The idea that America's 35 percent corporate tax rate is stifling U.S. economic growth is almost an article of faith among some politicians.
The sound bites from Republican presidential debates to campaign stops are basically interchangeable: "We need to bring that corporate tax rate down."
But in fact, very few corporations pay taxes on 35 percent of their profits. With the help of complex international tax loopholes, some companies manage to pay almost no corporate tax at all.
'Double Irish, Dutch Sandwich'
It's not necessarily big oil or pharmaceutical companies that are cashing in on complex offshore tax loopholes. In fact, the corporation with one of the most advanced tax-shirking techniques may have helped you find this very article: Google.
"If Google paid taxes at the full 35 percent rate on all of its profits, it would lose almost a quarter of its total profits," Bloomberg reporter Jesse Drucker tells weekends on All Things Considered host Guy Raz.
Drucker says the company saved more than $3 billion from 2007-2009 through a winding system of offshore subsidiaries. Google's not the only company that does this, he says; many other tech giants like Microsoft and Apple have similar structures. But Google's offshore tax rate — 2.4 percent by Drucker's count — bests its peers in the technology sector in ways that a retail giant like Wal-Mart could never hope to.
In 2003, Drucker says, Google transferred all of its non-U.S. intellectual property rights to a subsidiary in Ireland.
"From that point forward," he says, "any profits coming from sales overseas would be contributed not to the U.S. parent — where they would be taxed at a rate of 35 percent — but to the Irish subsidiary."
The corporate tax rate in Ireland? 12.5 percent.
But Google didn't stop there, Drucker says. The company used a financial tool known in the corporate tax world as the "double Irish."
"The Irish subsidiary pays royalties to a second Irish subsidiary," Drucker says, this one that declares its tax residency in Bermuda, where there's no corporate income tax.
Google faced another problem it had to work around. The company would have to pay taxes to move money directly from Ireland to Bermuda, Drucker says, so it used another tool known as the "Dutch sandwich."
"So the payments go from the Irish sub to the Dutch sub to the Bermuda-resident Irish sub," Drucker says.
"The combination of these strategies has helped Google cut its effective tax rate overseas to the low-single-digit rate," he says.
Bermuda Or Bust
Google, like most corporations, will be the first to tell you that this is all completely legal under U.S. tax law.
"We have an obligation to our shareholders to set up a tax-efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate," a spokesperson told NPR.
To some politicians and economists, that sounds like a good reason to lower the U.S. corporate tax rate and draw Google's profits back home.
But draw them from where?
"We know that the corporate income tax rate in a number of countries overseas — even in our competitors, in the G-7 countries — is in the mid- to high-20 percent range," Drucker says.
"U.S. companies are not shifting income into those countries. They are not shifting income into the U.K., France and Italy. They are shifting income into Bermuda and the Cayman Islands," he says, "jurisdictions where there is no corporate income tax at all."
"If that's the case, it seems to me that it raises questions about whether cutting the U.S. corporate income tax rate would do anything to change any of this behavior," Drucker says.
Taxes On Holiday
All of Google's crafty accounting applies only to profits it collects overseas.
Consumer advocate Ralph Nader says the situation in the U.S. isn't much better.
He cites a recent report by the liberal Citizens for Tax Justice, which lists 12 corporations that — thanks to various loopholes, subsidies and other advantages written into the tax code — paid zero federal income taxes over the last three years.
"This is a seismic change in what might be called any semblance of U.S. corporate patriotism," Nader says.
So what would a fair corporate tax rate look like?
"I think we need to get back to where the OECD countries are, in the low- to mid-20s," says economist Stephen Slivinski of the conservative Goldwater Institute, referring to the international Organization for Economic Cooperation and Development.
If that happens, Slivinski says, "you could probably see some kind of capital coming back into the U.S."
Drucker says that even under a proposed corporate tax holiday that would allow major U.S. corporations to bring profits home at a low rate of around 5 percent — marketed by the likes of Cisco and Pfizer as a "second stimulus" — Bermuda and the Cayman Islands would still offer lower rates.
A similar tax holiday in 2005 wasn't very productive at all, he says.
"All of the cash brought back from overseas was used to buy back stock and give companies a boost in their stock prices," Drucker says. "It wasn't used to hire people and build factories."