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Nobody likes paying taxes, but just how far would you go to avoid them? For some companies who market themselves as homegrown American brands, it's better to move cash overseas than to pay federal taxes on billions of dollars of earnings. According to the New York Times, U.S. law states that companies that are based here must pay American corporate tax on their worldwide earnings, not just their domestic sales. The U.S. corporate tax rate currently stands at 35%, one of the highest in the world.
But there's a loophole: American companies don't have to pay American taxes on foreign earnings that they don't bring back to the States. This has prompted many brands to establish offshore accounts where they "permanently reinvest" huge sums of money and avoid U.S. taxes along the way in a process known as inversion.
The U.S. Public Interest Research Group released a report back in June that called out many large American companies that are saving hundreds of millions (sometimes even billions) of dollars by avoiding U.S. corporate tax. Shortly after, pressure was applied to companies like Walgreens, which was in the process of moving its entire operation out of the country, presumably to pay lower taxes. Walgreens ended up not relocating after a barrage of protests, but if the move had taken place, the company would have saved up to $4 billion in taxes over the next five years.
We looked into six all-American brands that have offshore accounts (Gap, Nike, Estee Lauder, Tiffany & Co., Michael Kors, and Ralph Lauren) to see just how much money they were keeping overseas. Here's what we found:
According to each company's public records with the Securities and Exchange Commission, these huge sums of money had been, or are intended to be, "permanently reinvested" in accounts outside of the U.S., thus avoiding the 35% corporate tax rate. Ralph Lauren, a heritage brand that thrives on its Americana look, acknowledged that $2.176 billion of its own earnings were being taxed through foreign subsidiaries. If that money was brought back to the U.S., it'd be accompanied by a federal tax bill of $761.6 million, as compared to the estimated $441.7 million that it's currently being taxed. Total savings? Just under $220 million.
The story is similar for Nike. In its SEC filings, the company acknowledged that $6.6 billion of its total earnings has been filed and taxed through foreign subsidiaries. They even go so far as to do the math for us, stating that if that money was brought back into the U.S., they would have to pay $2.1 billion in federal taxes. What they paid instead? $1.5 billion.
Of course, the offshore accounts only contain part of what these companies make on an annual basis; Nike's earnings for 2013 alone were over $3.5 billion. However, the companies we looked into show no signs of slowing down or reinvesting their profits back into their U.S. bases. For another view, check out just how much money they would owe in U.S. taxes if the money in these offshore accounts were moved Stateside:
Additional reporting by Lavya Yalamanchi
· Offshore Shell Games [US PIRG Report]
· The Islands Treasured by Offshore Tax Avoiders [NYTimes]
· Why You Shouldn't Be Buying Your Sunscreen in America [Racked]