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Small business in Massachusetts would have to shoulder an extra $5,845 in taxes to make up for the revenue lost due to the abuse of offshore tax havens by multinational corporations, according to a new report by MASSPIRG Education Fund. As a new administration takes office and the possibility of tax reform again enters the national conversation, the report highlights how it’s small domestic businesses and ordinary Americans that have to shoulder the burden of multinational tax avoidance.
“The amount of cash corporations book to offshore tax havens is only growing, and it’s not because these corporations are actually conducting prolific amounts of business in the Cayman Islands,” said Deirdre Cummings, Legislative Director of MASSPIRG. “Our tax code is balanced in favor of big multinational corporations, and that means here at home we’re losing out on lower individual tax rates, more funding for public programs, or decreasing our national debt.”
Every year, corporations and wealthy individuals avoid paying an estimated $147 billion in state and federal income taxes by using complicated accounting tricks to shift their profits to offshore tax havens.
“Comprehensive tax reform must be a priority for Congress, including changes to the tax code to stop the flow of dollars into overseas accounts to prevent this practice from further endangering our small businesses, said U.S. Representative Niki Tsongas (3-MA). “Tax havens have an unfair impact on the entrepreneurs and innovators that are the backbone of the small business community and we have a responsibility to do what we can to provide certainty to these growing companies and community-minded citizens alike. I appreciate MASSPIRG’s efforts to conduct this report and its findings will be useful as my colleagues and I in Congress examine this important issue.”
The report found that the average Massachusetts small business would have to pay $5,845 to cover the cost of offshore tax dodging by large corporations. Offshore tax havens give large multinationals a competitive advantage over responsible small businesses which don’t have subsidiaries in tax havens to reduce their tax bills. Small businesses get stuck footing the bill for corporate tax dodging.
“As a small business owner nothing bothers me more than to see large corporations dodge their tax responsibility by stashing cash overseas and then leaving us to pick up the tab,” said State Representative Josh Cutler (Duxbury), chief sponsor of a Massachusetts bill to close an offshore tax loophole knows as the water’s edge loophole here in Massachusetts. “Small businesses already face plenty of challenges, we should not ask them to compete in a rigged marketplace favoring a few corporate giants that can afford to exploit our tax code.”
Many of America’s largest and best-known corporations use these complex tax avoidance schemes to shift their profits offshore and drastically shrink their tax bill. GE, Microsoft, and Pfizer boast the largest offshore cash hoards:
- General Electric maintained 20 tax haven subsidiaries and parked $104 billion offshore in 2015. With the help of offshore subsidiaries, General Electric paid a federal effective tax rate of -1.6% over the past ten years. GE’s tax rate was negative during that period because the company received net tax payments from the government.
- Microsoft reported a total of $124 billion in offshore profits. If this money had not been shifted offshore, Microsoft would have owed an additional $39.3 billion in taxes.
- Pfizer operates 181 subsidiaries in tax havens and holds $193.6 billion in profits offshore, the second highest among the Fortune 500. Pfizer recently attempted the acquisition of a smaller foreign competitor so it could reincorporate on paper as a “foreign company.” Pulling this off would have allowed the company a tax-free way to avoid $40 billion in taxes on its offshore earnings, but fortunately the Treasury Department issued new anti-inversion regulations that stopped the deal from taking place.
“With tax reform likely on the table for the new administration, it’s vital that all decision makers take into account the realities of how tax haven abuse hurts small businesses,” said Cummings. “Any tax reforms should slam the door shut on the flow of corporate cash into tax haven countries, not open those flood gates more widely.”
The report recommends closing a number of loopholes, including ending deferral, which allows corporations to defer paying taxes on profits booked offshore until they are brought back to the U.S. States. Massachusetts can take action locally to end the flow of cash to offshore tax havens by closing the water’s edge loophole and taxing profits booked to places like the Cayman Islands.
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