May 1, 2006 4:00 AM PDT
The politics of tech's tax breaks
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Depending on the company, the line disclosing that deduction was sometimes buried in financial filings, far removed from any mention of income taxes, which drew criticism from watchdog groups. Controversial financial accounting standards rules that took effect last summer should change that.
America's sky-high corporate taxes
Another favorite practice, however, has drawn more widespread outcry from corporate watchdogs and a handful of politicians. It involves shifting company assets to foreign countries with more favorable tax regimes.
Microsoft, Oracle, Google and Apple are among the companies that have arguably managed to reduce their tax payments--in some cases substantially--by setting up subsidiaries in Ireland, where the corporate income tax rate is only 12.5 percent.
A BusinessWeek Online article last month described how Apple made a similar move domestically, setting up a company in Nevada to avoid dealing with tax-happy California. (An Apple representative confirmed the existence of a regional treasury office in Reno but said that otherwise, "We don't go beyond" the contents of public filings.)
Of the financial statements analyzed by CNET News.com, Google's appeared to be the only one that overtly acknowledged the impact of its Irish subsidiary on its tax payments.
"We currently anticipate that our effective tax rate will decrease to approximately 30 percent in 2005 from 39 percent in 2004, primarily because we expect that our Irish subsidiary will recognize proportionately more of our earnings in 2005 as compared to 2004," Google wrote in its latest annual report. Others acknowledged obliquely that their effective tax rate in the United States would likely be reduced because of earnings taxed at lower rates in foreign jurisdictions.
This should come as no surprise, say free-market groups who have long said that the U.S. corporate income tax rate is simply too high. (They view tax competition as a healthy way to keep business environments welcoming and not too oppressive.)
"It scares away investment and it encourages companies, Enron the most infamous, to go through these complicated machinations to try to shift their profits out of the United States," said Chris Edwards, director of tax policy studies at the free-market Cato Institute.
The first step? A corporate rate cut across the board, ideally followed by a complete eradication of the corporate income tax, Edwards said.
Technology companies have made a similar plea. In a letter sent late last year to U.S. Treasury Secretary John Snow (click here for PDF), the ITAA called for reducing the federal corporate income tax rate to 25 percent.
Economists generally agree that lower taxes foster business investment. Ireland's economy is booming after its corporate income tax rate was sliced to 12.5 percent. Former Eastern bloc republics like Georgia, Russia and Ukraine have lower corporate income taxes than those of the United States, which a 2002 KPMG study said were the fourth-highest in the world.
"The problem with corporate taxes is that they're disguised ways of taxing individuals," said Fred Smith, president of the Competitive Enterprise Institute, which advocates lower taxes. Corporate income taxes mean "higher prices, lower wages, or reduced dividends, all of which affect a lot of people who aren't wealthy," he said.
The topic recently arose at a Senate hearing on global competitiveness, where Intel Chairman Barrett urged Congress to rethink the corporate income tax rate. He blamed "the relatively high degree of taxation of U.S. corporate revenues in the U.S., compared to the tax concessions (of) foreign governments" for discouraging new investment in manufacturing plants on American soil.
ITAA selected its recommendation of 25 percent because, when combined with the average state tax rate, it would be in line with the 29 percent average recorded across the 30 countries that belong to the Organization for Economic Cooperation and Development--a kind of think tank funded by developed nations. Right now the U.S. rate of 39.3 percent, which factors in the state average rate, is the highest among OECD members, the letter said.
"They'd be happy with zero," said ITAA's Childs. "But I think we're trying to introduce a standard of reasonableness that will be politically viable."
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