WASHINGTON - Nearly half the estimated $233 billion U.S. corporations earned abroad in 2001 is held in foreign tax havens, up from 38 percent in 1999 and 23 percent in 1988, according to an analysis of recent Commerce Department data.
The numbers come as the Internal Revenue Service and Treasury Department seek to increase corporate tax receipts in the face of huge federal budget deficits. Corporate taxes last year accounted for only 7.4 percent of total federal tax receipts, the second-lowest level on record after 1983.
"When it comes to corporate taxation, all you can hear is a giant sucking sound," said Keith Ashdown, vice president of policy and communications at Taxpayers for Common Sense, a nonpartisan budget watchdog. "This is legal money laundering and it's bleeding the federal Treasury white."
Treasury officials say globalization makes it increasingly difficult to track money American companies earn abroad. Fraudulent accounting has grown along with the global reach of U.S. businesses, while tax lawyers are finding new ways to legally use obsolete and porous reporting laws to their advantage.
"Companies are increasingly international," said Pamela F. Olson, former assistant Treasury secretary for tax policy. "The IRS has dedicated staff watching this, but my concern is their resources may not be as sophisticated as those on the other side. We need statutory change."
New legislation has further hampered tax collectors by making it easier for U.S. companies to claim foreign countries with low tax rates as their headquarters.
"Congress talks tough when companies move offshore to places like the Cayman Islands, but they don't get tough," said Sheldon S. Cohen, IRS commissioner under President Lyndon B. Johnson and now an attorney at Morgan, Lewis & Bockius LLP, a Washington law firm.
To halt the decline in corporate tax receipts, the U.S. government has over the past few months:
Sharpened its focus on U.S. companies that manipulate prices in ways that artificially prop up profits in low-tax countries and lower them in the United States.
Issued new rules aimed at reconciling the profits corporations submit to the IRS with the ones they disclose to Wall Street. Firms are legally able to report lower profits to the government than they report to investors because of inconsistencies between the rules that govern tax accounting and financial statements.
Multiplied the number of audits by shortening the time it takes to inspect a company's books.
Commerce Department data from December illustrate the challenge facing tax officials.
The figures show that corporate earnings held in offshore tax havens like Luxembourg or the Cayman Islands have doubled over the past 15 years. Those two countries have corporate tax rates of 0.9 percent and 5.2 percent, respectively, compared with 28 percent to 35 percent in the United States.
After combing through Commerce Department data, Martin A. Sullivan, an economist and columnist for Tax Notes, a daily journal on tax law and legal issues, concluded that the profits U.S. corporations booked in the world's 11 largest tax havens were more than double what they should be, considering the scope of the companies' operations in those countries.
U.S. companies recorded 46 percent of their total overseas profits in these 11 tax havens in 2001, the latest year for which figures are available, according to Sullivan's analysis.
But these countries accounted for only 19 percent of the overseas economic activity of the companies as measured by the value of their assets, sales, cost of equipment and number of employees.
The conclusion, economists say, is that U.S. corporations are getting better at parking excessive amounts of profits in low-tax countries.
"This is an inevitable byproduct of globalization," said Joel Friedman, an economist at the Center on Budget and Policy Priorities, a Washington think tank. "There is widespread agreement this is going on and revenue is lagging as a result."
Olson, the former assistant Treasury secretary, has not seen Sullivan's analysis but acknowledges there is a problem. She said Treasury officials have been calling for years for stiffer transfer-pricing rules, which govern what divisions of a multinational can charge each other.
"We have put out a couple [of] sets of changes over the last few months and we are likely to come out with new ones soon. This is a difficult area to administer even with the proper guidelines," she said.
A favorite tactic for corporations parking income abroad is known as "cross-sharing," in which a parent firm licenses its trademark or copyright to an affiliate in a country with low taxes. The country becomes the repository for the income earned from that license, which makes the firm's taxes lower than they would be if the license remained in the United States.
Companies also will sell products at artificially low prices to subsidiaries based in a tax haven, keeping the corporation's U.S. tax exposure to a minimum. The subsidiary then sells the goods locally at market rates at a large profit that is taxed at the foreign country's low rate. Such transactions, known as "transfer pricing," allow U.S. companies to concentrate income into low-tax jurisdictions, then wire those profits home during a bad earnings year.
Conversely, a domestic company may buy a product from a foreign subsidiary at an artificially high price. When the company resells the product in the United States, the profit appears small. The result: lower U.S. taxes.