As Congress debates the federal budget, it is critically important to raise new revenues that can support our nation’s long-term economic recovery. One excellent source of new revenues involves the billions of dollars in corporate tax loopholes, deductions, credits and outright giveaways that allow too many multinational corporations to avoid paying their fair share of taxes. This year, N.C. Policy Watch and the N.C. Budget and Tax Center are focusing on federal corporate tax reform as a means of highlighting the disturbing fact that too many American corporations are able to use these tax loopholes to skip out on their responsibility for contributing to the public investments that are needed for sustainable long-term economic growth.
To underscore this message, we are shining a light on a number of corporate tax avoiders with strong connections to North Carolina (Click here to read previous profiles of Duke Energy, Merck & Co., International Paper and DuPont).
This month, we’re focusing on the highly profitable technology giant IBM revealing the following:
- the size and scope of their businesses,
- the taxes they have avoided paying in recent years, and
- the methods they use to accomplish this.
Background and North Carolina connections:
Affectionately known as “Big Blue,” technology giant IBM is the largest corporation in the United States and one of the world’s largest technology companies, with more than 430,000 employees located in 170 countries. Additionally, the company has 12 research laboratories worldwide and has held the record for the greatest number of patents generated by a single company for 20 years in a row. Founded in 1911 as the Computing Tabulating Recording Company, IBM quickly became the nation’s leading developer of computer hardware, and eventually, information technology services. Currently headquartered in Armonk, New York, IBM has a significant presence in North Carolina, including major research facilities in Research Triangle Park and Charlotte. At the RTP facility, IBM employs a 14,000 full-time workforce focused on research and development. Additionally, Raleigh is the worldwide headquarters for IBM’s Networking Hardware, Retail Store Systems, Personal Systems Group, and Human Resources departments.
In 2012, the company earned $105 billion in revenues and claimed $119 billion in total assets, despite a sluggish recovery from the Great Recession.
|IBM at a glance|
|Technology giant IBM is the second largest company in the United States and is headquartered in Armonk, NY.|
|2012 Total Assets||$119 billion|
|2012 profits||$9.5 billion|
|2008-2012 profits combined:||$45.3 billion|
|Profits held offshore 2008-2012||+ $18.4 billion 2008-2012 (Total of $44.4 billion)|
|Effective Tax Rate on Total Profits, 2008-2012||Dropped to 5.8 percent|
Principal tax avoidance strategy:
Over the past several years, multinational corporations based in the United States have made record profits—and stashed those profits in offshore accounts. Most of these profits were earned here in the United States, but were shifted into these foreign tax shelters expressly in order to avoid U.S, corporate income taxes. As an analysis by the non-partisan Center for Tax Justice makes clear, the corporate income tax code treats these profits as “foreign” because they reside outside the United States, and as a result, they cannot be subjected to U.S. taxes until they are repatriated—or returned to the United States.
In effect, companies like IBM that stash profits in offshore accounts are able to shelter these profits from American taxation, dramatically reducing their overall tax liability.
Although IBM has been one of the eight most aggressive corporations in stashing profits earned in America in offshore accounts over the past five years, it is hardly alone in taking advantage of this loophole. In fact, no less than 92 Fortune 500 corporations each boosted their individual offshore profit holdings by at least $500 million in 2012—adding an additional total $229 billion to their offshore holdings in that year.
According to analysis by the Institute on Taxation and Economic Policy (ITEP), IBM reported about $45.3 billion in taxable profits to the United States government from 2008 through 2012. During this period, however, the technology giant actually earned an additional $18.4 billion in overseas profits that were sheltered in offshore bank accounts—effectively avoiding the corporate income tax, according to a report by Citizens for Tax Justice. By 2012, IBM had stashed a total of $44.4 billion in these offshore, tax-free accounts. By excluding these profits from taxation, the company was able to significantly reduce the effective tax rate it had to pay to an estimated 5.8 percent—a fraction of the statutory 35% federal corporate income tax rate.
Public services not provided that IBM’s taxes could have paid for:
As is becoming more apparent every day, the federal decision to implement billions of dollars’ worth of “sequestration” cuts in 2013 is beginning to take a real toll in North Carolina. For instance, sequestration cuts have dramatically reduced the number of children participating in Head Start— a program that helps children from low-income families from birth to age 5 to help make sure they are ready for kindergarten. This is one of the many crucial investments in early childhood program that have generated positive long-term academic achievement and regional economic performance. Among the documented impacts of sequestration are:
- In Alleghany County, the program ended one week early and reduced staff hours by nearly one month.
- In Durham County, there were 50 fewer spots available to children in early childhood programs.
- At the Coastal Community Action Agency, the Head Start program lost $300,000.
If IBM and other large corporations paid their fair share in federal corporate income taxes many—if not all—of these painful cuts could be avoided.
The bottom line:
IBM is a highly profitable international corporation that continues to be one of the pillars of the global computer industry. Part of being a good corporate citizen, however, involves paying the taxes that help make success possible—taxes that finance the training of the skilled workforce that makes IBM’s technological prowess and overall profitability possible. If companies like IBM are allowed to continue off-shoring their profits and avoiding their taxes, the rest of us are going to have to pick up the tab—either through more spending cuts or through the deterioration of the services that benefit us all and made IBM success possible.