Interview: Big Silicon Valley Cos. Avoid Paying Billions in Taxes
When a big company wants to protect its profits from heavy taxes, it can move the money overseas. Keeping those profits overseas essentially prevents the U.S. government from taxing them as long as the money stays offshore. It’s an increasingly common practice in Silicon Valley. A new analysis from our partners at the Center for Investigative Reporting shows that last year the Bay Area’s largest tech companies avoided paying taxes on nearly a quarter trillion dollars in profits.
This practice is legal, but some in congress say it’s time to crack down and give the federal government the funding that it needs. KQED's Joshua Johnson spoke to reporter Matt Drange, who helped crunch the numbers for the Center for Investigative Reporting.
Below is an edited transcript.
Joshua Johnson: So Matt your research found that more than two-thirds of these protected profits come from just five companies: Apple, Cisco, HP, Google and Oracle. What does this actually mean for the federal government? How much of an impact is Silicon Valley really having on the federal budget by not paying taxes on this money?
Matt Drange: Yeah, it’s a great question; it’s tough to say. We looked at the 50 largest companies, and of those companies only about a third, 17, actually gave an estimate on what the U.S. would stand to benefit if they brought all of this “overseas cash” back home. And we found that figure is about $26 billion, and this is a cumulative figure. So that’s one way to look at it.
And the other, which we also include in the story, is estimateds by a couple of economists. One [economist] up in Portland, Oregon, estimates the U.S. treasury from all companies, so Silicon Valley and every other company in the U.S., that is a multi-national company, because of their transfer pricing and shifting profits overseas, we are loosing an annual $90 billion. So you can see that Silicon Valley, obviously is a big chunk of that, but it sort of depends on how you cut it. And it’s tough to get an exact estimate, there aren’t very many out there.
Johnson: Now there had been an amnesty back in 2004 that let companies bring the money back into the U.S., with a very low effective tax rate, I believe it was 5 percent, could something like that work again?
Drange: Well something like that could happen again. Most people, I believe, have agreed that essentially most of the money that was brought back at about 5.25 percent tax rate, which obviously is far below the top 35 percent rate, actually went into the pockets of shareholders in the form of dividends. Very little actually went to job creation, which is what the company said it would do.
Johnson: Now there are two senators on Capitol Hill, Democrat Carl Levin of Michigan and independent Bernie Sanders of Vermont that are trying to do something about this. What are they working on?
Drange: So Carl Levin has sort of been on this issue for many years now that he’s tried to introduce a number of times, at least four or five, I believe, pieces of legislation that make it more difficult for companies to do this and would increase the transparency when they do it. So we don’t even know for example where their money is. We know that for “X” company, they keep $40 billion overseas, Apple for example. But we don’t know where that is. So he’s tried to introduce legislation that would fix that.
More recently actually, just last week, Bernie Sanders introduced a proposed bill that would essentially make the practice that these companies are engaging in by off shoring profits, they wouldn’t be able to do it any longer, it would be against the code. So that would change the ability for companies to invest profits indefinitely and instead they would have to pay the taxes that they owe on that money right away.
Johnson: Is there any political backing for that on Capitol Hill, or are these kind-of outlier ideas?
Drange: More and more now, what companies and the talk in Washington, is about a comprehensive corporate tax reform. You see very few really hard attempts to zero in on this issue.
Johnson: Is there any support in Silicon Valley for repatriating this money, for bringing it back stateside and paying taxes on it?
Drange: There is a group that has gotten very little attention in Silicon Valley, called the Silicon Valley tax directors group. This is made up of companies, Google, Apple and, I think, Hewlett-Packard is on there. Sort of the big faces of Silicon Valley. And they all share a common sentiment, which is that by having this money overseas, the U.S. is losing some sort of job creation. So they all share that unified goal of wanting to bring the money back. I just think from what they said publically, they don’t want to bring it back in the 35 percent rate.
Johnson: So what happens now? I understand there are some tax provisions that are built into the Fiscal Cliff deal that involve deferring taxes from a companies foreign subsidiaries, what does that involve and impact might that have?
Drange: That was essentially an extension of an existing provision, which allows companies to temporarily defer taxes on profits such as intellectual property, so you can think of this as royalty on a downloaded song on iTunes, for example. Sort of the very types of profits that are unique to Silicon Valley, in many ways. These are technology companies and the IRS code was written many, many years ago, for retailers and box stores. So what this provision allows companies to do, is to temporarily defer paying taxes and what congress decided to do with the fiscal cliff deal, as part of their package of extenders was to allow it to happen another two years and then they’ll revisit it then.
Matt Drange is a reporter for the Center for Investigative Reporting; his latest article involves Silicon Valley companies avoiding U.S. taxes by keeping their profits overseas.