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How Companies Like Amazon, Nike and FedEx Avoid Taxes - YouTube
Channel: CNBC
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The current United States
tax code allows some of the
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most profitable companies
in the world to not pay any
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federal corporate income
taxes.
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The present tax system ain't
fair.
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Actually, at least 55 of the
largest corporations in
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America paid no federal
corporate income taxes on
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their 2020 profits.
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And paid zero in federal
taxes.
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Some of these companies
include big names like
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FedEx, Nike, HP and
Salesforce.
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These companies are not
doing anything illegal, and
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these companies pay many
other forms of taxes.
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If a large, very profitable
company isn't paying the
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federal income tax, then we
have a real fairness problem
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on our hands.
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And it's costing the
government billions.
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You can think about a bucket
of corporate tax breaks that
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are deliberately there in
the tax code.
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And overall, they cost the
federal government roughly
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$180 billion each year.
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And for comparison, the
corporate tax brings in
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about $370 billion of
revenue a year.
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Those 55 corporations would
have paid a collective total
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of $8.5 billion.
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Instead, they actually
received $3.5 billion in tax
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rebates.
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Corporations can receive
refunds just like
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individuals do.
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And that doesn't include
corporations that paid only
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some of these taxes.
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But not all.
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The federal government
estimates that there's about
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40 billion each year and
corporate taxes that are
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clearly owed.
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Here's how the most
profitable companies in the
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country avoid federal
corporate income taxes.
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It's important to note the
federal income tax is not
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the only tax corporations
pay.
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They're subject to state
and local taxes, too.
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Right now, we're only
talking about the corporate
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federal income tax rate,
both domestic and
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international.
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The Federal tax rate at the
moment is 21% for domestic
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profits, but it's as low as
between zero and 10.5% if
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those profits are profits
of a US multinational that
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are earned offshore.
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What do we do to make
America the most competitive
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place in the world?
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The 2017 Tax Cuts and Jobs
Act slashed the 35%
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corporate tax rate to that
21%.
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The only tax levied at any
level that publicly traded
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businesses are supposed to
pay in proportion to how
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well they're doing. Where
the bigger you are, the more
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successful you are, the
more you ought to be paying.
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The corporate federal income
tax is about 7% of all
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revenues that the federal
government collects.
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Let's look at Amazon as an
example.
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Alexa, how much tax should
Amazon pay?
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Sorry, I don't know that
one.
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Amazon became famous in 2018
when the company reported
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about 11 billion in US
income and paid zero federal
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income tax. They actually
got a tax rebate of 129
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million, according to their
financial reports.
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We now have four years of
data.
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In those four years, Amazon
has now reported $79
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billion almost of US income
and has paid a total of 4
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billion in federal income
tax for a four year tax rate
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of 5.1%.
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So what that means is that
they're avoiding income tax
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at the federal level.
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Remember that the federal
rate is 21%.
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So in four years, Amazon's
effective tax rate was
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5.1%.
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I'll emphasize that
everything I've just said
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about what Amazon is doing
appears to be completely
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legal.
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Amazon told CNBC that its US
taxes reflect its
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investments, employee
compensation and current tax
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laws. The company paid
federal income taxes.
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Other federal taxes and
state and local taxes.
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Publicly traded corporations
have two different ways of
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accounting. So one form of
accounting is for
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shareholders. Let's call it
book income.
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You have profits that are
reported to shareholders
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using general accepted
accounting principles under
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financial accounting. And
the purpose of that is
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really to determine, is
this corporation profitable?
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Is it worth investing from
a shareholder perspective,
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how is the firm doing from
a performance side of
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things?
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And the second form of
accounting is for taxes,
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let's call it taxable
income.
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You have a set of rules that
are different from and often
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diverge from that
accounting.
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It determines how much tax
a corporation is paying.
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And what that means is the
amount of profits that
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corporations may be
reporting for financial
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purposes may be very
different from the profits
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that they are reporting and
they're paying taxes on for
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tax purposes.
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This is how some companies
are able to tell investors,
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we made billions of
dollars, but turn around and
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tell the government we made
$0.
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We can call all of these
tools a form of tax
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expenditures. Tax
expenditures are any
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targeted tax break, think
tax credits or incentives.
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We want more oil.
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We want more solar energy.
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We want more manufacturing.
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We want higher paying jobs.
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We want more capital
investment. And for each of
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these things, Congress has
enacted a tax break that, at
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least on its face, is
designed to encourage these
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things.
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Take a tax credit for
research and development as
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an example.
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There's the R&D tax credit,
which allows companies to
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take deductions and credits
for their spending on
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research, the things they
spend money on to make
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better hamburgers in the
case of McDonald's.
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Tool number two, accelerated
depreciation, another form
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of tax expenditure.
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We can also call these
write offs or expensing.
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This is a key example of
how those two different
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forms of accounting, book
and taxable incomes come
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into play.
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If you are a corporation
that's really in
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manufacturing, really
capital intensive, you may
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make a really large
investment in a given year
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under financial accounting
rules.
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To Determine your profits
you're reporting to
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shareholders, you may have
to deduct that over, say,
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ten years, for example,
under the general accepted
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accounting principles. For
tax purposes especially, you
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may be able to accelerate
those deductions in the
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given year and in some
cases even taking a full and
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immediate deduction against
your taxable income for that
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investment. What that means
is you may be reporting a
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profit for a financial
accounting purposes,
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reporting no profit or even
a loss for tax purposes.
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And that creates a
difference between your
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financial income and your
tax income.
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Tool number three, stock
options.
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There are tax breaks for
stock options which allow
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companies to write off the
cost with air quotes around
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of the stock options they
give their executives and
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other senior employees.
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So that that just comes down
to the different rules
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between book accounting and
tax accounting for when that
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compensation can be
deducted. For book
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accounting, it's deducted
immediately for tax purposes
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and maybe at a later date
when it's ultimately vested
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to the employee. And then
that creates a discrepancy
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in the total amount of
taxable income that these
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firms are reporting.
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They write them off as if
they were actual cash
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expense, when, of course,
giving stock options to your
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employees is absolutely not
the same.
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Sort of out of pocket
expense like signing a check
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every two weeks.
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And finally, perhaps the
murkiest of all tools, tool
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number four offshoring.
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There is a very deliberate
at the moment lower rate for
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foreign profits of US
multinationals and something
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between 0 to 10.5 on their
foreign profits.
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And that's an outright tax
benefit for them that's
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worth roughly $60 billion a
year, according to the Joint
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Committee on Taxation.
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But it also creates this
incentive to shift their
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worldwide profits inyo that
sort of foreign low tax
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bucket.
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U.S. based corporations are
finding ways to shift income
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into tax havens. You talk
about the Cayman Islands,
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Bermuda, Bahamas, Ireland
and Luxembourg and the
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Netherlands to some extent.
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Their estimates that sort of
shifting is in the tens of
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billions of dollars a year,
up to $100 billion a year.
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Here's an example.
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Whirlpool, a US company
known for manufacturing home
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appliances both in the US
and Mexico.
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Whirlpool tried to avoid
both U.S.
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and Mexican taxes on the
profits from its Mexican
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operations, and it did that
by having the Mexican
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operation owned by a
Mexican company with no
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employees, and then having
that Mexican company owned
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by a Luxembourg holding
company that had one
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employee. And then it tried
to claim that due to the
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combination of the US,
Mexico and Luxembourg tax
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rules the millions of
dollars of its profits from
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the Mexican operations
wouldn't be subject to tax
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in Luxembourg, wouldn't be
subject to tax in Mexico and
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wouldn't be subject to tax
in the US.
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So it was trying to sort of
take advantage of the
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disconnect between all of
those tax systems to avoid
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tax in all of those
countries. And a court said,
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no, that goes too far.
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That's not what the law
actually allows.
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Whirlpool told CNBC that it
follows all tax laws in the
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jurisdictions in which it
operates and that
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Whirlpool's use of the tax
code actually increased the
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amount of tax that the US
collected on its Mexican
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profits. The IRS thought
Whirlpool should have paid
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those US taxes earlier.
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It's still quite possible
for US companies to shift
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their intangible assets out
of the US to avoid taxes.
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And it should be a top
priority of policymakers
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right now to prevent them
from doing so.
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Accounting and tax experts
say that probably the first
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best way to fix a problem
is to go to the tax rules
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and look at each of the
different provisions and
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decide whether or not you
want that on the tax code,
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repeal those inefficient
tax breaks or reduce them.
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Some say that is
unrealistic, otherwise it
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would have happened anyway,
and it's a hard thing to do.
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One solution could be to
beef up the IRS.
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There is nothing the IRS
does that is more cost
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intensive that requires
more resources than
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investigating the tax
avoidance behavior of large
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multinationals.
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Between 2011 and 2019, the
IRS budget for
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enforcement was cut by
about a third.
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One policy solution would be
to implement minimum
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corporate taxes, both an
international minimum tax
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and a domestic minimum tax.
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A global minimum tax would
end the race to the bottom
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in corporate taxation.
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The legislation that's been
debated by Congress would
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raise the US minimum tax
rate on foreign profits from
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10.5% to 15%.
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Implementing an
international minimum tax
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would help tamp down on
some of the offshoring of
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profits that companies can
maneuver about.
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When that country doesn't
impose at least a 15% rate
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of tax, then the US will
impose an additional tax so
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that the corporation pays
at least 15% in each
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country, and that would
raise about $350 Billion
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over ten years.
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Then there's domestic
profits.
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One major proposal that's
come out over the last year
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and advocated by both Biden
administration and members
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of Congress has been to
levy a minimum tax on book
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income.
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Directly implementing a
domestic corporate minimum
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tax of 15% could reduce the
gap between the book income
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and taxable income,
basically cutting down the
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value of some tax
expenditures.
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The first priority with
corporate tax reform should
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be to get it to lift its
own weight, to pay for
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companies, to pay by
whatever means something
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closer to the statutory
rate.
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And the book income tax
would certainly accomplish
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that. I think there are
better ways of doing it.
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I think there are more all
inclusive ways of doing a
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minimum tax. But it's
certainly better than
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nothing.
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