Tech companies use a variety of techniques in order to drive their tax rates down into the single digits, even as they post billions in profits. Case in point, Apple paid just 1.9 percent tax rate on its overseas profits last year, according to the Associated Press:

Apple Inc. paid an income tax rate of only 1.9 percent on its earnings outside the U.S. in its latest fiscal year, a regulatory filing by the company shows.

The world’s most valuable company paid $713 million in tax on foreign earnings of $36.8 billion in the fiscal year ended Sept. 29, according to the financial statement filed on Oct. 31. [...]

Apple may pay some income taxes on its profit to the country in which it sells its products, but it minimizes them by using various accounting moves to shift profits to countries with low tax rates. For example the strategy known as “Double Irish With a Dutch Sandwich,” routes profits through Irish and Dutch subsidiaries and then to the Caribbean.

Apple is actually getting better at reducing taxes on its overseas money, as it paid a 2.5 percent rate on those earnings last year. The fact that these foreign earnings are not being taxed by any country, as Citizens for Tax Justice explained, likely means that “instead of being earned by real, economically productive operations in developed countries, [these] are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands.”

If Apple actually paid the U.S. corporate tax rate on that money, “the resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits over the last 11 years.” Of course, Apple is hardly alone in using legal techniques to avoid billions of dollars in tax payments to the U.S.

Before the stock market opened Monday, Apple was already the world’s most profitable tech company and it was already bigger than the entire American retail market on its own. By the time the market closed yesterday, the company had another feather to add to its cap: it is now the most valuable publicly-traded company ever, as its closing $665.15 share price gave it a market value of $623.52 billion, pushing it past Microsoft’s 1999 record number (though, adjusted for inflation, Microsoft’s value at the time was higher).

While Apple’s value — and its profits — have soared, the amount the company pays in taxes hasn’t. By utilizing low-tax states in the U.S. and offshore tax havens abroad, Apple has dodged billions of dollars in taxes over the last decade, including an estimated $2.4 billion in 2011 alone. The company paid a 9.8 percent tax rate in the U.S. in 2011 but just a 3.2 percent global rate, and the percentage it pays worldwide hasn’t exited single digits for more than a decade. As this chart from the New York Times shows, the amount Apple pays in taxes has remained relatively constant even as its profits have soared:

Those low tax rates aren’t enough for Apple, which has lobbied for tax breaks both at the state and federal level. California has passed four tax breaks aimed at tech companies since the 1990s; Apple lobbied for the last of those breaks, which could cost the state as much as $1.5 billion a year. It was also part of a coalition that lobbied Congress for a massive one-time corporate tax holiday that would allow it to bring its overseas profits home at a discounted tax rate, and it has admitted sending profits overseas to avoid American taxes.

Apple-style tax dodging comes at a cost to taxpayers and other American businesses. The California Public Interest Research Group estimates that corporate tax dodging cost the average taxpayer $434 in 2010. Citizens for Tax Justice, meanwhile, found that making up revenue lost to such tax dodging would cost each American small business $2,116 a year.

According to a report from the Federal Reserve, over the last two decades the nation’s biggest banks have created thousands of subsidiaries for the purpose of dodging taxes and regulation. As Bloomberg News reported, the most prolific user of these subsidiaries is JP Morgan Chase:

The biggest U.S. banks created more than 10,000 subsidiaries in the past 22 years as they expanded, using legal structures to pay lower taxes and escape tighter regulation, according to a Federal Reserve study.

JPMorgan Chase & Co. (JPM), the largest U.S. lender, has the most units at 3,391, followed by Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. (BAC) with more than 2,000 each, the study by the Federal Reserve Bank of New York shows. Citigroup Inc. (C), the third-largest lender, has 1,645. [...]

The subsidiaries in the Fed study include the banks’ overseas units. For Morgan Stanley, Goldman Sachs (GS) and New York- based Citigroup, about half the legal entities are based outside the U.S. At JPMorgan and Charlotte, North Carolina-based Bank of America, the ratio drops to below a quarter.

The use of corporate tax havens costs the U.S. government about $60 billion annually. In order to make up for that lost revenue, the U.S. would have to charge every one of the nation’s small businesses $2,116.

It’s likely no coincidence that the banks most focused on investment banking had more subsidiaries than commercial banks, as they’re more likely to want to help their clients shift money around to low- or no-tax jurisdictions. And as a new study from the Tax Justice Network showed, there’s at least $21 trillion in wealth held in tax havens by the world’s wealthy. Having thousands of subsidiaries surely helps the biggest banks facilitate such activity.

According to a new study, the world’s super-rich are shielding at least $21 trillion in secret offshore tax havens. Using data from the Bank of International Settlements, IMF, World Bank, and national governments, the Tax Justice Network found that an astonishing 100,000 people worldwide hold nearly $10 trillion of offshore wealth, equivalent to the size of the Chinese economy. According to the study:

1. Big banks manage the wealth. The three private banks handling the most assets offshore are UBS, Credit Suisse, and Goldman Sachs.

2. Offshore wealth is creating a global economic “black hole.” If the $21 trillion in offshore earned a conservatively-estimated 3 percent rate of return, and that income was taxed at just 30 percent, this would generate tax revenues of nearly $200 billion — roughly twice the amount OECD countries spend on international development assistance.

3. High impact on developing countries. In the 139 developing countries highlighted in the report, the richest citizens had amassed $7.3 to $9.3 trillion of unrecorded offshore wealth that is beyond the reach of local tax authorities. The report reveals that many developing “debtor” countries are actually quite wealthy, but the money is held by a few individuals.

4. Huge tax haven growth in the last few years. In 2005, the world’s top 50 banks managed $5.4 trillion in offshore money. By the end of 2010, the figure is over $12 trillion, representing an average annual growth rate of more than 16 percent.

This tax avoidance study comes at a time when many are questioning presidential hopeful Mitt Romney’s use of tax havens. As an executive at Bain Capital, Romney routed investments through companies in Bermuda or the Cayman Islands to allow investors to avoid U.S. taxes.

– Steven Perlberg

After significant pressure, Mitt Romney released two years of his tax returns, which showed, among other things, that he pays a lower tax rate than many middle-class families and has employed a Swiss bank account to hold his investments. Today, Vanity Fair ran an expose on Romney’s investments, providing some new details regarding funds that he keeps in the Cayman Islands, how his retirement fund grew so large, and how he manages to avoid paying his fair share of taxes.

“Romney, like the superhero who whirls and backflips unscathed through a web of laser beams while everyone
else gets zapped, is certainly a remarkable financial acrobat. But careful analysis of his financial and business affairs also reveals a man who, like some other Wall Street titans, seems comfortable striding into some fuzzy gray zones,” wrote Vanity Fair’s Nicholas Shaxson. Here are five ways Romney is engaging in such financial shenanigans:

1. Romney owns a corporation in Bermuda. Filings describe Sankaty High Yield Asset Investors Ltd. as a “a Bermuda corporation wholly owned by W. Mitt Romney.” The corporation was established by Romney in 1997, but was transferred into a blind trust under Ann Romney’s name the day before Mitt began his tenure as governor of Massachusetts. Bermuda is a famed tax shelter.

2. Romney uses special, tax-free stocks to inflate his retirement account. Romney’s independent retirement account set up during his time at Bain Capital could contain as much as $102 million — a staggering amount given limits on employee contributions. The Vanity Fair piece parses how Romney inflated his IRA so much: When Bain bought and sold companies, it gave employees select, high-risk, high-revenue shares of the business. These shares went straight into Romney’s IRA, so they were untaxed profits. And since they started off low, the shares were seen as being below contribution limits — despite the fact that they promptly grew into a large fortune.

3. Romney’s blind trusts are not-so-blind. Ann and Mitt Romney keep their investments in a “blind trust,” which means that they avoid making investment decisions that may impact their political work. But the Romney’s blind trust, which is run by their personal lawyer, includes investments in a company owned by their own son.

4. Romney uses a so-called “blocker corporation” to avoid taxes on his IRA. Though Romney says his investments in the Cayman Islands do not help him lower his tax bill, Romney’s IRA appears to have invested in an offshore corporation which then invests in U.S. businesses, to avoid paying the the U.S.’s Unrelated Business Income Tax.

5. Bain Capital helped financial fraudsters dodge taxes. Bain received investments from “the newspaper tycoon, tax evader, and fraudster Robert Maxwell” (who has since died), as well as other financial oligarchs, which helps provide them “with additional ways to skip around tax, disclosure, and regulatory requirements that they might trigger if they invested directly.”

Sales of iPhones, iPads, and iPods have made Apple the world’s most profitable technology company — its stock price is hovering around $600 a share, and it is now larger than the rest of the American retail market by itself. Apple often boasts about the number of jobs it has created in the United States; according to its own estimates, the company is responsible for a half-million American jobs.

What Apple hasn’t told Americans, though, is that an intricate financial set up utilizing low-tax states in the U.S. and offshore tax havens has allowed it to skirt billions of dollars in American taxes over the last decade. By setting up financial offices in states like Nevada — which has no income tax — and routing other profits through Ireland, Luxembourg, and nations in the Caribbean, Apple avoided an estimated $2.4 billion in American taxes in 2011 alone, the New York Times reports:

Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.

California’s corporate tax rate is 8.84 percent. Nevada’s? Zero. [...]

Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. [...]

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan.

Apple’s American tax rate was 9.8 percent in 2011, according to Sullivan. Its global tax rate, however, was just 3.2 percent and has been in the single digits for the last decade. Its profits are skyrocketing. The amount it pays in taxes, however, has barely budged:

While dodging American taxes, Apple has lobbied both state and federal governments for large tax breaks. The California state legislature has passed four tax breaks aimed at tech companies since the mid-1990s — the most recent, which Apple lobbied for itself, will cost the already-crunched state government $1.5 billion a year. The company is part of a coalition called Win America that has lobbied Congress to temporarily lower the tax rate on overseas profits that are returned to the United States — even as it admits to routing profits overseas to avoid American taxes in the first place.

Corporations like Apple have argued for lower corporate tax rates in the United States, insisting that the current 35 percent tax rate is hurting growth. But while that is the highest marginal rate in the world, companies rarely pay it. The U.S. is actually near the bottom in corporate tax revenues collected; in 2009, only Iceland collected a smaller share of its GDP in taxes. That has an adverse effect on all taxpayers, who foot the bill for the $60 billion lost to corporate tax dodging each year. In 2009, offshore tax havens cost the average individual taxpayer $434; in 2010, making up the lost revenue would have required an extra $2,116 from each American small business.

This week, Citizens for Tax Justice released a report showing that 26 major American corporations haven’t paid federal corporate income tax for the last four years. But that is just the tip of the iceberg when it comes to corporate tax avoidance.

In fact, the use of offshore tax havens by corporations costs the government $60 billion annually. Such tax dodging gives multinational corporations a leg up on smaller firms that can’t avoid their tax bills, whether its through higher taxes or fewer services. According to a new report from U.S. PIRG, the cost of corporate tax havens amounts to $2,116 for every small business in America:

Instead of competing on a level playing field, small businesses and those without offshore tax havens must pick up the extra tax tab and compete against the artificially lower costs of multinational companies using tax havens.

To illustrate that burden, this paper looks at how much more the average small business tax bill would need to be to cover the $60 billion in federal revenues estimated lost each year from multinational corporations using offshore tax havens. We define a small business as one with less than 100 employees, using Census Bureau data on the number of such businesses. Based on the number of small businesses in the United States, each would need to pay an additional $2,116 in taxes to shoulder this burden.

“When corporations shirk their tax burden by shifting profits legitimately made in the U.S. to offshore tax havens like the Caymans, the rest of us must pick up the tab through either cuts to public spending priorities, higher taxes, or more debt,” said U.S. PIRG’s Dan Smith, a co-author of the report. A poll commissioned by the American Sustainable Business Council, the Main Street Alliance, and the Small Business Majority — organizations seeking to level the playing field between small and large businesses — found that more than 90 percent of small business owners believe that corporate tax havens are a problem, while “three-quarters of respondents agree that their small business is harmed when loopholes allow big corporations to avoid taxes.”

President Obama has been trying, since he came into office, to crack down on some of the offshore tax havens utilized by corporations, but has been stopped by conservatives and corporate lobbying every time. Instead, Republicans have designed a “small business tax cut” that would actually further enrich hedge fund managers, sports teams, and millionaires.