May 28, 2020 / 12:41 PM / a month ago

Exclusive: U.S. taxpayers' virus relief went to firms that avoided U.S. taxes

LONDON/BOSTON (Reuters) - Last month Zagg Inc, a Utah-based company that makes mobile device accessories, received more than $9.4 million in cash from a U.S. government program that has provided emergency loans to millions of businesses hit by the coronavirus.

FILE PHOTO: The Nasdaq building in Times Square is illuminated in blue as part of the "Light It Blue" initiative to honor healthcare workers, during the outbreak of the coronavirus disease (COVID-19), in New York City, New York, U.S. April 23, 2020. REUTERS/Eduardo Munoz/File Photo

The money was part of the $660 billion Paycheck Protection Program (PPP) — a linchpin of President Donald Trump’s economic rescue package, meant to save small firms convulsed by the pandemic and help them to keep workers on the payroll.

Claimants certified the loans were necessary to support their business and received an average of $115,000 as of May 26, according to the Small Business Administration, which administers the program. Nasdaq-listed Zagg’s loan was more than 80 times that amount.

That wasn’t the only help Zagg had from the government lately. Last year, the company received a $3.3 million tax refund and racked up U.S. tax credits worth $7 million, its public filings show. It made $6 million in profit for 2019, but paid no tax in the United States.

Zagg has booked much of its profit through small companies in far-off Ireland and the Cayman Islands, its filings show.

The company’s situation is one of several that reveal a previously unreported aspect of the government relief program: The fund is giving millions of dollars in American taxpayer money to a number of firms that have avoided paying U.S. tax, a Reuters examination found.

In all, Reuters’ analysis of public data found around 110 publicly traded companies have each received $4 million or more in emergency aid from the program.

Of those subject to taxes, 12 of the companies recently used offshore havens to cut their tax bills, the analysis found. All together, these 12 received more than $104 million in loans from U.S. taxpayers. Seven of them paid no U.S. tax at all for the past year.

The program, which provides low-interest loans that are forgivable if companies use most of the money to pay employees, has been widely criticised for problems ranging from early bottlenecks that prevented small businesses from receiving money, to confusion that led millions of dollars to be handed out to relatively affluent firms.

Zagg, which sells its accessories in stores, online and via TV, declined to comment on its tax affairs but said separately it needed the cash from the program to keep its team together. It said in its annual report that its 2019 tax credits were “primarily attributable to a change in our global tax structure with respect to intangible intellectual property.”

The Treasury Department declined to comment.

Of the almost 110 recipients of $4 million or more, Reuters found some 46 paid no U.S. corporate tax for the last year. There are many reasons for this, not all to do with tax avoidance.

There is no suggestion that loan recipients which channelled profits offshore have broken tax rules or the law, or that firms which have not paid U.S. tax may not be eligible for aid. As Erik Gordon, professor at the University of Michigan’s Ross School of Business told Reuters, “nobody has a duty to pay more taxes than the law itself requires.”

Still, the fact that some recipients haven’t been paying taxes may add a new dimension to the controversy around the program. Some 39 million Americans — one in five in the workforce — have lost their jobs since the pandemic began. When Americans are scrambling for resources to fight the pandemic, “it’s a mistake to let companies not paying their fair share of taxes reap further gains from the American taxpayer,” said Zoe Reiter, director of civic engagement at Washington D.C.-based watchdog group Project on Government Oversight.

NO RULES

The small business loan program does not explicitly address tax avoidance. Companies applying for loans must certify they need the cash, commit to buying American where possible, and promise to use the money to pay employees who live in America.

But when it comes to corporate taxes paid to the U.S. government, the 11-page application form contains no conditions.

For U.S. Senate Democrat Sheldon Whitehouse, of Rhode Island, the fact that firms which channelled profits offshore could receive taxpayer bailouts highlights a need for reform.

Whitehouse, who sits on the Senate’s subcommittee on taxation and IRS oversight, introduced legislation last year to close loopholes that allow companies to use tax havens. With the anti-tax Republican Party controlling the Senate and a Republican president in office, such change is unlikely for now.

“This pandemic has laid bare a corporate culture in large companies to avoid paying taxes in profitable years but come to the government for handouts in a crisis,” Whitehouse said in response to Reuters’ reporting.

The Reuters analysis covers only a fraction of the program: Officials haven’t yet detailed who received loans. Private companies have gotten most of them so far. They seldom reveal such information, unlike publicly-traded firms.

Reuters used the latest available financial information for around 420 publicly traded companies that have applied for the forgivable loans, which was collated by data provider FactSquared. It shows publicly traded companies have collectively received less than $2 billion of the total.

“CRITICAL ROLE”

After some companies claimed loans running into tens of millions of dollars, the U.S. Treasury Department said last month that “big public companies with access to capital” would have a hard time proving they really needed the funds. As public scrutiny intensified, more than 60 publicly listed recipients went on to repay the loans.

Zagg wasn’t among them. The company, whose brands include a phone screen protector called InvisibleShield, employs 628 people, including 479 in the United States. It said in a statement to investors in mid-April it had temporarily cut executive pay and furloughed or laid off staff.

Explaining to Reuters on April 24 why it was keeping the cash, a Zagg spokesman said in an emailed statement the funds would play “a critical role in ensuring we have our team in place as the economy reopens.”

“DOUBLE IRISH”

At the core of Zagg’s tax arrangement is a subsidiary registered in Ireland: Patriot Corporation, registered at Rineanna House, a small office block outside Limerick.

Patriot Corp owns intellectual property for Zagg, such as brands and patents. According to the latest available filings, which cover 2018, it licensed rights to these to another Ireland-based Zagg subsidiary, Zagg International Distribution Ltd. That company sold Zagg’s products outside the United States, according to company accounts and websites.

The distribution company was subject to Irish tax rates of 12.5%.

A quirk of Irish law helped the parent Zagg make an even bigger tax saving: Companies registered in Ireland can pick another place as their tax domicile. Ireland-based Patriot is tax-resident in the Cayman Islands, according to the Irish registry. The Caymans do not charge corporate income tax.

For 2018, Zagg International Distribution paid around 4 million euros ($4.4 million) in royalties to Patriot Corp. That left the distribution firm with a profit of just 110,000 euros. And Cayman-resident Patriot Corp’s millions of dollars were liable for zero tax.

The maneuver is a long-standing tax avoidance method, and an example of what tax planning experts call “the Double Irish.”

“It’s purely a device to shift income to a zero-tax jurisdiction located in the sunny Caribbean,” said J. Clifton Fleming, a professor of tax law at Brigham Young University in Provo, Utah. Irish tax officials declined to comment.

GILTI CHARGES

In all, the Reuters analysis found more than 20 companies that applied for emergency help had used offshore subsidiaries to reduce their tax.

Twelve — including Zagg — reported their tax affairs had triggered a U.S. government levy designed to stop tax avoidance.

The measure, enacted by Congress in 2017, is called Global Intangible Low-Tax Income (GILTI) — pronounced ‘guilty’ by tax experts. Six tax experts told Reuters that the fact a company has been hit with a GILTI charge is a clear indication of tax avoidance.

“They shouldn’t have a GILTI charge unless they are shifting income to a low tax jurisdiction,” said Eric Zolt, a professor at the UCLA School of Law who served as a consultant to the U.S. Treasury Department.

Under GILTI, if a company records profits in a territory where it would pay much less tax than the U.S. standard rate of 21%, it must pay an extra charge. The sum typically only goes a small way to make up the tax shortfall, tax experts say.

Companies are not obliged to disclose they paid a GILTI levy — many don’t, say academics who study the issue. So Reuters’ analysis gives only a partial picture of the public companies that may have channeled profits offshore before they got COVID-19 relief.

SLEEPING EASY

Culp Inc, a North Carolina-based manufacturer of mattresses and upholstery fabrics, was another firm which paid GILTI fees before it applied for taxpayer-backed loans.

It received $7.6 million in taxpayer support last month.

Since 2011, the company has repeatedly told investors in quarterly calls that it pays no or “minimal” U.S. income tax. Its overseas operations include a Caymans-registered company.

Culp, contacted by Reuters on May 13, declined to comment on its tax arrangements. Two days later, a Culp representative told Reuters it had already voluntarily repaid the relief loan on May 13 “out of an abundance of caution” after the Treasury revised its guidelines on eligibility.

LOVELY ISLAND

A third beneficiary of the loans program that also disclosed a GILTI charge was Delaware-registered Spanish Broadcasting System Inc (SBS), which operates Spanish-language radio and TV stations under names including Mega, La Raza and Amor across America and Puerto Rico.

Four of its 14 radio stations are on the island.

Over the four years from 2016 to 2019, SBS reported cumulative losses of $20 million in the United States and profits of $15 million in the U.S. territory of Puerto Rico.

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In 2018, SBS said it received a tax benefit in the United States after writing off intercompany debt with its Puerto Rico subsidiary. It declined to explain to Reuters why it was profitable in Puerto Rico but made losses in the United States, or to discuss its tax arrangements more broadly.

“Spanish Broadcasting System is a U.S. taxpayer that fully complies with all U.S. tax laws,” it said in a statement.

Combined, Zagg, Culp and SBS received about $24 million from the U.S. taxpayer-funded loan program, the Reuters analysis found.

Edited by Paritosh Bansal, Tom Lasseter and Sara Ledwith

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