On paper, the US has what is often said to be the highest corporate income tax rates in the developed world. At 35 percent, the US’s corporate income tax is the highest rate compared to all of the OECD industrialized nations. But while the sticker rate might be high, the truth is that many major companies in the US manage to successfully avoid taxes using completely legal strategies. In fact, more than a few major companies actually manage to avoid paying any corporate income tax at all in the US, including General Electric and International Paper to name a few. A recent study by the Institute on Taxation and Economic Policy found that roughly 100 companies avoided paying any corporate income tax at all for at least one year in the period between 2008 and 2015. So, how is it that major companies are able to successfully avoid taxes? Let’s take a look.
- Strategically incorporating. Companies are able to choose where they incorporate, and by opting to create intermediate holding companies and subsidiaries in tax havens or low tax regime countries, they can significant reduce their tax burdens. This allows companies to syphon their profits to foreign subsidiaries where the tax rate is much more favorable, a practice known as offshore sheltering.
- Accelerated depreciation. Tax law allows companies to expense the cost of their capital at a quicker rate than it actually wears out, allowing a company to declare less income and defer tax payment to several years down the road as the long as the company continues to invest its capital.
- Offering stock options to employees. Companies often use offering stock options to employees as a way to decrease their tax bill. That’s because when companies offer stocks to employees, they can write off the difference between the price the employee paid for the stock and the market value as tax deduction. When companies offer significant amounts of stock to senior employees, the difference can add up pretty significantly and can turn into a substantial deduction.
- Tax breaks. In some cases, companies don’t even have to go out of their way to significantly reduce their tax burden. All they have to do is take advantage of pre-existing tax breaks. For example, the US federal tax code grants generous tax breaks to a whole range of different sectors, including the oil and gas sector, the alternative energy sector, and the video game and film production sector. These tax breaks tend to benefit the biggest companies. Over the course of the past 8 years, the US government doled out around $285 billion in tax subsidies and breaks, and close to half of that went to just 25 countries. AT&T was granted a staggering $38 billion in tax breaks, while Wells Fargo and JP Morgan Chase had $31.4 billion and $22.2 billion shaved off their tax bills respectively.
The bottom line is that there are a number of perfectly legal strategies by which a major company can avoid tax. While there have been calls to reduce the US corporate tax rate, this ultimately calls into question the need to do so. After all, if so many companies are already paying a rate well below 35%, then what would be the point in decreasing it?
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