While U.S. companies are finding ever more ingenious ways to cut their high tax bills, there are a few firms that may be pushing the envelope with their strategies.
Their motivation is likely the fact that the United States has the unwelcome distinction of having the highest corporate tax rate among developed nations, according to tax calculations by the Organization for Economic Cooperation and Development.
Burger King is in the headlines for its agreement to purchase Ontario-based Tim Horton's donut store chain, and is therefore going to have taxes its way by becoming a Canadian citizen,
The Washington Post noted.
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By doing so, it will slash its effective tax rate of nearly 40 percent down to 26 percent — a savings of millions that can fall straight to the bottom line.
But moving elsewhere to escape the government's tax clutches is not the only tactic American companies are following, according to
USA Today.
The newspaper identified seven companies in the S&P 500 index — Google, TripAdvisor, PetSmart, Oracle, Genuine Parts, IBM and Kohl's — that have managed to pay a lower effective tax rate each year for the past five years.
Paying less in taxes helps companies provide more profits for their shareholders, but eventual tax reform could impact some of those who are now paying the least, the newspaper suggested.
"To the extent that tax-planning strategies are legally allowed, they often result in a permanent reduction in the firm's tax obligations," wrote Nicholas Yee of research firm Gradient Analytics in a recent report. "However, there can be no guarantee that the reduction is sustainable."
For instance, USA Today reported, Google managed to shrink its effective tax rate to 15.7 percent in 2013 from 27.8 percent in 2008 despite its profits surging by more than 200 percent during that five-year time span.
In a regulatory filing, Google said the reduction was "primarily as a result of proportionately more earnings realized in countries that have lower statutory tax rates" — it is not repatriating its cash to the United States where it would be taxed at the high U.S. rates. The company also took advantage of a federal research and development credit that was part of the American Taxpayer Relief Act of 2012.
Another company, TripAdvisor, has slashed its effective tax rate from 39.3 percent in 2008 to 27.8 percent in 2013, while its profits have soared 184 percent
TripAdvisor said a restructuring of its non-U.S. operations for "more efficient treasury management and global cash deployment" helped reduce its taxes in addition to the expansion of its non-U.S. operations. The company won a tax incentive from Singapore that gives it a reduced tax rate there of 5 percent, compared with the typical 17 percent tax rate.
However, TripAdvisor is being audited by the IRS, therefore wise investors should be watchful of companies that have managed to find tax loopholes, USA Today warned.
The best way to deal with the U.S. corporate tax problem may be to repeal it entirely, and also trim the personal income tax, replacing them with a broad-based value-added tax on consumption,
Harvard economist Greg Mankiw writes in The New York Times.
"If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same," Mankiw noted.
"The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses."
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