The Legacy of Michigan Senator Levin and Offshore Taxation Issues
When Senator Levin, the Democrat from Michigan, announced his retirement from the Senate in 2014, you could hear a collective sigh of relief from the corporate business community. Senator Levin had dedicated himself to investigating our tax system and how corporations were able to avoid taxes through offshore accounts.
With the recent release of the Panama Papers, Senator Levin would have found even more evidence to cite in his investigations. His commitment to bipartisan investigations through the Senate Permanent Subcommittee on Investigations (“PSI”) provided plenty of evidence and food for thought on the policy issues surrounding corporate tax responsibility.
Senator Levin was able to reveal sophisticated accounting techniques that turned corporate profits into tax deductible expenses. He exposed how Apple figured out how to book profits in Ireland and hide such accounts from both US and Ireland tax authorities. He also targeted Swiss bankers who traveled to the US to market tax evasion to rich American account holders.
Each year, a number of the Fortune 500 companies escape over a $100 billion of US corporate income taxes by shipping profits to offshore jurisdictions, according to the Citizens for Tax Justice. Over 350 of the 500 companies maintain over 7500 subsidiaries in tax havens.
US companies use three basic techniques for siphoning profits to overseas locations: check-the-box, deferral and transfer pricing. Check-the-box is an IRS regulation that hides transactions between offshore subsidiaries from auditors. Deferral is used when companies pay fees to offshore subsidiaries making the profits go untaxed until the company brings the money back to the US shores. Transfer pricing occurs when a company sells goods to itself as they move the items from factory to marketing operations to the final customers, which allows the company to book the profits in an offshore tax location.
Levin’s PSI documented how Apple used check-the-box to transfer much of its profits to an account in Ireland that was invisible to Irish and US tax authorities. Apple structured its business to take deductions in high-tax countries, like the US, and then declare profits in low-tax countries. Apple then created two Irish holding companies to reduce significantly all of its reportable profits.
Apple used these techniques to avoid $10 billion in federal income taxes each year.
Senator Levin’s PSI developed damning evidence that Credit Suisse orchestrated a marketing campaign to lure tax evaders from the US to open Swiss bank accounts to avoid tax burdens. In response, Credit Suisse claimed that the marketing efforts were the work of several rogue bankers, but Senator Levin was able to demonstrate that the strategy was a calculated plan to push a business strategy.
Based on his commitment to exposing corporate and individual tax loopholes, Senator Levin pushed legislative proposals to close loopholes tied to offshore companies used by wealthy Americans and corporations to avoid taxes. Senator Levin was never able to get his legislation enacted but with the recent Panama Papers scandal and renewed focus on offshore tax havens, Congress may take a renewed look at the issue, building on Senator Levin’s long-time commitment to the issue.