Loyola University Chicago School of Law, JD 2022
Shortly after Bristol Myers Squibb filed to create an offshore subsidiary in Ireland, the IRS took notice. The large drug manufacturer’s actions would now allow them to attribute some of its patent rights and medications to the subsidiary, and therefore subject to a twelve and a half percent Irish corporate tax rate, which is far less than the current twenty one percent rate in the United States. Additionally, while Bristol Myers had maximized the write offs and deductions for their products in the United States, the Irish deductions would now offset the U.S. taxes.
As a result of using the Irish tax haven, the IRS is accusing Bristol Myers of owing nearly $1.4 billion. The dispute was made public after the IRS’s analysis of the situation was released with redacted information able to be made visible.
However, Bristol Myers is just one contributor to the estimated $245 billion that multinational corporations have been sheltering from U.S. tax collectors. In coordination with the President’s American Jobs Plan, which is estimated to cost $2 trillion, the Biden administration has formulated The Made in America Tax Plan, an effort which includes several tax raising proposals to pay for their ambitious agenda. These reforms would raise taxes on some of the largest corporationsand attempt to reduce similar practices as Bristol Myers.
Use and growth of tax havens
While there is not one single definition, tax havens are generally a country with a low or no corporate tax and allows businesses to easily attribute their income there. A corporation will then use that nation’s loose corporate laws to form a shell company – an organization that effectively exists only on paper with no other purposes. Like Bristol Myers, the original corporation then sells a patent to the shell company and agrees pay a license fee for the product. The profits would then be subject to the tax haven’s tax code.
Judge Learned Hand famously wrote in one judicial opinion that “[a]ny one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury.” However, a study by the Joint Committee on Taxation found that ninety one Fortune 500 companies paid $0 in federal corporate taxes in 2018 as a result of incentives created by the 2017 tax law. Surely, there must be a balance between arranging a business to lessen the tax liability and the world’s wealthiest contributing their fair share in taxes.
Raising the corporate tax
In 2019, the corporate income tax raised an estimated $230.2 billion or 6.6 percent of the total federal revenue. This percentage has steadily declined in recent years. One proposal by the Biden administration is to raise the corporate tax rate to twenty-eight percent, up from its current twenty one percent. While still less than the pre-2017 35 percent tax rate, the change would push the U.S. once again towards the top rate for any nation.
Needing global cooperation
Ultimately, any major reform in this field will require a more cohesive corporate tax rate across the G-20, less developed nations, and current tax havens. Raising the corporate tax rate alone would likely lead to more corporations opting to use more tax havens in a similar way as Bristol Myers.
To solve this issue, the Biden administration will begin negotiating for the establishment of a global corporate tax making fewer incentives to move profits oversees. The administration’s plan includes imposing a twenty one percent minimum tax, up from ten and a half percent, on U.S. companies’ foreign income. To further lessen the number of corporations utilizing tax havens, the Biden administration has also proposed denying some tax deductions for companies which move their profits offshore and to any tax haven which does not comply with the global minimum tax.
With a greater focus on where corporations conduct their business rather than the location of their headquarters, this new approach would affect industries differently. For example, U.S. technology companies operating in Europe would pay more in taxes to these nations. By announcing the U.S. position to establish a global corporate tax, Treasury Secretary Janet Yellen said that “the tax plan incentivizes the whole world to give up the game.”