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Tax Evasion Causes Cash Abroad to Rise

Tax Evasion and Profits

Folder tabs with focus on offshore account tab. Business concept image for illustration of tax evasion.US-based companies added $206 billion to their offshore profits last year, shielding earnings in low-tax countries.

Bloomberg News reports that multinational companies have accumulated $1.95 trillion outside the US, up 11.8 percent from last year. Three companies—Microsoft Corp., Apple Inc., and International Business Machines Corp.—account for 18.2 percent of the total increase.

Tax Loopholes

“The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore,” said Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group, which seeks to counteract corporate influence.

Many of these companies are moving patents and other intellectual property to low-tax locales. US multinational companies reported earning 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.

“If you can choose between San Antonio and Shanghai, and you pay no taxes one place and 25 to 35 percent at home, you’re encouraged to move jobs overseas,” said Paul Jacobs, CEO of Qualcomm Inc., in his Mar. 4 farewell address. For US corporations, these overseas profits are building up and they are choosing to not bring the cash home and face the tax consequences. Because of this, CEOs like Jacobs are urging Congress to pass legislation that allows American companies to be able to bring money back to the United States without tax penalty. Doing so, they argue, would decrease tax evasion and increase domestic investment.

22 Companies

The majority of the offshore profits are held by a small number of companies. The top 22 corporations in Bloomberg’s analysis have more accumulated earnings outside the US than the other 285 combined. Under U.S. accounting rules, companies don’t have to assume they will pay federal taxes on profits they have deemed indefinitely reinvested outside the U.S.

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OECD Releases First Pillar of Model Framework

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”) has released the first pillar of its model framework for automatic exchange of tax information.

Standardized Form and Automatic Exchange

The “Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard” establishes a standardized form that banks and other financial institutions would be required to use to gather a range of client account and transaction data to submit yearly to their domestic tax authorities. The different tax authorities would then exchange this information automatically, either bilaterally or multilaterally, depending on the specific agreement.

As summarized by the OECD: “The standard . . .  calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.”

Swiss Banking Skepticism
The Swiss Bankers Association (“SBA”) noted that the recommendations from the OECD “are in general a step in the right direction,” yet continued to have problems with the overall framework:

“Firstly, the basis to be used for client identification are domestic money laundering regulations,” the SBA said. “There are still different standards in this area.” Secondly, “it is becoming apparent that the U.S. will not be prepared to offer full reciprocity,” the SBA said.

Finally, the Swiss Bankers Association noted the high costs that are likely to result with implementation of the new OECD standard. The new standard, claims the SBA, will be significantly higher than the costs of implementing FATCA.

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