Companies based in the United States now have over $2.1 trillion stashed overseas shielded from U.S. taxes. That's a sixfold increase in 12 years, NBC News reported citing research provided by Capital Economics.
Generally, the U.S. tax policy allows companies based in the country to defer any tax obligation on money earned overseas until it's returned to American soil, or repatriated.
The newly Republican-controlled Congress does plan to debate the possibility of a "tax holiday" -- allowing companies to repatriate cash at significantly lower tax rates -- when it convenes in January, but until that happens money continues to sit overseas. The biggest offenders, Bloomberg reported, are some of the largest multinational companies based in the U.S. These entities moved another $206 billion in profit into more tax-friendly countries last year.
Among the top beneficiaries of this policy are three of the leading U.S.-based technology brands Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and IBM (NYSE:IBM) which added a combined $37.5 billion (18.2% of the increase) to their offshore bank accounts, according to the business news site.
It's a problem created jointly by the complexities of the U.S. tax code and the fact that many countries have much more business-friendly policies.
"The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore," Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group told Bloomberg.
How much money is this costing us?
In 2013 the Congressional Research Service released a report on the topic "An Analysis of Where American Companies Report Profits: Indications of Profit Shifting." The study examined whether multi-national corporations were moving profits out of high-tax countries (including the U.S.) and into low-tax nations with little corresponding change in business operations, a practice known as "profit shifting."
The report showed that "significant shares of profits are being reported in tax preferred countries and that these shares are disproportionate to the location of the firm's business activity as indicated by where they hire workers and make investments." American companies, for example, reported earning 43% of overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland in 2008, but hired only 4% of their foreign workforce and made only 7% of their foreign investment in those countries. It's a complete flip on reality as the countries you would expect to generate the most business (which also happen to be the ones with the highest tax rates) accounted for only 14% of American MNCs overseas' profits, but 40% of foreign hired labor and 34% of foreign investment.
The report also showed it's a growing problem, as the discrepancy between where profits are reported and where hiring and investment occurs has increased over time. There's no clear consensus of how much all of this obfuscation is costing the U.S. but the report cites academic estimates of the annual revenue loss to the U.S. ranging from from $30 billion to $90 billion.
It's a big problem
Medtronic (NYSE:MDT), a medical device company, announced in June that it planned to shift its headquarters from Minnesota to Ireland in conjunction with its acquisition of Covidien (NYSE:COV), the New York Times reported. The shift appears to be purely for tax reasons as the company won't really be leaving its U.S. home.
"The company will maintain principal executive offices in Ireland and operational headquarters in Minnesota," Medtronics wrote in a press release.
That sounds an awful lot like "we'll do some paperwork and rent some space in Ireland, but the real control will stay exactly where it is. Covidien is based in Ireland currently, but Medtronics executives will be leading the new brand.
While it seems like Medtronics is gaming the system, it's really a matter of operating within U.S. law to avoid paying a 35% tax rate. There are few companies which would choose paying high taxes over lower ones, or none at all, even if it means having cash tied up in offshore accounts where it's less useful.
Medtronics, Apple, Microsoft, and IBM are certainly not alone in sheltering money overseas. They're just well-known examples of something that has become a common practice.
Congress needs to fix this
Earlier this year U.S.-based eBay (NASDAQ:EBAY) repatriated $9 billion and paid $3 billion in taxes for the privilege of now being able to spend its own money in its home market. That type of confiscatory tax policy will likely serve as a warning to other companies looking to bring their overseas war chests home.
The key for Congress is: find a way to make the tax rate on overseas profits brought back to the United States more reasonable so the companies can spend their foreign booty here, boosting the economy.
Obviously collecting taxes is important, but they could consider alternatives that don't totally discourage companies from repatriating revenue. Maybe a solution lies in reducing tax rates but requiring companies to spend a portion of it. That will lead to hiring, investment, acquisition, research, and other economic drivers. There's a veritable pot of gold sitting in overseas banks and all it takes is a little government action (a tall order these days) to have a portion of it working for the American people.
Daniel Kline owns shares of Apple and Microsoft. The Motley Fool recommends Apple, Covidien, and eBay. The Motley Fool owns shares of Apple, eBay, International Business Machines, Medtronic, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.