In Big Corp Tax Loophole Closer #16, I recommended that the US Government should disallow deferral of earnings of Puerto Rico Controlled Foreign Corps.
In this Big Corp Tax Loophole Closer #17, I am expanding that recommendation to disallow the deferral of all foreign earnings of all companies.
To give an excellent insight on this issue, let me study the US Big Multinational Medical Corps, most of which are Big Pharma Corps.
From a review of income tax footnotes in their SEC filings, I found ten of them whose foreign tax breaks (i.e. the tax benefits from having lower tax rates in foreign jurisdictions) exceeded $1 billion each over the most recent three years. Here they are, along with their related foreign tax breaks, which totaled $28.5 bil for the years 2008 through 2010:
………………..............(mils of $s)
JNJ.............................6,532
Merck.........................4,970
Abbott Labs................3,266
Amgen........................2,874
Pfizer..........................2,729*
Eli Lilly.......................2,205
Medtronic...................1,901
Bristol Myers Squibb...1,878
Gilead Sciences...........1,094
Covidien.....................1,083
Total for all 10...........28,532
*Pfizer's foreign tax breaks amount above is unusually low, for its size, because of certain transactions related to its merger with Wyeth.
To be financially transparent, seven of these ten companies specifically pointed out which foreign jurisdictions had significant Tax Incentives which they took advantage of.
All seven mentioned Puerto Rico’s tax incentives, four of them mentioned Ireland, three of them mentioned Singapore, and two of them mentioned Switzerland. And most of them stated that there were tax incentives in other foreign countries, which they took advantage of, without mentioning the foreign countries specifically.
The three Big Medical Corps which did not specifically mention any foreign country were Abbott Labs, Gilead Sciences and Covidien. You have to wonder where the SEC was here.
Here are the US Pretax Income (PTI), International Pretax Income, Worldwide Pretax Income, and the related International Pretax Income Percentage Mix for each of these ten Big Medical Corps for the most recent three years:
.......................................................World.....Intl
............................US..........Intl........Wide......PTI
...........................PTI..........PTI.........PTI......Mix %
...........................(millions of US dollars)
Pfizer...............(7,869)....37,812.....29,943...126%
Abbott Labs.......1,146.....17,617.....18,763....94%
Eli Lilly*............3,718......6,857.....10,575....65%
Medtronic..........3,988......6,144.....10,132....61%
JNJ...................20,112....29,519.....49,631....59%
Amgen................6,736.....8,800.....15,536....57%
Merck................11,682....15,192.....26,874....57%
Covidien.............2,573......3,139.......5,712....55%
BristolMyersSq...8,786.....7,663.....16,449....47%
Gilead Sciences...6,489.....3,600.....10,089....36%
Total.................57,361..136,343...193,704....70%
* Eli Lilly includes its Puerto Rico earnings in its US total.
Yeah, these Big Medical Corps have successfully shifted 70% of their earnings, along with the related jobs, overseas.
It's not just about lower wages in places like Puerto Rico, it's more markedly due to tax savings. When you take the $28.5 bil of foreign tax breaks of these Big Medical Corps for the most recent three years, and divide it by the $193.7 bil of worldwide pretax income, you get a drop in these companies’ effective income tax rates in total of an incredible 14.7%...I’m not kidding, just do the math.
This is why Big Medical Corps lobby so intensively for an 85% tax holiday for foreign earnings repatriation. They got one in 2004, and now they are pushing for another.
It is pretty clear to me that the country clearly needs more financially astute members in the US Congress, on both sides of the aisle, looking out for the country's best interests, like Chris Van Hollen in the House and Mike Crapo in the Senate. And these members of US Congress also need more staff members who have extensive financial expertise. This is the main reason the country has a $14.3 trillion debt, and an unemployment rate of 9.2%. The US Government has no chance when it goes up against the financially savvy, greedy, deceptive, awesomely-powerful Big Corps and their lobbyists.
The above numbers are just for Big Medical Corps, and only for three years. When you extrapolate this to all US Big Multinational Corps, the projected total foreign tax breaks would be clearly off the charts.
My recommendation here is to disallow the deferral of all foreign earnings, starting in 2012. Also, there should be no 85% tax holiday on the estimated $2.0 trillion of unremitted foreign earnings that will exist as of the end of 2011.
Because of the horrible US job and US debt situation we now face, I would consider some wise tweaking of the foreign earnings repatriation tax rules to allow for some one-time somewhat discounted federal income tax rates on some of these $2.0 trillion of unremitted earnings, but it is critical that these initiatives are enacted wisely, and thus only when they clearly and directly create a sufficient number of good full-time US jobs.
Although they say otherwise, the majority of Big Corps have no interest in creating US jobs. They like it precisely where they are now, where their wage costs are low, their employees work extremely hard, and it is very easy for them to find good replacement employees on the cheap. Big Corp earnings benefit immensely in this environment.
