Between 1999 to 2002, US multinational corporations increased profits in countries with no taxes or low rates by 68% while sharply reducing profits recorded in countries where they engage in substantial business activity, a study published in the journal Tax Notes shows.
Ireland top location for US Multinational Profits
In low-tax Ireland, for instance, profits of subsidiaries of US multinationals have doubled in four years, from $13.4 billion to $26.8 billion. Profits from operations of U.S. multinationals in no-tax Bermuda have tripled, from $8.5 billion to $25.2 billion. Not surprisingly, those two tax havens rank as the number one and number two locations in terms of profitability for U.S. corporations operating abroad- surpassing long-time leading investment partners like the United Kingdom and Canada. But Ireland and Bermuda are only part of the story.
October 2004: Ireland is the world's most profitable country for US corporations, according to analysis by US tax journal Tax Notes. In a study by the journal's Martin Sullivan, it was found that profits made by US companies in Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8 billion, while profits in most of the rest of Europe fell. In his analysis Sullivan termed Ireland a 'semi-tax haven' for US firms, because firms are involved in real productivity in contrast with locations such as Bermuda.
Between 1999 to 2002, US multinational corporations increased profits in countries with no taxes or low rates by 68% while sharply reducing profits recorded in countries where they engage in substantial business activity, a study published in the journal Tax Notes shows.
Source: Tax Notes
In 2002, US companies reported $149 billion of profits in 18 tax-haven countries, up 68% from $88 billion in 1999, according to Tax Notes, which analyzed the most recently available Commerce Department data. This compares with a 23% increase in total offshore profits earned by US multinationals during the same period-total profits of US multinationals’ foreign subsidiaries around the world stood at $255 billion in 2002.
According to the New York Times, Commerce Department data not referred to in the study suggest that US companies took 17 cents of each dollar of worldwide profits in tax havens in 2002, up from 10 cents in 1999.
Tax Notes shows that for each dollar of profit taken in Luxembourg in 1999, US corporations took $4.56 of profit in 2002. The result for Bermuda was $2.96; for Ireland $2.01; and for Singapore $1.72. These countries are viewed as tax havens or partial tax havens. For UK, each dollar of profit taken in 1999 was equal to 67 cents in 2002; for Germany, it was 46 cents.
Martin Sullivan, a former US Treasury Department economist who specialised in international taxation, say in his Tax Notes report that the big rise in profits recorded in tax havens like Bermuda had no relationship to economic activity there. US companies booked $25.2 billion in profits in Bermuda in 2002, although total revenues there were only $34.3 billion, according to Commerce Department data. Many companies seek to lower their taxes by setting up foreign units and using internal lending so profits are taken primarily in tax havens and costs are incurred in high-tax countries.
Source: Tax Notes
Sullivan noted that 58% of offshore profits are now recorded in tax havens and writes: 'In low-tax Ireland, for instance, profits of subsidiaries of US multinationals have doubled in four years, from $13.4 billion to $26.8 billion. Profits from operations of U.S. multinationals in no-tax Bermuda have tripled, from $8.5 billion to $25.2 billion. Not surprisingly, those two tax havens rank as the number one and number two locations in terms of profitability for U.S. corporations operating abroad- surpassing former leading investment partners like the United Kingdom and Canada. But Ireland and Bermuda are only part of the story. Tax havens Luxembourg and Singapore-with 2002 effective tax rates of 1.4 percent and 11.4%, respectively- have also seen dramatic increases in the profitability of U.S. companies domiciled there. In tiny Luxembourg, sandwiched between France and Germany with a population of 437,000, the profits of subsidiaries of US companies jumped from $4 billion in 1999 to $18.4 billion in 2002. In Singapore, subsidiaries’ profits increased from $4.4 billion to $7.5 billion.'
The rise of US profits in low tax countries has been matched by a decline in profits in the large industrial countries where US companies conduct most of their business. Sullivan says as a group, Canada, France, Germany, Italy, and the United Kingdom saw the profits of U.S. companies operating in their borders fall 25%-from $72 billion in 1999 to $54 billion in 2002 (a drop from one-third overseas profits in 1999 to a little more than one-fifth in 2002). While these five countries accounted for 44% of foreign sales, 44% of foreign plant and equipment, and 56% of foreign employee compensation in 2002, they accounted for only 21% of foreign profits. In countries where effective tax rates have fallen, profits of U.S. companies operating within their borders have risen significantly.
Source: Tax Notes
In Denmark, where the tax rate fell from 23.9% to 7.6%, profits rose 200%. In Belgium, where the tax rate fell from 26.6% to 12.5%, profits rose 84%. In Spain, where the tax rate fell from 26.1% to 12.7%, profits rose 26%. In Portugal, where the tax rate fell from 21.5% to 9%, profits rose 65%. And in New Zealand, where the tax rate fell from 36.7% to 10.3%, profits rose 200%. How It HappensThe United States generally taxes corporations on their worldwide profits. However, subject to some limitations, corporations can offset the tax paid to foreign governments against their U.S. tax liability. The United States should be able to collect additional revenue on overseas profits located in low-tax countries as the U.S. corporate tax rate is 35 percent.
If for example a foreign tax rate is 5 percent and the overseas business of a U.S. corporation generates say a $100 of profit, the United States (with a 35 percent corporate tax rate) would collect $30. However, U.S. corporations can defer their U.S. tax liability on overseas profits as the foreign income is only subject to U.S. tax when it is paid as a dividend or repatriated to the U.S. parent. The facility of 'deferral' can allow a U.S. corporation to permanently defer taxes on foreign profits generated in low-tax jurisdictions and by taking advantage of this tax-avoidance measure, a corporation can directly increase the profits reported to shareholders.
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