Ever wonder why GE manages to have a tax rate of 2% and you pay 35%.
Why your taxes are high and the big multinational corporations pay less and less?
The answer is simple. The big companies shift their profits into countries where there is low or no tax.
Why do I care, you say? Well if the corporations are paying less tax, there are only three ways to make up the shortfall; either you pay more tax, we take out more debt, or we cut spending.
How do they do this you ask? Seems impossible to do legally.
Well, they do it and it is all legal.
For instance, big insurance companies set up reinsurers in Bermuda. Then, when they write a policy in the US, they reinsure it back to their reinsurance company. Magically, the reinsurer has lots of profits in a place with no tax and the US Company, where the tax rate is 35%, has little.
The drug companies put their patents and formulas into their companies in tax havens like Bermuda, BVI, and the Caymans and then they move a lot of the profits there using licensing and royalties charged to the companies in places with taxes like the US, Canada and Europe.
Finance companies like GE, do the same thing using loans where they move the profits to low tax countries with interest payments, a variety of fees, and pricing with captive distributors.
Bottom line, Sals Manufacturing in Ohio can’t do this and pays 35% in tax. On the other hand, GE paid on 1.8% from 2002 to 2011, according to The Citizens for Tax Justice.
Part of the reason they can do this is that most countries only see their little slice of the pie and not the big picture. They don’t understand how the profit is being siphoned off and where it is going. Thankfully, the shell game is starting to crumble.
The Organization for Economic Co-operation and Development (OECD) which is basically the top industrial countries, just issued new guidance on transfer pricing documentation. Essentially, it means the multinational companies are going to have to tell all on a worldwide basis so the tax authorities and understand how the profit is being shifted and taxes avoided.
This is a first step in leveling the playing field between Sal and GE. The next step is US tax reform.
See, Guidance on Transfer Pricing Documentation and Country-by-Country Reporting, released September 16, 2014 as part of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) project, replaces Chapter V of the OECD Transfer Pricing.