Corporations Use $20 Billion Legal Tax Loophole

TIGTA Inspector General J. Russell George was unavailable for comment.

"The IRS doesn't have the resources to adequately examine even corporate returns they have identified as having problems," said Martin Lobel, a tax attorney and Chairman of Tax Analysts, which publishes Tax Notes.

"Given the resources the IRS has, policing transfer pricing is like policing the New Jersey Turnpike on a bicycle," said Lobel.

Yet not all of the corporations examined by the GAO paid little or no tax due to the use of transfer pricing. A large number of corporations pay no taxes because they are what's known as "shell" corporations, or companies established as legal entities but do little if any actual business.

Without a significant business operation these entities might have zero tax liability yet are still counted among the 66 percent of corporations that pay no taxes, as the report stipulates.

According to Sullivan, many corporations avoid paying taxes because they are simply not profitable. Airline and automotive industries, for example, have struggled significantly during the eight-year span the GAO studied. Large corporations like General Motors, Ford, and Chrysler have millions in assets, yet their federal income tax liability would be zero if they did not turn profits in a given year.

"There can be perfectly legitimate reasons why corporations aren't paying taxes," adds Brostek. "There can also be less legitimate ones. We're unable, from the work that we did, to actually comment on those."

Still, the fact that corporations with millions in assets -- whose CEOs earn tens of millions in annual salaries -- pays nothing in federal income tax does not sit well with some. "It's not fair," said Lobel, calling the dichotomy "outrageous."

"The competetive market has not held down CEO salaries while it's held down employee salaries," he said. Not only is it unfair to taxpayers, he added, "it's unfair to the shareholders, too."

And while two-thirds of corporations are not paying taxes, profitable corporations, Sullivan argued, fall into the one-third of corporations that do pay.

"This report isn't saying that Exxon/Mobil or any Fortune 500 company isn't paying tax. You can't infer that," said Sullivan.

That does not mean, however, that these corporations who are paying contribute their fair share. Corporations should pay tax on 36 percent of their profits, but Lobel believes the effective rate holds near nine percent because of tax subsidies and transfer pricing abuse. "[Thirty-six] is the rate in the code, but nobody pays it. If they do, they've got to fire their accountants," he said.

Michelle Dubert is a freelance writer based in New York. Her work has appeared on, and in New York magazine.

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