Gillian Tett Shows She Does Not Understand Offshore “Profits,” Parrots Corporate Propaganda Instead

The Financial Times’ Gillian Tett needs to talk to experts on corporate taxation rather than take dictation from the likes of Apple’s Tim Cook. Her current column, A real-world solution to the tax repatriation ruckus, is unabashedly inaccurate and misleading.

Massive Tett Error #1. Corporate cash for companies like Apple is not offshore. Tett:

President Barack Obama proposed raising an additional $238bn in tax by imposing a one-off levy of 14 per cent on repatriated cash piles if they were used for infrastructure spending… What the American economy needs is not on-off populist measures to ban tax inversions or repatriate overseas cash piles….the dismal status quo: a world of ever-growing offshore cash piles

This is nonsense and means that the basic premise of the article is 100% off base.

Corporate profits are booked in offshore entities. Tax books are not the same as accounting books or movement of cash. As top tax expert Lee Sheppard wrote in Tax Notes in 2013 (no online source):

But for reporting companies subject to generally accepted accounting principles and U.S. worldwide taxation, let’s stop talking about ‘‘offshore’’ earnings and ‘‘bringing the money home.’’ The earnings are merely booked offshore. The earnings are by and large not banked offshore. To the extent that the much-ballyhooed $2 trillion of deferred foreign earnings is classified as permanently reinvested in cash, most of that cash is sitting in U.S. banks, where it is propping up their capital.

Apple, for instance, runs its “offshore” profits as an internal hedge fund out of Nevada.

Massive Tett Error #2: Allowing companies to repatriate profits will lead to more investment and spending. Tett:

So investors would do well to note that cash repatriation is a topic on which Mr Trump has also been articulate — and unusually precise. Notably, under his tax plan American companies would pay a one-off discounted rate of 10 per cent if they “bring their cash home and put it to work in America”. Some of his advisers privately say this rate could be cut further — to, say, 5 per cent — if there was clear evidence of the cash being used to create jobs.

Again, we have the misrepresentation about “cash” being overseas. But corporate claim that they would invest more in the US if they were allowed to book those offshore profits in the US is demonstrably false. Why? The US gave companies a repatriation holiday in 2004, after a bout of the very sort of whinging they are engaging in now. And what did they do? They increased dividends and executive pay.

It’s not that hard to get input from a tax pro to understand what the real issues are. But the Financial Times too often veers between top-notch reporting and analysis to using its brand to promote corporate pet issues. Sadly, Tett, who regularly writes incisive columns, is also too willing to sell out her personal brand to dubious causes like this one.

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  1. craazyboy

    I recall GWB telling us in 2004 that corporations would be required to “invest” the imported Greenbacks in US jobs and infrastructure in order to get the tax break. I guess the IRS or someone was supposed enforce the rule.

    ‘Course GWB also told us there are no Greenbacks in the Social Security Lockbox.

    Finance is complicated. The Lockboxes are half full.

    1. SomeCallMeTim

      If his statement was anything like his other speeches mentioning businesses in the same sentence as some *public benefit* not necessarily profit maximizing, it’s likely “suggested to voluntarily” is a better description than “required to.” He was a complete tool, and one without moving parts.

  2. SteveB

    IMO this repatriation issue of corporate cash for a tax discount is similar to the idea of a “path to citizenship”
    for illegal immigrants…. We’ve done both once…. it not only rewards bad behavior but it ENCOURAGES more of the same behavior….

    Tett’s wrong, Trump’s wrong, Cook is wrong..

    1. oho

      ” it not only rewards bad behavior but it ENCOURAGES more of the same behavior….”

      bit off-topic, but i think that as implied the visceral reaction among many people to just neutron bomb the entire DC/Manhattan establishment is that rank-and-file people are tired off following the rules while the rules are bent/ignored if you’re in a “preferential” cohort—-whether thru deferred prosecution agreements, bailouts or catch/release border control policy.

      please any fellow lefties don’t flame the messenger.

      1. art guerrilla

        oho, i can be even more off-topicer-than-thou:
        what about the w-a-y under-reported (non) story of furriners being granted citizenship of Empire in return for their mercenary services ? ? ?

  3. cnchal

    . . . To the extent that the much-ballyhooed $2 trillion of deferred foreign earnings is classified as permanently reinvested in cash, most of that cash is sitting in U.S. banks, where it is propping up their capital. . . .

    That $2 trillion was beaten out of Chinese slave labor by the likes of Apple and Wal Mart.

    Economists are too clever. They feign stupidity and say we just don’t understand why the economy is so crappy for the little people, and why is there deflation instead of inflation, unless it’s their own paycheck.

    $2 trillion in hoarded cash sits there, not moving, propping up bank capital. Money behind a dam, and when it breaks, that money flows into executives pockets, where it does the least good for the most people.

    1. craazyboy

      It doesn’t sit there. It moves around same as your money does in between the April 15s of every year. Except their tax liability on it is deferred indefinitely, or until their lobbyists can get the “tax holiday”. In the mean time, they are using the money for whatever they want – say a new factory in Mexico, stock buybacks and dividends, mergers and acquisitions, even management bonuses. If you’re a bank, you don’t even need net profit and you can still pay bonuses!!

      It’s like if you reduce your withholding on your paycheck and buy yourself a candy bar for Christmas.* Except you really do need to come up with your tax liability money before April 15, because you can’t defer the liability forevah.

      * This works even if you got paid for making a US product that got exported to Europe and you purchased a Chinese candy bar. All accounting gets converted to Dollars whether you are a meathead domiciled in the US or even a US corporate person.

      1. cnchal

        I am going to defer to the top tax expert, and take him or her at their word, unlike the useless eaters, where evidence comes in every day on how useless or worse than useless they really are.

  4. rusti

    Corporate profits are booked in offshore entities. Tax books are not the same as accounting books or movement of cash.

    I had a bit of a tough time wrapping my head around this as someone with no accounting background. I found an old Matt Taibbi article that explains a few mechanisms, here’s a taste:

    In reality, much of the untaxed income is actually earned in the United States before elaborate accounting schemes siphon it overseas. The racket is simplest for tech and pharmaceutical companies, whose value is tied to intellectual property. According to David Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else, Pfizer provides a prime example. When the company was developing Viagra, it transferred the economic rights to its intellectual property abroad, ultimately to a shell company in Liechtenstein – an infamous European tax haven. On each sale of the drug here, the European subsidiary charged the U.S. parent company a steep royalty – payment of which moved the profit from high-tax America to low- to zero-tax Liechtenstein.

    1. pfitzsimons

      But does the money actually flow, that is into a Liechtenstein bank, or does the European subsidiary just increment its ledger with the assigned profit?

    2. Thor's Hammer

      Interesting parallel with the private equity “business” model. The private equity shell game as played by Romney’s Bain Capital and others is basically a vampire system. The object is to bleed the target company of all its value by loading it up with management fees and debt, and then leave the dry husk to blow in the wind.

      The Apple/Pfizer model of profit shielding is similar in that it’s goal is to use slave labor to produce a product, electronically transfer profits to the most favorable criminalized tax locale, and leave the taxpayers of the US stuck with the bill of supporting the national infrastructure and Empire until they are but dry husks blowing in the wind and all the money is in the hands of the Overlords.

      The Overlords then use the laundered profits to build homes in domestic tax havens like Wyoming. Hint: Who is the richest individual in Wyoming? John Walton’s widow with something like 16 billion in reported assets.

  5. Robert Dudek

    Why not simply tax multinationals as a percentage of their revenue? Corporate taxes would then be paid in the jurisdiction wherein the customers are.

    1. craazyboy

      US Imperialism is expensive, and I don’t want to have to pay for it all by myself. We should get US taxes on foreign sales. Double for international banking – because we now have their biz as a public liability. If this makes “the cost of doing biz too high”, I say yeah!

    2. Teddy

      It isn’t so simple. Different businesses have different profitability – thus revenue tax would be a massive gift to corporations with high profit/revenue ratio (like Uber, where main cost is rebranding racketeering as “sharing economy”) while it could completely crush retailers (where maybe 5% of the price is profit). Moreover, I would argue that it would have negative social consequences because it would give advantage corporations that basically live off bullshit (almost entirety of Silicon Valley etc) while disadvantaging those that actually build and create something.

  6. Synoia

    When the company was developing Viagra, it transferred the economic rights to its intellectual property abroad, ultimately to a shell company in Liechtenstein

    Which is either a “sale” of real property, and such “sales” should be taxable events, or it is a fraudulent transfer.

    1. uahsenaa

      Sales tax may have been paid at point of sale, but that’s not what Taibbi is talking about, which is corporate income tax. There are two legal entities Pfizer US and Pfizer Liech. Shell Company, which, in reality may be controlled by the same people but for tax purposes are separate. The royalty paid by Pfizer US is booked as an expense, so that Pfizer US can make it look like little to no profit was made, since the booked expense, completely made up though it is, wipes out the revenues from sales of the drug, so the profits that would have been booked by Pfizer US if the shell company with the IP didn’t exist are offshored by means of the royalty payment. Pfizer the multinational corporation may have turned a profit but Pfizer the US tax entity appears to have made little to no profit at all, and it’s that entity’s books that are responsible for determining how much is to be paid in corporate income tax.

  7. Clive

    The FT can be truly excellent with few, if any, mainstream rivals.

    But it’s Achilles Heel is far too frequently descending into corporate hagiography. Some CEO interviews they have done are cringeworthy. It goes on to infect the hackery on occasions, such as here.

    1. clincial wasteman

      Yes on both counts! Would you agree Clive — and others of course — that it has gradually been getting worse over several years? Still mercifully free of the lifestyle sermons that infest the Guardian et al, but international/geopolitical coverage in particular is consistently awful. (Gideon Rachman, Philip Stevens, anyone? Contributing Editor Niall Ferguson??!!!) Tett, whose crisis-buildup writing c. 2006 was outstanding, seems since she got the US editor job to spend a lot of time writing ‘anthropological’ weekend supplement columns about her cosy chats at Davos, so the major missed point nailed by Yves here is not quite a surprise.
      As far as mainstream rivals go, no there aren’t many. (And such as there are I only get to see by working as a press cuttings translator — sole means of access to the £3-a-copy FT too): Frankfurter Allgemeine Zeitung is at least still serious, but Le Monde reeks of pompous piety and El Pais is a cheerleader for reaction in Latin America; Le Monde Diplomatique (no relation to the daily) is not bad (and does an English-language edition) but is a monthly magazine; any other Italian-reading heterodox commies out there (huge demographic, right?) might appreciate il manifesto, which is daily but not mainstream by any measure.

  8. inode_buddha

    Hrm. I think we can do away with corporate taxes altogether, and do away with taxing earnings abroad. BUT in exchange for doing so, we will have reciprocal trade agreements, tarriffs and all, ala’ 1912, *and* capital gains will be at the same rate as gambling *and* no more carried interest.

    I truly hope and pray that the next President will float this idea

    1. OpenThePodBayDoorsHAL

      I think Golem nailed it when he wrote that we have to tease apart the two co-dependent partners in this: corporations/banks, and governments.
      “But it’s not illegal” is the universal “defense”. Exactly. But precisely who makes these laws?
      So “governments”, to the extent that they still exist as functioning entities outside of corporation/bank capture, are to blame.
      I say we just go back to the tax levels and rules we had under Eisenhower.

  9. susan the other

    All these tricks, setting up shell corps to magically transform income into expenses; setting up trusts that cannot be taxed until the money is transferred out of the trust; or LLCs or whatever; or maybe sinking it in real estate and then depreciating it – all these tricks are just money laundering. They make money disappear for tax purposes. It sounds like the big banks are the temporary beneficiaries because it makes them look like they have higher capital reserves. It must be impossible to separate this dark money out – how do you know if it is drug money or corporate profits or even stolen money?

  10. susan the other

    Also does anybody else remember last year how Putin announced a new legal mechanism, borrowed from the West, and now legal in Russia too for repatriating oligarchs’ offshored rubles? It was a trust that allowed them to bring money back into Russia but protected it from being appropriated by the government. Amazing that Russia didn’t know about trusts before. So this must have made Russia’s balance of payments/debts look more balanced. Else why do it?

  11. Michael Hudson

    It’s even worse, Yves.
    I’ve written a lot about this before, but here’s the key for anyone who wants to go through the statistical work.
    1. go to the Treasury Bulletin and find “Liabilities to U.S.” of Panama, Liberia, BWI and all the other offshore banking centers.
    2. Get from the Fed (it used to be in their Bulletin) “Liabilities to U.S. banks” for these centers.
    You will see that America is the great beneficiary of “hot money” throughout the world.
    In 1991 had an intern sit all summer in my apartment doing this by hand.
    As I described in “Finance Capitalism and its discontents,” in 1967 the State Dept. asked Chase and other banks to set up centers to attract the world’s criminal capital (away from Switzerland and other non-dollar areas), in order to bolster the US balance of payments during the Vietnam War years.
    The banks acted as good citizens and complied. Now they’re reaping the windfall.

    1. HotFlash

      Whoa, 1967, eh? This is huge. And another piece of the puzzle. BTW, hope your apt had a/c :).

  12. JustAnObserver

    On a slight side note. It’s been sad to watch Gillian Tett’s descent from more-or-less must-read during the 2006/07/08 crash to today’s frequent bursts of corporate boosterism. The ’06 Tett would not, I think, made the amateur-hour blunders that Yves eviscerated above.

    I know correlation is not causation but this does seem to coincide with her move from London to New York. Is there something uniquely and insidiously poisonous in the Wall Street culture that causes even half-way sane people (Yves being a shining exception) to start mentally rotting away as soon as they come into close proximity ? Even more so than the City/CanaryWharf, Frankfurt, Brussels, etc.

    1. JustAnObserver


      My apologies for misplacing the “shining exception” thing. Should have been after “proximity”. :(((.

    2. Yves Smith Post author

      She’s not just moved from London to NY, she was also promoted to be editor in chief (not the exact title, but that’s her role) for the operations here. So she’s now much more an editor than writer. The result with her still wanting to keep her hand in writing is she doesn’t have the time to be the Tett of the runup to the crisis. And she’s now hobnobing regularly with the big dogs, which is corrupting intellectually. It’s actually remarkable that she can write good pieces at all (which she still does pretty often) in her current setup.

  13. templar555510

    I think a large part of the whole ‘ offshore ‘ issue is semantic. The use of terms like ‘ cash piles ‘ or ‘ being repatriated ‘ and constant references to ‘ islands ‘ embeds the notion of sack loads of banknotes being stashed away under palm trees in sunnier climes . And it is very difficult to shed this image of a tax ‘ haven ‘ . The idea that it is all just a matter of accounting and computers seems just too simple; just like the very creation of money in the first place. Try telling your uninterested neighbour that it’s created out of nothing and that the nearest tax haven may be only a few miles from where he or she is standing. That’s the end of a beautiful friendship.

  14. craazyman

    How many ships and planes would it take to bring a $2 trillion cash pile back to the U.S. if they tried to do it all at once? Ummm. Think about that.

    It might cost more to bring the cash back, if you factor in the fuel and other operating expenses, than we could possibly save by having the cash here.

    Why don’t they leave it where it is but spend it on things made here? That way they could send it back with each purchase. It might be cheaper that way, to mail it back each time somebody bought something,

    If there’s a lot of it in Europe from Viagra sales, then that would mean Victoria’s Secrets might get some good business out of this. I’d hope it would be more than that though. A European man should do more than womanize with his cash. He could but some American-made beer, for example. How can they drink that crap over there in the first place. Sometimes they even drink it at room temperature. That’s incredible. They should try an ice cold Budweiser.

    1. OpenThePodBayDoorsHAL

      As templar says, the money’s not “over there”, it’s already right here. Microsoft Ireland just books the revenue, then turns around and buys overnight US paper with it.

  15. Fiver

    I thought they were going to do this as the US economy was coming down mushy off QE2, but they went ahead with Bernanke’s (or somebody’s) decision to take the world head-first into the fullness of his little experiment – with truly perverse results all around the globe to see.

    It’s incredible to me how successful the propaganda was that packaged globalization as something nice, something shared, some ‘community’ of sorts, a ‘we are the world’ thing that masked the epic bonanza for giant corporations and capital to run riot. While sovereign governments everywhere were under constant bombardment from the right, time and time again the people who were supposed to represent the public interest caved in a way I’m sure would appear graphically as confirming the ‘thin edge of the wedge’ theory. I’ve wasted most of my life getting to the point to be able to say that.

    I wonder about the optics of this for Obama, as in, why now if not back then, i.e., why, if they could’ve avoided QE3 by doing this infrastructure deal, but didn’t, then how is it justified now, right in front of the Election? Assuming of course, the Republicans have changed spots, and are hoping to look responsible. Course, what are the chances of that?

    I wondered, in the context of the related piece on huge companies which are nominally domiciled and not paying taxes in Ireland, and how much that distorts Ireland’s GDP, who could possibly say now they can correctly evaluate national economies at all, given how much more of the US economy has come under thrall of fiancialization/securitization which to me also explains the very low productivity numbers.

  16. Ian

    Yves- the same way you exposed the shortcomings and fraud in the private equity/pension fund area, you could bring heat to bear on the offshore tax haven industry.
    At one point around 5-6 years ago I read that the amount of money held in Cayman Island banks by US companies had grown from 10 trillion to 18 trillion dollars. Grand Cayman would be a good place to start.

    1. sd

      Question – would happen if there was political unrest in a tax haven? How would that impact companies registered in tax havens? Does anyone know?

      1. Thor's Hammer

        Political unrest in a tax haven? That’s what the Imperial Armies are for!

        A brief history of Panama:

        Manuel Noriega demands a larger cut of the profits from drug laundering being run by the Colombian cartels in cooperation with the CIA and used to fund Contras and death squads in Nicaragua, El Salvador, and Guatemala.

        The Marines invade Panama, bomb residential areas of Panama City, kill a few thousand people, capture Noriega and haul him back to a maximum security prison in the USA. No more “political” unrest!

        Twenty years later the Panama City skyline is transformed with hundreds of skyscrapers, built on the backs of a business model that welcomes stolen and tax sheltered corporate and private money alongside drug money and the fortunes of the Overlords who seek the layers of invisibility they once enjoyed in Switzerland.

  17. Anders F

    What do the banks do with most of $2 trillion as cash? Do they put it to work in America? They can’t use it all for dividends and executive pay, can they?

    1. Yves Smith Post author

      Did you not read the post? It’s not cash.

      Moreover, and I didn’t get into that in the post, but they exaggerate how much they have in tax profits parked offshore. They calculate the difference at the highest applicable rate in the US when they’d never pay that. So this is phoney baloney on every level.

      1. Anders F

        I used the word cash because the post said “most of that cash is sitting in U.S. banks”. I assumed it meant customer inserts and that’s what I meant. I have no financial training, is that wrong too? It still does happen that banks do give loans for production development, doesn’t it?

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