Panama Papers leaked a lot of informations hidden by companies how to avoid paying taxes. With the recent release of millions of secret documents from a Panama law firm that helps corporations and wealthy individuals reduce their tax liability, the spotlight is trained anew on tax avoidance. Companies with offshore outposts typically argue that those subsidiaries serve a legitimate business purpose. A new report suggests that in many cases the primary goal must be tax avoidance.

According to a review of the most recent IRS data by the watchdog group Citizens for Tax Justice, American corporations in 2012 housed more than a half-trillion dollars' worth of profits in just 10 small nations. The group said the smoking-gun proof that the schemes are about tax avoidance comes from Bermuda, the Cayman Islands, the Bahamas and Luxembourg.

"It is obviously impossible for American corporations to earn profits in a given country that exceed that country’s total output of goods and services," the report concluded. "Clearly, American corporations are using various tax gimmicks to shift profits earned in the U.S. and other countries where they do the bulk of their business into their subsidiaries in these tiny countries that impose little or no tax on corporate profits."

How this process works. Corporations set up affiliated shell companies in countries where taxes are low or nonexistent and reroute payments and liabilities to serve their needs. For instance, the car service Uber processes payments outside of the United States through its shell corporation in Bermuda, a tax haven with a 0 percent tax rate, where it then posts its profits. That leaves less than 2 percent of its net revenue taxable by the United States, according to Bloomberg.
American companies' shift of their profits to their offshore subsidiaries has occurred even though the United States' effective corporate tax rate is among the lowest in the industrialized world. A related report issued last week by CTJ found that the United States is the fourth-least taxed nation in the Organization for Economic Cooperation and Development, at 25.7 percent of its annual GDP.

While on paper, the U.S. statutory tax rate is among the highest in the developed nations — topped out at a combined state and federal rate of 39.1 percent in 2014 — tax credits, exemptions and other tax avoidance techniques can bring that rate much lower, according to a Congressional Research Service analysis released in 2014. For instance, pharmaceutical company Pfizer managed to pay just 7.5 percent in taxes in 2014.

Tax avoidance isn’t going unnoticed by the federal government. Last week the Obama administration's Treasury Department moved to try to stem some of the shift of cash offshore. (Pfizer recently dropped plansto merge with Allergan based in Ireland, where it could have paid little or no taxes). Calling inversions one of the “most insidious tax loopholes out there,” the president and his administration released far-reaching rules to stop corporate inversions, which are transactions in which U.S. companies take foreign addresses by merging with a smaller company overseas where they can more easily avoid paying American taxes.

“The problem here isn't America versus Europe — it's giant multinational firms versus small domestic businesses,” Anneliese Dodds, the European parliament’s rapporteur on corporate tax, said in response to the Treasury’s assertion that the EU was unfairly targeting American companies. “No government should be cooking up a sweetheart tax deal for any company — be they American, British or Martian — that they don't then offer to everyone else.”


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