How big is the aggressive avoidance?

By Gonzalo Jalles, CEO, Cayman Finance

We get bombarded everyday with examples of companies that are legally avoiding taxes and may have abused the system.  We get brainwashed with the politically convenient fantasy there is money sitting somewhere that can be used by countries like the US to resolve their fiscal challenges without imposing additional cost on their citizens.  We hear more and more statements such as, “in trying to avoid double taxation we have created a system of double non-taxation”.  Have we?

Abuse will always happen; it is human nature.  Rules should be clarified and simplified to prevent abuses.  Those that violate the rules should be prosecuted to the full extent of the law, but really how big is the problem?

A recent study published by the Tax Foundation sheds light into how misleading the headlines are.

In 2010, US corporations made $470 billion abroad, and they paid to other governments $128 billion or 27.2%, so most corporations are not using foreign subsidiaries to achieve double non-taxation.

Not only that, but the 27.2% of 2010 compares with an average between 1992 and 2010 of 26.4% and a low of 24.9% in 1999.  So the statistics don’t just support the misconception of rampant abuse, but they tell us the apparent problem is not growing.

The other misconception is places like the Cayman Islands are used by these corporations to avoid paying taxes; after all, Cayman ranks 11th by the total profit declared by these companies in 2010, and we all can see there are no US corporations that could have generated $12 billion dollars in taxable income in 2010.

But wait a second, what does that mean?  It means Cayman is a holding company for subsidiaries in other countries where the multinationals do pay taxes.  Cayman facilitates the allocation of capital between these subsidiaries.

In fact, of the over $12 billion in taxable income declared in Cayman, US multinationals paid abroad $4 billion in taxes — a whopping 33% vs. 35% federal tax in the US.

What this demonstrates is there is no indication US multinationals are using Cayman to achieve double non-taxation; the facts simply do not support what we are being sold.