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Number of S&P 500 Firms Skirting US Taxes Hits New Record

Author: Frank L. Brunetti|April 20, 2015

The number of S&P 500 firms that do not pay U.S. corporate income taxes has surged to an all-time high.

Number of S&P 500 Firms Skirting US Taxes Hits New Record

The number of S&P 500 firms that do not pay U.S. corporate income taxes has surged to an all-time high.

At a time when many enterprises are performing inversions and shifting their legal addresses overseas, a record 54 companies in the S&P 500 have achieved a lower effective tax rate from the U.S. corporate income tax, Bloomberg reported.

Changing corporate structures

As a result, the number of firms in the index that enjoy this particular status has risen more than 100 percent from four years ago, according to the media outlet reported. While some firms have been declaring themselves real estate investment trusts to obtain more favorable tax treatment, others have been completing inversions, which involves them transferring their legal address to another country.

Some companies have been converting to REITs, which are taxed as pass-through entities because of the way they are set. These strategies have drawn a great deal of attention, ranging from Washington lawmakers to industry experts who want to give their two cents on corporate tax policy.

High corporate income tax rate

Many of these observers and commentators have noted that companies based in the world’s largest economy currently pay a top income tax rate of 35 percent, which is one of the highest of any developed nation. In addition, the tax code currently contains a complex web of deductions and subsidies, and as a result, some major firms pay an effective tax rate that is far lower.

Amid this situation, calls for tax reform have gained significant momentum, and over the last several months, numerous lawmakers have proposed simplifying the existing treatment of corporate income and also reducing tax rates.

Obama tax proposal

Earlier this year, President Barack Obama outlined a proposal that would lower the top corporate income tax rate to 28 percent in order to make the U.S. more competitive relative to other nations.

In addition, his plan would lengthen depreciation lives and impose a minimum tax on foreign profits. Under current tax code, companies that generate earnings through overseas activities can simply keep these resources in foreign nations instead of bringing them back to the U.S.

Critics have contended that the current system encourages such global companies to invest overseas, as by keeping their financial resources there, the firms would not have to pay the high corporate income tax rates imposed in the U.S.

New inversion rules

While the fate of this proposal – and the other ones that have been floated in Washington – is uncertain, the U.S. Department of the Treasury announced new rules in September 2014 that will make it more difficult for U.S. companies to conduct inversions for the purpose of enjoying more favorable tax treatment, according to Bloomberg.

Obama commented on these actions in a statement, lauding the progress made.

“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend,” he stated.

When speaking with members of the media, Lew said that by making these changes, he wanted to give companies more reason to avoid performing an inversion, Bloomberg reported. Even though the Treasury took this step, working with Congress can potentially generate far greater results, Obama emphasized in a statement.

Companies weigh in

Amid this situation, many companies that changed their corporate structure have asserted that they are obligated to legally minimize their tax bills because they answer to shareholders, according to Bloomberg. Paul Bisaro, chairman of specialty pharmaceutical Actavis Plc., stated that the current tax code is detrimental to firms based in the U.S.

There may be evidence to support his claim, as several high-profile companies in the S&P 500 – including Iron Mountain – have altered their corporate structure to become a REIT and therefore enjoy more favorable tax treatment. Even after such changes, it is worth keeping in mind that almost all firms listed in the S&P 500 that have either switched over to REIT status or performed an inversion still pay some U.S. corporate income taxes.

Number of S&P 500 Firms Skirting US Taxes Hits New Record

Author: Frank L. Brunetti

At a time when many enterprises are performing inversions and shifting their legal addresses overseas, a record 54 companies in the S&P 500 have achieved a lower effective tax rate from the U.S. corporate income tax, Bloomberg reported.

Changing corporate structures

As a result, the number of firms in the index that enjoy this particular status has risen more than 100 percent from four years ago, according to the media outlet reported. While some firms have been declaring themselves real estate investment trusts to obtain more favorable tax treatment, others have been completing inversions, which involves them transferring their legal address to another country.

Some companies have been converting to REITs, which are taxed as pass-through entities because of the way they are set. These strategies have drawn a great deal of attention, ranging from Washington lawmakers to industry experts who want to give their two cents on corporate tax policy.

High corporate income tax rate

Many of these observers and commentators have noted that companies based in the world’s largest economy currently pay a top income tax rate of 35 percent, which is one of the highest of any developed nation. In addition, the tax code currently contains a complex web of deductions and subsidies, and as a result, some major firms pay an effective tax rate that is far lower.

Amid this situation, calls for tax reform have gained significant momentum, and over the last several months, numerous lawmakers have proposed simplifying the existing treatment of corporate income and also reducing tax rates.

Obama tax proposal

Earlier this year, President Barack Obama outlined a proposal that would lower the top corporate income tax rate to 28 percent in order to make the U.S. more competitive relative to other nations.

In addition, his plan would lengthen depreciation lives and impose a minimum tax on foreign profits. Under current tax code, companies that generate earnings through overseas activities can simply keep these resources in foreign nations instead of bringing them back to the U.S.

Critics have contended that the current system encourages such global companies to invest overseas, as by keeping their financial resources there, the firms would not have to pay the high corporate income tax rates imposed in the U.S.

New inversion rules

While the fate of this proposal – and the other ones that have been floated in Washington – is uncertain, the U.S. Department of the Treasury announced new rules in September 2014 that will make it more difficult for U.S. companies to conduct inversions for the purpose of enjoying more favorable tax treatment, according to Bloomberg.

Obama commented on these actions in a statement, lauding the progress made.

“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend,” he stated.

When speaking with members of the media, Lew said that by making these changes, he wanted to give companies more reason to avoid performing an inversion, Bloomberg reported. Even though the Treasury took this step, working with Congress can potentially generate far greater results, Obama emphasized in a statement.

Companies weigh in

Amid this situation, many companies that changed their corporate structure have asserted that they are obligated to legally minimize their tax bills because they answer to shareholders, according to Bloomberg. Paul Bisaro, chairman of specialty pharmaceutical Actavis Plc., stated that the current tax code is detrimental to firms based in the U.S.

There may be evidence to support his claim, as several high-profile companies in the S&P 500 – including Iron Mountain – have altered their corporate structure to become a REIT and therefore enjoy more favorable tax treatment. Even after such changes, it is worth keeping in mind that almost all firms listed in the S&P 500 that have either switched over to REIT status or performed an inversion still pay some U.S. corporate income taxes.

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