kellogg Brown & Root (a former Halliburton subsidiary), was able to avoid paying hundreds of millions in Medicare and Social Security taxes for years — all while receiving $16 billion in plum contracts.

Follow-up:
Members of the Senate Finance and Budget Committees have been particularly vocal on the issue of offshoring revenue, introducing legislation to address the problem, such as the Stop Tax Haven Abuse Act. President-Elect Obama has indicated support for the concept. Congress has held a string of related hearings in recent years, including a July 2008 panel focused on the tropical tax haven of the Cayman Islands, where one office building purports to house 12,748 corporations. The IRS has previously announced plans to step up activity on the issue, unveiling an August 2008 settlement offer to over 45 of the nation’s largest corporations that would allow them to keep 20 percent of the pre-2008 deductions claimed through particular tax shelters, so long as they agreed to stop using those shelters by 2010. In response to a request for comment, an IRS spokesman noted that the agency has embraced various new strategies to increase tax compliance, such as increased scrutiny of mid-market corporations with assets between $10 million-$50 million, and will “closely monitor” its handling of large corporate audits. Meanwhile, Congress’s October 2008 bailout bill included a provision closing a loophole that hedge fund managers have used to avoid taxes on offshore income. As budget pressures tighten, more action on the issue looks likely.