Just Taxes Blog by ITEP

Guilty, Not GILTI: Unclear Whether Corps Continue to Lower Their Tax Bills Via Tax Haven Abuse

Guilty, Not GILTI: Unclear Whether Corps Continue to Lower Their Tax Bills Via Tax Haven Abuse

January 7, 2020

Matthew Gardner
Matthew Gardner
Senior Fellow

President Trump and GOP lawmakers often cited corporations’ abuse of tax havens, e.g. shifting profits offshore to avoid taxes, as justification for dramatically lowering the federal corporate tax rate under the 2017 Tax Cuts and Jobs Act. By 2016, corporations’ offshore cash haul had grown to $2.6 trillion, representing hundreds of billions in lost federal tax revenue.

During the tax debate, however, it was clear that lawmakers’ policy goal was to simply cut the tax rate, rather than strengthen the law by closing loopholes. Still, they claimed the new lower 21 percent U.S. corporate tax rate, combined with two new anti-abuse safeguards, would prevent tax haven abuse. But two years later, most corporations have chosen not to disclose information that would indicate whether this is true.

The tax law’s backstop provisions, dubbed Global Intangible Low Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT), are the only barriers against wholesale profit shifting by the many companies that did the same thing under the old tax law. The GILTI provision subjects certain foreign income from intangible assets to a minimum tax, while the BEAT provision uses an alternative tax base that takes away deductions for certain payments to foreign entities.

But most corporations—including some of the big tech companies at which these provisions are aimed—are simply refusing to disclose in their annual financial reports whether they are subject to these backstop provisions. This makes it virtually impossible for policymakers and the public to assess whether the new tax system’s anti-avoidance safeguards are anything more than a speed bump against the continued flow of U.S. corporate cash offshore.

The Securities and Exchange Commission (SEC) sensibly requires companies to disclose, in their annual reports, the effect of any specific tax provisions that increase or decrease their income taxes by 5 percent or more. But in practice, companies are generally not held to this legal requirement, and they routinely group the effects of multiple tax provisions into one broad estimate.

An ITEP survey of Fortune 500 corporations’ 2018 annual reports found less than two dozen companies that disclosed the effect of the GILTI provision, and just two that disclosed the effect of the BEAT.

A rare example of compliance is the Avery Dennison Corporation, which discloses in its 2018 annual report that the company paid $16 million and $9 million, respectively, due to the GILTI and BEAT provisions.

Far more typical, however, is Apple Inc., which reveals nothing about the impact of these anti-avoidance provisions on its 2018 taxes. Apple’s silence on this point is troubling because, despite CEO Tim Cook’s protestations to the contrary, the company was one of the most flagrant offshore tax dodgers under the old tax law, shifting as much as $230 billion into low-rate tax havens by 2016.

Any shortlist of companies that ought to be subject to the new anti-avoidance provisions should begin with Apple. But because the company won’t disclose the size of its exposure (if any) to the GILTI and BEAT, the public simply can’t know whether the company is getting away with massive offshoring under the new tax law. The same is true of dozens of Fortune 500 companies that offshored cash in the past.

There’s a simple remedy for this omission: Congress should require companies to separately disclose the effect of the GILTI and BEAT provisions in their annual financial reports each year. Disclosure can tell us when these provisions work—as they appear to have for Avery Dennison in 2018—and when they don’t, as we know from Avery Dennison’s 2019 quarterly report. (The company reveals that it “implemented…structure changes to better align with our business strategies,” a move that coincidentally reduced its BEAT liability to zero in 2019 and that suggests it may be straightforward for tax-dodging companies to avoid the BEAT entirely.)

But it’s far more important to know whether these anti-avoidance provisions are hitting the hugely profitable tech and pharma firms that have so far refused to disclose this information.

This isn’t just a matter of fairness: when Congress enacted the 2017 tax cuts, lawmakers were operating with a $1.5 trillion 10-year cap on its tax-cutting largesse, and the GILTI and BEAT provisions were vital in keeping the estimated cost below that level. If these provisions are as loophole-ridden as many observers fear, the budget hole facing policymakers going forward could be even more irresponsibly large than initially expected.

In the long run, if U.S. multinationals are allowed to shift their profits into tax havens at will, smaller companies and individual families will likely be the ones picking up the tab for this profligacy.