Loophole lets corporations save billions in taxes

AFP Photo/Jim Watson
The United States has let corporations get away with billions of dollars in tax-breaks thanks to a paperwork loop-hole that has allowed companies to forego a special type of corporate tax.

Under a rule commonly called “check-the-box,” American corporations have been able to shift profits from abroad simply by signing off an extra item on tax forms. Normally these companies are required to pay around 35 cents on the dollar in corporate tax, but the Treasury Department now estimates that it has lost billions each year since companies began taking advantage of the little-known shortcut.

In a 2009 report released by Congressional Research Services, they estimate that the government has missed out on around $10 billion annually because of the gaffe. Originally the rule was created so companies could transfer subsidiaries into what the IRS refers to as “disregarded entities.” It encourages corporations to invest abroad while saving money so that, ideally, they will then pump their profits into domestic research and development.

But according to the report, titled Tax Havens: International Tax Avoidance and Evasion, “Multinational firms can artificially shift profits from high-tax to low tax-jurisdiction using a variety of techniques,” which includes check-the-box. The report adds that the installation of that feature in the 1990s led to “unintended consequences” for foreign firms. “On average,” continues the report, “very little tax is paid on the foreign source income of US firms.

The option was originally installed so that companies would be able to save on paperwork, reports Financial Times. They add that, because of the option, US corporations have been able to expand overseas thanks to tax breaks. The US Department of Commerce reveals that earnings of American companies abroad have doubles since 2004.

Because only large corporations are able to take advantage of check the box, it limits who exactly can use the loophole. That does mean, however, that those massive companies that President Obama is aiming to tax more heavily with his Buffet Rule are those that are getting the most out of check-the-box.