Did you know that 20 percent of profitable U.S. corporations pay nothing in U.S. corporate taxes? How on earth can they do that? How about the rest of 80 percent? Are they paying taxes in full amount?
This post will offer you the answers, as objective as possible. Read on.
Q: How can 20 percent of profitable corporations pay zero taxes?
So, let's take the questions above one by one. Firstly, let's talk about the fact that 20 percent – or 19.5 percent to be exact - of big companies pay zero taxes, in spite of all the profits that they generate, according to GAO report. Your question: How can they do that?
Firstly, let's define what “profitable” means. In calculating profits, there are essentially three concepts:
- Book income: Income that's on a publicly filed financial statement. Corporations, obviously, want this figure to be as high as possible, as it impacts their ability to attract investors and please their shareholders.
- Taxable income: Income that's on the tax return reports. Corporations want to minimize this through various tax avoidance methods.
- Economic profit: revenues minus expenditures.
The GAO's report is based on the corporations' book income – which corporations want it to be as high as possible. That said, the actual figure based on taxable income should be lower than 19.5 percent.
Regardless of the accounting methods, there are several reasons, according to Tax Foundation:
- Tax deductions: The companies get deductions for the carried-forward-losses that they had in the past years.
- Depreciation: For corporations that have large capital, they may be able to write off a large fraction of the investment by treating them as a current year's expense.
- Profitability: Their operations are profitable offshore, but are loss-making, domistically.
Q: How about the rest – are they paying taxes in full amount?
Alas, no – depending on your definition for 'full amount.' In this post's case, full amount means the taxes that they should be paying under 'normal' circumstances.
We've covered this in one of our previous posts, but to recap, the top 50 U.S. companies are paying an average of 26.5 percent tax rate – below the U.S.' statutory tax rate (35 percent).
Alphabet (Google,) for example, holds more than half of their profits offshore, which is a part of the reason why their effective tax rate is at 20.2 percent. Here's another example: General Electric only pays 6.7 percent in taxes, while receiving federal loans/bailout, enjoying more than $40 million in tax break – while 'stashing' their money offshore, at $119 million.
All in all, there are indeed corporations that pay taxes lower through creative tax planning, e.g. Taking a portion of their assets offshore – which can be legally done. In fact, there are tactics that can be adopted by companies of any sizes, all by creating offshore structures for operations outside your home country.
Conclusion: Tax 'loopholes' allow more benefits
So, what can we make of the facts above? It's simple, really. There are perks that most businesses won't enjoy, and one of them is tax breaks.
The premise: There are legal loopholes that big corporations use to lower their taxes which we can adopt, regardless of our company sizes. Want proof? Here's a prominent one.
One of the loopholes comes in the form of offshore structure, which allows you to avoid taxes legally. Unless the government does a tax reform that closes down the loopholes, big companies will always try to capitalize the loopholes, and smaller companies will eventually follow.
There are indeed corporations that pay taxes lower through creative tax planning, e.g. Taking a portion of their assets offshore. The good news is, small companies can follow suit using the same strategy.
Now, there's a fine line between the legal and illegal uses of offshore structure, and that's all about ethical standpoint that's adopted by each company.
If you want to learn how to lower your tax through proper tax planning via offshore structure, consult with us.