When I was a much younger man, and unused – in many respects – to the sheer crookedness of the world, I was told by my boss to do something that I thought seemed rather wrong: to over-invoice a client in an overseas operation. It was a matter of some tens of millions of US Dollars with an open, confirmed, letter of credit in place that had on it not just the sale prices of the shipments that were to be made but also the freight costs. Except that the freight costs were exaggerated to the tune of 500%.
With five shipments of product required, the five invoices would also include one-fifth of the agreed freight costs. That was three million plus excess Dollars on each invoice compared to the true cost of shipping and insurance. Each of those three million dollops of money were handily divided between one of my boss’ accounts in the Caymans, the contact in the country of origin of the LC (which happened to be Nigeria) was credited in his account in London, and there was a small pay-off to the company that “approved” the quality of the goods shipped.
Money has always talked big time in London and there would be no way that this operation would ever have had the tax authorities breathing down its necks, or question the need to move millions of dollars around the world. It’s just good business, right?
Well, President Barack Obama has moved from campaign promises to actually
putting his foot on some of the offshore shenanigans that have been going on unabated for a long time. Although there are many wealthy individuals who hide money overseas, the vast majority of those playing the offshore game are the large corporations including, it seems, all the US banks that received TARP money from the US taxpayer.
There are all sorts of manipulations possible, but the main reason those corporations form subsidiaries in the Caymans, Vanuatu, The Isle of Man, The Channel Islands, etc. is for a place to receive real overseas business profits so they do not show up on the US-audited accounts, and therefore escape US taxation.
And the easiest way to siphon off money from those overseas operations is to over-invoice from the tax haven, reducing liability in those countries where you actually do business.
Avoidance or evasion? The former is legal, the latter is not. I think it is evasion, particularly as it is common for these corporations to deduct expenses on their domestic tax bill before consideration of overseas profits. The Obama administration has estimated that the measures would likely bring in $240 billion in additional tax revenue over ten years. That is probably a very conservative number.
After the announcement, the squealing from industry started immediately, as did the noise from the Republican party yelling about extra taxes, double taxation, reduction in jobs, restriction in growth, etc. Rather than extra taxes, of course, the move is simply trying to ensure the taxes that are really due are actually
paid. Double taxation agreements with other countries – which by happenstance do not include tax havens! – mean that taxes paid in the US will have any taxes already paid overseas deducted from the total due. Reduction in jobs? Really, the other way around: successfully implementing the new policies would actually reward corporations for keeping jobs at home. The announcement certainly brought immediate screaming from
India where many jobs will be in jeopardy, and rightly so, with a lot of those positions coming back to the US.
The claims that the playing field will no longer be flat internationally are also likely to be bogus. As soon as other countries see policies like this working they will also modify their tax avoidance rules to bring their own corporations into line, and bring a lot more money home.
But there are other things that need to be looked at by the administration, one of the most important of which is that, for US corporations, over one-third of overseas profits (the parts not hidden in the tax havens) are reported in The Netherlands, Ireland, and Bermuda; these are countries where corporate tax rates are rather askew compared to other nations…
The Obama administration reported that US corporations paid an effective tax rate of only 2.3% on their 2004 overseas profits. Isn’t that a great gig we would all like to get on? Tell you what, I’ll over-invoice you if you over-invoice me.
