Must Reads, Profiles in Corporate Tax Avoidance

Profiles in corporate tax avoidance: International Paper

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April 15 is “Tax Day”—the day by which all Americans must file their federal income tax returns. This year, N.C. Policy Watch is using Tax Day as a means of highlighting a frequently under-reported message at this time of year: Namely, that not all Americans (and especially not all American corporations) are paying their fair share of federal taxes.

To underscore this message, we are shining a light on a trio of giant corporate tax avoiders with strong connections to North Carolina by summarizing:

  1. the size and scope of their businesses,
  2. the taxes they have avoided paying in recent years
  3. and the methods they use to accomplish this.

Click here to read previous profiles of Duke Energy and Merck & Co.


Company: International Paper, Co.

International Paper Mills, village of Chisholm, Jay, Maine; from a c. 1908 postcard published by the Metropolitan News Company, Boston, Massachusetts.

International Paper Mills, village of Chisholm, Jay, Maine; from a c. 1908 postcard published by the Metropolitan News Company, Boston, Massachusetts. (left)

Background and North Carolina connections:

International Paper is a 115 year-old company that was founded via a merger of several pulp and paper mills in the northeastern United States. Today, the company is the largest company of its kind in the world. It is headquartered in Memphis, Tennessee.

As a company whose core mission revolves around turning trees into paper products (it owns millions of acres of forests worldwide), it comes as little surprise that a large proportion of International Paper’s business is centered in the heavily-forested American Southeast. The company has scores of facilities east of the Mississippi and south of the Mason-Dixon Line.

International Paper, Co. at a glance
The largest pulp and paper company in the world; headquartered in Memphis, Tennessee
Total assets $27 billion
2008-2012 profits combined: $2.8 billion
Net 2008-12 federal tax rate: 2.6%
2008-2012 federal taxes paid: $74 million
5-year compensation of CEO John Faraci (as of April 2012): $49.3 million

Though not based in North Carolina, IP maintains 18 different facilities in North Carolina—including three large mills in the east, as well as multiple packaging plants, warehouses, recycling centers and retail outlets.

Paper production, of course, has also long been a controversial environmental subject and IP has received significant criticism through the years in this area—both for its impact on forests and for the water and air pollution it emits.

Despite struggles in recent decades, the company has more than 60,000 employees worldwide and more that $27 billion in assets. Forbes.com reported last year that IP’s CEO John Faraci has received an average compensation of around $9 million per year for each of the last six years. Faraci is also a major figure in national Republican politics.

Principal tax avoidance strategy:

The U.S. corporate income tax rate is officially 35%. Many of our nation’s most profitable corporations, however, pay nowhere near this statutory rate because they are able to take advantage of numerous loopholes, tax deductions, and other tax breaks to virtually eliminate their effective tax liability. In some years, these profitable corporations paid no income tax at all, or even more troublingly, actually received rebates from the federal government. This has been the chief technique used by International Paper.

In 2011, CBS Money Watch reported that IP had been recognized as one of the nation’s “Top 25 Corporate Tax Dodgers.” After listing General Electric as the “top” tax dodger, the story noted:

“Remarkably, that’s NOT the lowest tax rate in the survey. International Paper, which earned $198 million in pre-tax profits from U.S. operations and got a $249 million refund, wins that distinction with a negative 125.8% effective federal rate.”

Taxes avoided:

International Paper reported a profit of $467 million to the federal government in 2012 which, at a rate of 35%, should have resulted in a federal tax liability of $163.45 million. Nonetheless, as a result of its use of creative tax avoidance techniques, it actually enjoyed a federal tax rate of only 3% and paid taxes of only $14 million.

For the five years between 2008 and 2012, IP reported a total profit of just over $2.8 billion. Again, however as a result of tax avoidance techniques, its effective federal tax rate for this period was just 2.6%. In other words, IP paid a total tax for the five-year period of just $74 million (or only about $29 million more that it paid its CEO for the same period).

Public services not provided that IP’s taxes could have paid for:

As more and more people are aware, the recent federal decision to implement billions of dollars worth of “sequestration” cuts is beginning to take a real toll in North Carolina. For instance, sequestration is expected to slash nearly $16.8 million in Special Education grants in North Carolina in the coming year, with as many as 10,000 fewer students receiving services and 200 instructors losing their jobs.

Obviously, however, if International Paper and other large corporations had paid the statutory rate (or something close to it) in federal income taxes, many – if not all – of these painful cuts could be (and would have been) avoided.

The bottom line:

Like many giant multinationals with controversial records in protecting our fragile environment, International Paper is a corporation that badly needs to upgrade its reputation for corporate citizenship.

On its website, IP claims that:

“The people of International Paper believe that ‘ethical behavior and personal integrity are the core of our culture. This is the ethical foundation that guides our work and our lives.”

The company’s leaders could go a long way toward showing they are serious about this statement if they saw to it that the company pays its federal income taxes.

The data in this report regarding International Paper’s profits and taxes were provided to N.C. Policy Watch by the Institute on Taxation and Economic Policy and derived from an analysis of the corporation’s “10-K” filings with the Securities and Exchange Commission.

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