One of Zero Hedge's greater contributions to society in 2010 was finally putting the "cash on the sidelines" BS that was every empty headed pundit's go-to line when cornered and with nothing else to retort, in the trash bin of intellectual sophistry where it belonged. What surprised us is that it took as long as it did before someone dared to point out the flagrantly obvious. That said, today Bloomberg has released a terrific piece of investigative reporting, that may very well refute much of what we said, since it appears that contrary to legal permissions, companies have been very busy using the gray area in the tax code (the same that gets ordinary citizens in lots of trouble with the IRS but not mega corporations, never mega corporations) to repatriate tens, if not hundreds of billions in the past few years. Meet the "Killer B” and “the Deadly D" just two of the strategies that have allowed the following to happen: Merck & Co. bringing more than $9 billion from abroad without paying any U.S. tax to help finance its acquisition of Schering-Plough Corp.; Pfizer Inc. importing more than $30 billion from offshore in connection with its acquisition of Wyeth and taking steps to minimize the tax hit on its publicly reported profits; Eli Lilly & Co. carrying out many of the steps for a tax-free importation of foreign cash after its roughly $6.5 billion purchase of ImClone Systems Inc. in 2008. In other words, despite America's deplorable budget condition, where every dollar in organic revenue is matched by one dollar of debt issuance, companies are doing more than ever to avoid paying any taxes... anywhere.
From Bloomberg:
At the White House on Dec. 15, business executives asked President Obama for a tax holiday that would help them tap more than $1 trillion of offshore earnings, much of it sitting in island tax havens.
The money -- including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes -- is supposed to be taxed at up to 35 percent when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.
What nobody’s saying publicly is that U.S. multinationals are already finding legal ways to avoid that tax. Over the years, they’ve brought cash home, tax-free, employing strategies with nicknames worthy of 1970s conspiracy thrillers -- including “the Killer B” and “the Deadly D.”
The explanation, in case anyone is confused:
“Sophisticated U.S. companies are routinely repatriating hundreds of billions of dollars in foreign earnings and paying trivially small U.S. taxes on those repatriations,” said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles. “They devote enormous resources first to moving income to tax havens, and then to bringing those profits back to the U.S. at the lowest possible tax cost.”
The trade off is not big: about the size of one bond auction.
U.S. companies overall use various repatriation strategies to avoid about $25 billion a year in federal income taxes, he said.
Then again, that is about two months' worth of unemployment benefits to those who actually pay taxes. But when one has the sheep happily paying their share of corporate tax evasion, and the Fed even more happily monetizing debt, why should the IRS care?
And since it is now obvious that (tax) laws are meant to be if not broken, then certainly bent, one can now speculate just why companies such as Microsoft have to misrepresent their tax reality and claim they are issuing bonds when in fact they do have full recourse to all that lovely offshore cash:
“The fact that they have these cash hoards suggests that investment is not being constrained by lack of cash,” Slemrod said.
U.S. multinationals boost earnings by shifting income out of the country via transfer pricing, a system that allows them to allocate costs to subsidiaries in high-tax countries and profits to tax havens. Google Inc., for example, cut its taxes by $3.1 billion in the last three years by moving most of the income it attributed overseas ultimately to Bermuda, Bloomberg News reported in October.
The tax benefits from such profit shifting can have a greater impact on share price than boosting sales or cutting other expenses, since the reduced rate goes straight to the bottom line, said John P. Kennedy, a partner at Deloitte Tax LLP, speaking at the conference in Philadelphia Nov. 3.
In other words, in the biggest of paradoxes, as long as companies are allowed to use tax schemes to defraud America, they will have even less of an interest to actually hire, as the IRR to the bottom line from tax evasion is greater than that from organic growth! Please reread this sentence as it is critical, and goes to the heart of America's gradual transition to what some call a fascist corporatocracy, coupled with ever increasing unemployment. For all those wondering why the unemployment is and continues to be sky high, look no further than the corrupt tax gatherers.
And some memorable buzzwords to should allow the peasantry to grasp and recall just how big the worries of corporate treasurers are when it comes to tax avoidance (and evasion):
The “Killer B” maneuver is named for section 368(a)(1)(B) of the Internal Revenue Code, which deals with tax-free reorganizations. A U.S. company using the technique would sell its shares to an offshore subsidiary, bringing cash back to the U.S. tax-free. The offshore unit could then use the stock to make an acquisition. In 2006, the IRS issued a notice aimed at shutting down the maneuver.
The “Deadly D,” also named for a section of tax law, allows a U.S. company to attach the high tax basis in a newly acquired company to one of its existing foreign units. In some cases, doing so enables the U.S. parent to pull cash from the subsidiary up to the amount of the recent purchase price tax-free. The Obama administration has proposed changing the provision that enables the maneuver.
And since nothing is ever covert in any newly developed Banana Republic, here is how tax-deminimis status is spun at fully open and public gatherings:
Willens, the independent tax adviser, said the steps indicated a likely D reorganization, or another method “to extract earnings from overseas without tax consequences -- of course.” Lilly had no comment beyond its filings, said David P. Lewis, the company’s vice president for global taxes.
The KPMG panel discussion in Philadelphia, called “Global Cash Tax Management Plans and Repatriation Planning,” dissected other techniques, including one that took six slides to explain. It works like this:
Soon after a U.S. multinational has purchased another U.S. company, the new unit promises to pay the parent a large amount of cash pursuant to a note agreement. Since both parties are U.S. companies, there is no tax bill for the parent under current U.S. law.
Then the new acquisition converts to a foreign company. So when the payment pursuant to the note is made, it comes from overseas. That means the foreign cash is treated as a nontaxable payment under the note, instead of a taxable dividend.
Going Offshore
The newly converted foreign subsidiary could access the multinational’s existing offshore cash by borrowing from a foreign sister unit, said Glenn, the KPMG tax partner. He and Zollo were joined by colleague Frank Mattei, as well as Don Whitt, a Pfizer tax official.
“This basic transaction is something that at least a couple of taxpayers have done, and I know a number of others have evaluated,” Glenn said. The strategy’s name follows the alphabetic tradition of Bs and Ds. It’s called “the Outbound F.”
Remember: if US individuals even think of doing something as tax evasive as the above mentioned, the thought police will be knocking at your door. So unless one is a corporation, preferably a monopoly, and best of all: so massively leveraged (think GE) it needs its own propaganda station, and endless Fed and taxpayer backstops, don't even try to visualize a world in which the rules that apply to corporations can even remotely be applicable to ordinary US peasants. Perhaps this is why those who are bored and actually look at the final 2010 Treasury Direct Statement will find that the US government collected $1.3 trillion in individual incomes taxes net of refunds...and $160 billion in corporate.
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