Companies shift losses to high-tax countries to trim taxes

Thu Sep 1, 2011 1:01pm EDT

Related Topics

(Reuters) - For nearly two decades, global corporations have increasingly shifted trillions of dollars in worldwide profits to low-tax countries across the Caribbean, Europe and Asia to reduce their tax bills and maximize the bottom line.

With the shaky world economy now battering those profits, a new trend has emerged: some corporations are quietly moving losses back to high-tax countries, a move that can also lower their tax bills.

The trend, identified in a report this week by the Organization for Economic Co-Operation and Development club of industrialized nations, comes as corporations face lower profits and higher losses in a struggling global economy. That means they have fewer profits to park in tax havens that lower or eliminate the taxes owed on those profits.

But the losses are still valuable, tax-wise. Because most high-tax jurisdictions, including the United States, allow generous tax deductions and credits for losses, shifting them to higher-tax jurisdictions can lower a corporation's tax bill in a tough economy, the OECD said in the report.

"We are surprised by the extent of the losses," Jeffrey Owens, director of the OECD's Center for Tax Policy and Administration, said in a brief interview on Wednesday. "It has changed the nature of the game."

He added that the "corresponding shift" of corporate losses from low-tax to high-tax jurisdictions was evidence of "aggressive tax planning schemes."

LEGAL OR NOT?

The report did not single out countries or companies, but it said while some of the moves may be legal, others were skirting laws in individual countries. Owens said the OECD was working with member states to encourage countries to tighten certain loopholes, including the multiple use of single losses and use of losses in mergers or acquisitions.

The report, "Corporate Loss Utilization through Aggressive Tax Planning," covers Australia, Austria, Canada, Denmark, France, Germany, Ireland, Italy, New Zealand, Norway and Sweden, from 2000 through 2009. Not all countries provided data for all years, and in some cases, losses could not be calculated as a percentage of GDP.

The report can be found at www.oecd.org/document/6/0,3746,en_21571361_44315115_48587270_1_1_1_1,00.html

Owens said that while the OECD did not have United States data, "there is no reason to suspect that the losses are any less in the U.S.," meaning that U.S. corporations, which face on paper a statutory tax rate of 35 percent -- one of the highest in the world -- are also shifting losses to higher-tax jurisdictions.

The OECD report, which singled out one industry -- financial services -- said banks headquartered in high-tax countries were buying and selling derivatives among operating subsidiaries in low-tax jurisdictions and then shifting losses to higher-tax jurisdictions to "manage large loss-making financial assets" held on their balance sheets.

Martin Sullivan, an economist at Tax Analysts, a trade publication, said he thought the majority of the loss-shifting described in the report "pertains to banks, since they are the ones that had huge losses in 2008 and now are making profits."

The tax-boosting principle at work centers on loss carry-forwards, a legal accounting technique that allows corporations to apply their current year's net operating losses to profits in future years. While the move is designed in part to help companies avert bankruptcy, it also allows them to reduce their tax bills.

Laws governing losses vary by country, even among high-tax jurisdictions, and corporations are using those variations to "exploit differences among country rules through aggressive tax planning," the report said.

THREE SCHEMES

The OECD report identified what it called three high-risk schemes designed to maximize the tax value of carry-forward losses. They are:

* Corporate reorganizations, in particular those in which profitable companies buy money-losing companies solely for the tax benefits of their losses, which is illegal in the United States.

* Certain financial instruments, including currency swaps and schemes that "refresh" soon-to-expire losses.

* Non-arm's-length transfer pricing, or the prices companies charge between subsidiaries for goods and services. This is not legal in the United States and is a subject of growing scrutiny by the Internal Revenue Service.

Strategies include shifting losses to a money-losing entity; circumventing time restrictions within countries on carrying over losses; using single losses multiple times; and using securities lending, currency swaps and sale-and-repurchase agreements, or Repos, to create artificial losses with no real economic or business purpose other than to generate a tax loss.

In 2006, according to the OECD report, German corporations reported corporate losses of 576.3 billion euros, the last year for which it reported data to the OECD. The figure was equal to nearly one-quarter of Germany's GDP that year, the OECD said. French corporations had corporate losses of 256 billion euros in 2008, up from 255 billion euros in 2007 and 245 billion euros in 2006, the only three years it reported. Australian corporations had losses of 113 billion euros in 2009 -- nearly double the level of 2000 -- and 106 billion euros in 2008 and 99.9 billion euros in 2007.

(1 euro= $1.42)

(Reporting by Lynnley Browning in Hamden, Conn.; Editing by Howard Goller and Maureen Bavdek)

FILED UNDER: