Dow Today – Targeting Overseas Tax Shelters – The New York Times
From The New York Times, I’m Michael Barbaro. This is The Daily.
To pay for its sweeping infrastructure plan, the Biden administration wants to crack down on large and profitable American companies that have used tax shelters to avoid paying billions of dollars to the government. My colleague, investigative reporter Jesse Drucker, on how one American company did just that.
It’s Wednesday, April 7.
Jesse, how did you find this story?
So I was talking to a guy not too long ago, and he says, look, the I.R.S. is in a big dispute with a big multinational company, and there is a document laying this out to some degree that’s floating around out there, and you should try to get a hold of it.
That’s a very tantalizing tip.
Yeah. So I put out some calls. Amazingly, the first person I speak to says, yeah, I know what you’re talking about. I said, well, can you get me a copy of this? He says, I could get you a copy of this. So he sends me a copy of this document. It’s 20 pages long. It’s an I.R.S. memo laying out in a fair amount of detail a dispute with a big company, but it’s very heavily redacted. Enormous portions of the document are whited out, including the name of the company, the amount of money in dispute, some of the offshore entities that the company was using. So I ask the person, what do I do? How am I going to get around this?
He said take the PDF document, copy and paste it into a Word document, and highlight it. And so I did that, and magically, all of the redactions disappear.
Wow. So your high-tech investigative solution to this problem —
— was Control C, Control V, cut and paste.
And Jesse, once this document is no longer redacted, what is the story that it starts to tell you?
So the document revealed that the company was Bristol Myers Squibb, and it revealed that the I.R.S. was alleging that Bristol Myers used an offshore tax scheme that it alleged was violating an anti-abuse provision in the tax code.
Bristol Myers is the second biggest drug company in the U.S. They make all sorts of drugs from anti H.I.V. treatments to Eliquis, a very popular blood thinner. And years ago, like many multinationals, had set up an elaborate structure offshore in Ireland as a way to cut its taxes.
And Jesse, why Ireland?
So Ireland has been a very popular destination for years, particularly for tech companies, like Google and Apple, pharma companies, like Merck, Pfizer, Bristol Myers Squibb, because Ireland makes it easy for you to move profits through their country into places like Bermuda and the Cayman Islands and Switzerland — where it gets taxed either not at all or at very, very low rates, like single digit rates. Think of Ireland is like a very user-friendly gateway into the Caribbean and the rest of the tax haven world.
I’m sure that’s how the people of Ireland want you to see it.
I think it’s how a lot of the tax accountants of Ireland want you to see it.
OK, so Bristol Myers sets up this Irish operation to get a better deal on taxes. Then what?
So in 2012, Bristol Myers realizes that it has a problem and also potentially an opportunity. It’s got a bunch of tax deductions that it can use in Ireland, but it’s run out of tax deductions in the U.S.
And just, Jesse, for the uninitiated, when you say tax deduction, you mean a technical excuse to pay less taxes.
Yeah, just a write-off, like you know, you give money to your favorite charity, you get to deduct that from your taxable income.
So what had happened is they were sort of had run into a mismatch, which is they had all these profits from some drugs in the U.S., and at that time, the U.S. corporate income tax rate was 35 percent. And they had all these deductions in Ireland. So what they did was they set up an offshore partnership, where they essentially exported the deductions from Ireland into the U.S. to shelter their profits in the U.S.
Huh. Can you do that?
Well, the I.R.S. says you can’t. The I.R.S. says that this violated an anti-abuse provision of the tax code, the anti-abuse provision of 704(c) of the tax code, I’m sure one of your favorite provisions.
That all happens in 2012. And there’s a lot of interesting things about that timing. I wrote a story in 2006 about Merck, and Merck had done a transaction just like this. And G.E. did a transaction like this. and Dow Chemical did a transaction like this. And the I.R.S. was attacking those transactions in court and winning. And so one of the most interesting things about this transaction involving Bristol Myers Squibb is there they are watching the I.R.S. attacking these transactions, courts are siding with the government, and Bristol Myers does its tax shelter anyway.
So this deduction importation scheme is something Bristol Myers and its lawyers definitely would have understood was risky and quite likely illegal.
Yeah, absolutely risky. I can assure you their lawyers were very aware of what was going on with G.E. and Dow Chemical and Merck. You know, with the Merck transaction, it was set up in part by this kind of legendary tax lawyer who actually wrote in a trade publication, he kind of laid out how to do this scheme. And he opens his article with a quote from Al Capone, where he says, “A good lawyer with a briefcase can steal more than 10 men with machine guns.”
So this was a very kind of widely known transaction, and it was widely known by 2012, at least certainly, that the government didn’t like it. And that the government was successful in challenging it. But Bristol Myers decided to risk it anyway.
Right. And for how long do they undertake this before the I.R.S. notices?
So we don’t exactly know the answer to that. The I.R.S. memo is dated April 2020, so that’s about 7 and 1/2 years after Bristol Myers sets out, but we don’t know exactly when the I.R.S. got wind of it.
And Jesse, for the years that Bristol Myers Squibb undertook this, despite the legal risks, how much money did they save, and I guess, deprive the U.S. taxpayer of?
The I.R.S. analysis has an estimate that over the entire life of the transaction that they expected Bristol Myers would avoid about $1.4 billion in federal income taxes.
That’s a tremendous amount of money to not pay the Treasury.
Yeah, that’s real money. I mean, by the standards of disputes that the I.R.S. gets into with big multinational companies, that is an enormous dispute. I should say that it’s a dispute that’s ongoing. We know the I.R.S. has challenged Bristol Myers over this, but we don’t know where the case stands at the moment.
So when we think about the Biden administration’s plans to pay for something like the infrastructure bill by making big corporations pay what they really owe in corporate taxes, this is basically exhibit A, it sounds like. This is exactly what the White House is talking about.
Yeah, absolutely. I mean, the kind of days of companies using these kind of convoluted offshore strategies to get out of paying U.S. income taxes is one of the things they want to try to end.
And based on your reporting, how many versions of this kind of scheme are out there and how much money might the U.S. be getting cheated out of?
Well, there’s kind of endless permutations of schemes like these. I mean, a few years ago, there were estimates that the U.S. was losing in excess of $100 billion a year from multinational companies pushing their profits offshore. So you can very easily see how over the course of a decade that adds up to a trillion dollars or more.
Right. So this is a pretty widespread problem. The Biden people aren’t exaggerating when they describe this as a tremendous missed opportunity for revenue.
Oh yeah, absolutely. I mean, look, for years, and you had companies like Google paying taxes at a rate of 2 or 3 percent on the majority of their profits around the world. I mean, they’re doing their sales in places like the U.S. and France and Germany and Japan, but their taxable income ends up in Bermuda.
And according to President Biden, if those companies were to pay what they really owe, then he could rebuild roads and bridges and cities and pay for an infrastructure bill.
Yeah, that’s the theory. You know, it reminds me of the old story with Willie Sutton, the famous bank robber, where they asked him why do you rob banks, and he said that’s where the money is at. I mean, not to compare the U.S. government to a bank robber, obviously, but U.S. multinationals have been stowing trillions of dollars overseas for decades, and the Biden administration is basically saying, look, if we can tax that money, we can pay for a lot of stuff.
Right. To quote Willie Sutton, that’s where the money is.
That’s where the money is.
We’ll be right back.
- archived recording
Secretary Yellen, thank you so much for joining us. We look forward to hearing your remarks.
- archived recording (janet yellen)
Thank you to the Council for this invitation.
Jesse, how does the Biden administration envision making companies like Bristol Myers pay their fair share of corporate taxes?
- archived recording (janet yellen)
President Biden’s proposals call for bold domestic action.
On Monday, Treasury Secretary Janet Yellen gave a speech.
- archived recording (janet yellen)
We are working with G20 nations to agree to a global minimum corporate tax rate.
And she articulated the administration’s support for a global minimum tax for companies overseas.
- archived recording (janet yellen)
Competitiveness is about more than how U.S. headquartered companies fare against other companies. It’s about making sure the governments have stable tax systems and that all citizens fairly share the burden of financing government.
In other words, if you are a big multinational, and you’re going to push your profits into Bermuda or the Cayman Islands, where your tax rate is zero, you are now going to pay taxes at a minimum rate of 21 percent on those profits.
- archived recording (janet yellen)
Together, we can use a global minimum tax to make sure that the global economy thrives based on a more level playing field in the taxation of multinational corporations.
The day of zero tax profits would be gone.
And explain how a minimum corporate tax would work technically.
Yeah, so like let’s take the example of Bristol Myers. So we don’t know exactly how much Bristol Myers has been paying on the profits they’ve been pushing into Switzerland and Ireland, say. But let’s imagine that’s 10 percent. What the Biden administration is saying is, look, OK, you’ve paid 10 percent overseas. But we want 21 percent. So you’re going to have to pay us the spread between the 10 you’ve already paid and the 21 that we want. So in that case, you’d be paying an additional 11 percent.
Got it. So the U.S. Treasury is demanding the difference between the very low rate that a company like Bristol Myers might be paying in a place like Ireland and the tax rate back in the U.S.
Right, exactly. I mean, the theory is if you had a system like that, then the Bristol Myers of the world wouldn’t do transactions like these because they wouldn’t be saving any money, or at least they wouldn’t be saving enough money that it’s worth doing them.
Got it. So the U.S. isn’t going to be collecting every single dollar of corporate taxes that perhaps it wishes. But in collecting the difference, it’s sending a very clear message to these companies. It’s just not going to be worth your time to transfer profits and patents overseas.
So Jesse, how is it that such a tax does not currently exist if these tax avoidance schemes have been going on for so long and with so many companies?
Well, so overseas tax regulators have been trying to do some version of this for about eight years. I mean, basically beginning in 2013, tax regulators in France, Germany, the UK., Japan, you name it, announced big efforts to crack down on these schemes. And basically, what was happening was the UK. was tired of Starbucks coming into London, opening up coffee shops all over the city, and not paying them any income taxes. And the same process was being replicated all around the world, and the biggest offenders were U.S. companies.
Yeah, and that process of trying to crack down on these schemes was not opposed by, but I would say the Obama administration really kind of dragged its feet for four years on taking part in that in a full throated way, and did actually say that it was opposed to some of the things that were being proposed.
Why? Why would the Obama administration oppose foreign governments getting their fair share of corporate taxes when the U.S. itself knows how important it is to get its fair share of corporate taxes?
Because it was viewed as basically an attack on our companies. Like it was Google and Starbucks and Amazon. It was big U.S. companies depriving these foreign markets of tax revenue. And the U.S. position was, if you’re going to make our U.S. multinationals pay higher taxes, that’s going to put our companies at a competitive disadvantage, and we don’t like that.
So these big global proposals didn’t really get very far under Obama.
Yeah, for the most part, they did not get very far. Now, interestingly, what we did have during the Trump administration in 2017 as part of the Republican overhaul of the tax code, although that overhaul was driven by enormous tax cuts and tax breaks for multinationals, it did include the kernel of a minimum tax overseas for companies at a much lower rate than what Biden is proposing — at a rate of 10 and 1/2 percent — and with a lot of caveats and carve outs.
But it sounds like this Trump tax law does acquaint the U.S. and its corporations with the concept of a corporate minimum tax.
Yes. And what the Biden administration folks are doing is they’re building on that, and they’re doubling it to 21 percent.
So how are American corporations reacting to this proposal to double the corporate minimum tax from that 10.5 percent to 21 percent?
Negatively. The Business Roundtable, which is a big business lobbying group, has already come out and said we don’t like this. We already pay a global minimum tax. We’re not interested in having a new one and having a new one that’s twice as much as what we already pay.
Right, which seems somewhat predictable. And I guess the question is, will they use their lobbyists and their influence in Washington to try to prevent this tax from coming into being and therefore try to kneecap the mechanism by which President Biden pays for an infrastructure bill?
Yeah, I mean, look, no one can predict the future. But obviously, you have to assume there’s going to be a lot of opposition to this. I think the assumption is like this is sort of the opening salvo, that if they are successful at raising the corporate tax rate, if they are successful at creating a true minimum overseas tax rate, that it’s going to be at some level that’s not quite at what they’re proposing, but it’s going to be some compromise.
Ah, so it may not be 21 percent. It may land somewhere between 21 percent and 10.5 percent.
Got it. So Jesse, based on your reporting, what are the chances that this corporate minimum tax actually happens?
You know, look, there’s a reason that the U.S. has not gone after these arrangements in the past in a full throated way, and that’s because these are very powerful interests. I mean, you think the power of the entire U.S. tech industry, the entire U.S. pharma industry. Every major multinational company has some version of a tax arrangement like this and stands to see their taxes go up. You can see it’s very obvious why there would be quite a bit of opposition to this. And remember, the kind of minimum tax lite that we saw in the Trump administration was in the context of overall enormous tax cuts for corporations. This is like only stick and no carrot.
Jesse, given those power dynamics you just laid out, the power of all these companies to prevent anyone from holding them accountable for these tax schemes, I’m curious what your reaction has been to this new White House proposing such a sweeping solution to tax avoidance?
That’s a great question. I mean, for me it’s pretty extraordinary. I mean, I’ve been writing about offshore tax dodging by big multinationals for the better part of the last 15 years. And you know, anyone that you talk to about these schemes, like Google attributes billions of dollars of profits to a mailbox in Bermuda and pays taxes at a rate of 2 percent overseas. Anyone you talk to about this stuff says this is totally preposterous. This is outrageous. How can this be? And it be. Nothing happens. Nothing changes. So to see proposals that are squarely aimed at all this stuff, you really wonder: Does this mean that the era of big multinationals dodging taxes, pushing all their profits offshore might finally be coming to an end?
Thank you, Jesse.
Thank you, Michael.
We’ll be right back.
Today’s episode was produced by Austin Mitchell, Robert Jimison, Stella Tan and Alexandra Leigh Young. It was edited by Dave Shaw and engineered by Marion Lozano.
That’s it for The Daily. I’m Michael Barbaro. See you tomorrow.