How Corporate Tax Cheats Still Get Billions In Government Business

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"How Corporate Tax Cheats Still Get Billions In Government Business"

IRS

CREDIT: AP

Despite supposed bans on companies that move offshore to avoid paying U.S. taxes getting federal contracts, more than a dozen large offshored companies get more than $1 billion a year from government work, according to a Bloomberg News investigation.

In 2002, as Congress was creating the Homeland Security Department, it included a clause to prohibit business with companies that move their addresses overseas to avoid taxes here at home. But the ban only applied to companies that made the move after November 2002, grandfathering in those who had already done so. It also didn’t apply to any companies’ subsidiaries. In 2007, Congress extended the no-business-with-tax-dodgers ban to all departments for the year. It enacted similar one-year bans in four of the next six years.

But the bans are somewhat easy to get around. Companies regulate themselves, reporting whether they are subject to the ban when applying for federal contracts, and Bloomberg found at least three companies that have acknowledged that they are subject to it, yet told a federal database that they are exempt.

The bans are also narrow, not applying to a company that shifts its address abroad if it has substantial business in that country or undergoes a major change in ownership. That means, for example, that companies that avoid U.S. taxes by buying another one headquartered elsewhere can avoid the prohibition. At least four companies appeared on a House Ways and means list of these so-called “inversions” but get federal contracts. And some companies with foreign addresses simply partner with U.S.-headquartered companies to apply for federal contracts.

Rep. Rosa DeLauro told Bloomberg that she’s working on a bill to expand the contracting ban’s definitions to cover more companies.

The issue has taken on a sense of urgency as inversions where American-based companies buy foreign ones to avoid U.S. taxes have increased. Over half of the 76 companies that have used this move over the last three decades did so since the recession. Another 11 companies are considering an inversion in the near future. And low-tax countries Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland are home to 43 percent of U.S. corporate overseas profit in 2008 despite that they represent 4 percent of overseas hiring and 7 percent of those companies’ total foreign investments. A total $2 trillion of U.S. profits is now stockpiled abroad.

The offshoring of corporate profits costs the Treasury Department between $30 billion and $90 billion a year, and future inversions could cost the government another $19.5 billion in revenue over the next decade.

That’s helped reduce the corporate tax load generally, which means that everyone else’s taxes are making up a larger share of government revenue. Corporate income taxes used to make up a third of federal revenue in the 1950s, but now account for less than 10 percent. Meanwhile, workers’ taxes used to make up about 10 percent and are now about 40 percent of all collections.

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