Looming tax debate eyes corporate loopholes. Here are Mass. firms that dodged the taxman
Staff Reporter, Washington Business Journal
The future is foggy as to whether a tax-reform bill will ever make its way to President Donald Trump's desk, but one aspect of the debate is crystal clear: The nation's corporate tax landscape is far from a level playing field. And the devil is in the details.
A Business Journals analysis of public company data found dozens of examples where conglomerates with billions in revenue — and even billions in operating income — paid no corporate income taxes in their most-recent fiscal years. Many of those companies were waylaid by deep losses in the energy sector, though others — General Electric Co. (NYSE: GE) and Ebay Inc. (Nasdaq: EBAY) among them — have long ranked among the most profitable and recognizable brands in the world.
A deeper look at the tax code shows a complicated landscape that rewards some sectors over others, and incentivizes companies to hold assets or intellectual properties overseas in jurisdictions with far friendlier tax codes. Many of those loopholes, and whether to do away with them altogether, are at the forefront of the unfolding tax-reform negotiations now taking place in Washington.
The group of billion-dollar companies that reported no income tax expenses last year reads like a Who's Who list of Corporate America. San Jose-based Ebay led all non-payers in 2016 with a net tax benefit of $3.6 billion. The company, which reported $9 billion in revenue and $2.3 billion in operating income last year, told shareholders in February that the benefit stemmed from a legal change in how its business is "aligned" as well as valuations tied to unspecified "intangible assets."
Many companies use tax benefits, essentially the opposite of a tax expense, to their advantage by rolling them into future years as income deductions. Those offsets can lower a given company's tax exposure by billions, depending on its size and the year the benefit is applied.
The Business Journals analysis included more than 3,500 public companies, including 748 companies that reported no tax expenses last year. Among those no-tax companies, some 95 were in an energy sector pounded by falling oil and gasoline prices. They collectively reported a net income tax benefit, or credit, of $17.7 billion.
Tops among them was Houston-based ConocoPhillips, which reported a nearly $2 billion tax benefit in 2016, while other industry heavyweights including Chevron Corp. (NYSE: CVX) and Exxon Mobil Corp. (NYSE: XOM) collectively reported billions more in net-tax benefits.
And in Greater Boston, the disparities are no less apparent.
There's GE, which saw a tax benefit of $464 million last year, one of the largest in the country. Medical device maker Boston Scientific Corp. (NYSE: BSX) saw a $170 million tax benefit in 2016. And Burlington-based web hosting firm Endurance International Group (Nasdaq: EIGI) saw a $110 million tax benefit.
Meanwhile, Framingham-based TJX Cos. Inc. (NYSE: TJX) paid $1.4 billion in taxes while life sciences powerhouse Biogen (Nasdaq: BIIB) paid $1.2 billion in taxes.
Publicly traded banks recorded about $50.7 billion in income tax expenses in the most-recent reporting year, the most of any sector. Computer hardware makers as well as health care companies were a distant second and third in the rankings with just over $17 billion in reported tax expenses apiece.
The company with the largest tax expense last year? That was Cupertino, California-based Apple Inc. with a total reported expense of $15.7 billion.
TO REFORM OR NOT REFORM
At the heart of the tax reform debate is the notion that by simplifying the U.S. tax code and eliminating a tangle of complicated deductions, the country stands to actually generate more tax revenue. Critics say the Republican-led effort is really intended to benefit the nation's biggest and wealthiest companies by lowering their overall tax liability.
A recent analysis by the Tax Foundation, a tax-reform advocate based in Washington, D.C., estimated that loopholes and popular deductions now in place will enable corporations avoid trillions in potential tax expenses over the next decade. Among the costliest avoidance schemes, in terms of lost revenue for the U.S. government, were overseas shelters
Still, few argue that the nation's existing tax code is easy to understand, or necessarily fair to all payers. David Brunori, a tax expert and professor of public policy at George Washington University, said the existing tax system disproportionately punishes many U.S. companies, particularly those with limited operations abroad.
“They bear the brunt of the corporate income tax,” he said. "Anybody who is in the U.S. and doesn’t have a lot of overseas operations tend to pay at the highest effective rates. There is absolutely no doubt about that.”
It’s a sentiment echoed by Rep. Kevin Brady, a Republican from Texas and chairman of the powerful House Ways and Means Committee, and one of the key players in the tax-reform debate. He described the nation's top marginal tax rate of around 38.9 percent for corporations, which ranks among the highest in the world, as unfair and counterproductive.
He said the nation's relatively high rates, combined with far-friendlier tax policies abroad, encourage too many U.S. companies to keep earnings and cash generated by their international subsidiaries overseas and protected from more onerous tax rates at home.
"In our proposal, they won’t be rewarded for doing that because we won’t be taxing internationally, they’ll have zero rate to bring their earnings back,” Brady recently told The Business Journals. "It’ll be much more difficult for businesses to game the system, which, to me, is really critical."
Kyle Pomerleau, director of federal projects at the Tax Foundation, said the need for tax reform is about simplification and treating similar activities the same under the tax code. He cited the example of how owning an existing factory and buying new equipment for it is treated better under the tax code than if someone was to build a new factory from scratch.
"I don’t think there is a tax code that is going to perfectly level their tax rates under a financial statement," Pomerleau said. "Manufacturing is just more capital intensive and that's the way it is."
n Edgar Allan Poe’s “Purloined Letter,” detective C. Auguste Dupin discovers a stolen letter in the thief’s own apartments after police searches had failed to turn it up. It was hidden in plain sight, on a card rack hanging from a ribbon, though it had been resealed. The police had assumed that it would have been hidden away and could not see it in the open.
