Forum Post: When you're making up the list of who's not paying their "fair share"
Posted 13 years ago on Oct. 13, 2011, 2:51 a.m. EST by Frankie
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Don't forget to include Google, Facebook, Microsoft and others who use complex schemes to (technically legally) shelter huge profits offshore and video game makers who abuse tax breaks intended to promote lab-based research to write off all of their software development as "R&D."
See below...
...Electronic Arts, founded in 1982, has since become one of the world’s dominant video game companies — producing popular titles like SimCity, FIFA soccer, Harry Potter and Madden NFL — and has benefited mightily from that tax incentive.
The company’s software development costs — including salaries for the designers — have totaled nearly $6 billion over the last five years.... ...
The failed attempts to restrict the R.& D. credit to basic research have been a boon for video game companies. Even when companies are merely creating new versions of existing games — conducting research that would have little value to anyone but themselves — their development processes usually involve enough experimental uncertainty to qualify for the tax break.
During the last five years, Electronic Arts has claimed tens of millions in tax savings from research and development credits for its various games, according to the company’s regulatory filings. (Company officials declined to specify how much of that total came from the federal government.)
At the same time, the I.R.S. and the United States Tax Court have denied the credit for some projects that would have benefited the community as well as the companies receiving it. In 2009, for instance, the federal tax court denied Union Carbide’s attempt to claim a research and development credit for its project to reduce the pollutants released from the smokestacks of a refinery in Louisiana. Union Carbide failed to meet the experimental threshold for the credit, though video game makers often seem to have little trouble meeting the requirement.
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Michael D. Rashkin, author of “Practical Guide to Research and Development Tax Incentives,” said that the video game industry had failed to name a technological breakthrough that had helped anyone beyond its shareholders, employees or customers.
“The research credit benefits the wrong companies and encourages the wrong kind of research,” said Mr. Rashkin, a tax expert and executive at Marvell Technology, a company based in Santa Clara, Calif. “By diverting funding and attention from where it could be most useful, the credit is hobbling American innovation.”
Yet, given the sharp decline in American manufacturing jobs over the last half century, subsidies for research and development still have wide support. The Obama administration has proposed making the research and development tax credit permanent (it has been renewed every two years since 1981), and expanding it, at a cost of more than $100 billion over the next decade.
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Electronic Arts has not been content to merely collect the many benefits from existing tax breaks. Mr. Kohl, who had an extensive background in mergers and acquisitions law, arrived at the company in 2004, the same year Congress passed a domestic production deduction that was intended to cut taxes on companies that export. When President George W. Bush signed the law in October, it listed an assortment of industries eligible for the break, including sound recordings and computer software, but did not specify video games.
Electronic Arts paid $60,000 early the next year to hire a prominent Washington tax lobbying firm. Soon after the law was signed, its lobbyist, Jonathan Talisman of Capitol Tax Partners, was granted a meeting with the Treasury Department’s deputy assistant secretary of tax policy — the same office Mr. Kohl once held — to ask that the deduction be extended to video game companies and the revenues they earned from online subscriptions. When the I.R.S. issued its final regulations, video games and their online revenues were specifically cited as qualifying for the deduction. That deduction last year equaled 9 percent of its production costs, offering E.A. significant tax savings.
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In 2003, before joining Electronic Arts, Mr. Kohl co-authored a widely-cited proposal urging the federal government to crack down on corporate tax avoidance, warning that “the tax shelter problem is simply too detrimental to the tax system not to act.” As head of tax at Electronic Arts, he became a noted expert in using foreign subsidiaries to legally, and sharply, cut a corporation’s United States tax bill. As a co-chairman of the Silicon Valley Tax Directors Group, he also moderated a seminar in 2010 that showed technology companies how to use offshore subsidiaries to reassign the licensing of their intellectual property and, in some cases, reduce their effective federal tax rate substantially from 35 percent.
Electronic Arts has more than 50 overseas subsidiaries, according to its recent regulatory filings, many in low-tax countries like Bermuda, Singapore and Mauritius. The company has also accumulated more than $1.3 billion in profits offshore, where it will not be taxed by the United States unless it is brought back into the country.
http://www.nytimes.com/2011/09/11/technology/rich-tax-breaks-bolster-video-game-makers.html?pagewanted=all
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.
“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”
The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.
Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)
The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
Top ten http://communities.washingtontimes.com/neighborhood/ad-lib/2011/apr/10/tax-evaders-wall-shame/
Thanks. Yeah, most recognize those types of companies as "evil corporations" but they don't necessarily think of the "cool companies" who do exactly the same things.
oh damn, someone told me about double Irish the other night and I read a little bit good reminder
Higher corporate tax rates push money out of the country.