Why Big Companies Pay No Taxes

We've probably all heard about how some big companies get away with paying no taxes.  I've wondered how this could be the case.  Well, now I know.  Last night, I had an international tax accountant in my car, and she explained it in fairly simple terms.

Say you've got Big Company X.  Big Company X is a huge, multi-billion dollar company that does business all over the world.  But they're an American business, so how come they don't cough up their fair share?

OK, but Big Company X is made up of many subsidiary companies:

And those subsidiary companies are in other countries, like India, Singapore, China and the U.K.  Each of those companies pays taxes in the country where they reside.  So, it's not that they're not paying taxes - they're just not paying it to the U.S.

And there are laws on the books in the U.S. and in other countries to prevent corporations from being double taxed.  Because if a company had to pay huge taxes in every country where they did business, then it wouldn't be worth doing business at all.

Still, surely the main company has income and should pay taxes in the U.S., right?  Well, there's something called the Foreign Tax Credit, and it relates to this double taxation thing.  Sometimes these subsidiary companies do end up getting taxed by both the U.S. and a foreign country.  And in that case, that double taxation is offset to some degree by the Foreign Tax Credit.  But what Big Company X will do is instruct their subsidiaries to pass that credit up to them (which they can do), and use it against the taxes that just the Big Company X headquarters owes.  Which is how Big Company X avoids paying taxes to the U.S. while diverting that tax burden to their subsidiaries.

The other piece of the puzzle is this.  Why do these big companies have subsidiaries all over the world?  Because the U.S. has a tax rate of 34%, higher than almost any other country.  By contrast, the worldwide average is 22.9%.  If the U.S. were to lower the corporate tax rate to 20% or even 10%, it would encourage businesses to set up shop here instead of in other countries, and then they would pay their taxes here instead of there.

Now, the woman I talking to was a little tipsy, so you can take this all with a grain of salt, and my apologies if I've gotten anything wrong here.  But she was clearly a smart cookie.  And I was amused that she professed herself to be a strong liberal, but on this issue she believes a very Republican argument can be made.

So the next time you hear that big corporations don't pay taxes, you'll know that's not true.  They do pay taxes, just not to the U.S.