Tax Avoidance & Evasion: Are Taxes Only For The Little People?

Like the Queen of Mean notoriously said, “only the little people pay taxes,” and although she was convicted and sentenced on numerous counts of tax evasion, Leona Helmsley had a point.

It seems that big corporations, or anyone worth more than a few peanuts, is trying to minimize the amount of taxes they pay on their wealth. Let’s take a look at the largest scam ever and the way corporate America avoids billions of dollars in taxes every year.

So, how exactly does the corporate world get around the taxman? There are many clever tricks the filthy rich use to remain rich and get even richer – let’s take a look at a few.

First on the list are tax havens. This loophole is based on a very simple idea. If taxes are high in one geographic region, then you can either move your company somewhere else (where the tax payable is lower), or simply register it elsewhere. This workaround has been a significant asset to corporations, and for some time now relocating has been a quite standard way to reduce or completely avoid paying taxes. After all, this process is not that big of a disadvantage, since after everything is up and running, residents can usually return back to their home country.

This is a big part of why tax evasion through these offshore havens occurs on a massive scale. A recent study has discovered that about a total of $20 trillion is currently hidden in offshore tax havens. If you’re curious, the most popular offshore destination is in the infamous Cayman Islands – one of the few territories with more registered organizations than people.

Shell companies are also used quite widely in tax evasion practices. These ‘shell’ companies have no substance, and only exist on paper. The shell company has a totally legal existence, but in reality the company doesn’t provide any actual services or sell any goods. By using these shells, large corporations (or any entities, really) are able to funnel all of their money through these companies – effectively avoiding the unpleasant tax brackets. You’re probably asking yourself – how can this actually work? Well, since most corporations use shell companies to buy and sell in foreign governments – they do not need to report these international operations domestically. The idea behind this sketchy practice is pretty clever, really.

Similar to the shell company method of tax evasion, shell trust funds are also quite popular. This scheme involves wealthy entities paying into a trust fund, which accepts their money as “donations”.

The next step in this scheme is my personal favorite. This same trust fund then offers its members very cheap loans (often times interest free). The borrowers then surely and consistently ‘forget’ to pay the sum back – effectively dressing up their salaries as low interest loans. Doing this allows members to write off most of their income tax, as they receive tax credits for their ‘donations’.

Unethical? Maybe. Effective? Absolutely.

The three methods of tax evasion discussed above are the most popular ways of dodging the metaphorical tax bullet. Some lesser known, but shadier methods are also used by greedy billionaire entities.

Equity swaps are a great example of the classic ‘scratch my back and I’ll scratch yours’ scenario. This scheme works when two wolfish corporations come to an agreement to help one another reduce their tax payable. This is done by exchanging the gain and loss of a set of assets without actually transferring the ownership. Everybody wins! Well, everyone besides the IRS…

Goes to show – the more money you have the more you want. Moral values go right out of the window the second there is an opportunity to stuff more money into your (already) tight pockets. That being said, you’ve got to commend the creativity some companies and corporations display while squeezing through these tight loopholes.

An example of such creativity is the way some corporations avoid paying their capital gains tax.

Before going off on this rather sneaky method of tax evasion, let’s first review what capital gains tax actually is. This tax kicks in each and every time there are capital gains (didn’t see this coming, huh?). Capital gains, as a term, refers to the profit realized on the sale of any non-inventory asset that was purchased at a cost lower than what you’ve sold it for. Property, stocks, bonds and all sorts of precious metals are popular commodities on which capital gains are often realized. So, if you’re lucky enough to profit on the sale of your assets, you’re legally subject to this tax. Obviously, anywhere there is tax to be paid there are also greedy, rich people, very interested in avoiding it.

Although, the loopholes surrounding capitals gains tax are getting patched up rather quickly, there are still ways of getting around paying this tax. Using shares as an example of a non-inventory asset, let’s take a look at how one might get around their legal obligation to pay the tax.

One cunning way involves borrowing some money from an investment bank – using the aforementioned shares as collateral after purchasing options (at a fixed rate). What you do next is simply not pay the loan back, and the investment bank will be forced to cash your collateral. This allows the borrower to avoid being caught in the capitals gains tax net, while still having access to all of the cash – pretty ingenious if you ask me.

The above is evidence enough that the big guys don’t usually have any intention of paying their full dues. If there is a way to cut on tax, you can bet your bottom dollar that the corporate world will do their best to do just that. After all, the rich have to find new ways of getting richer.

Now that we know what actually goes on behind the closed doors of corporate America, let’s ask another question. Who are the biggest offenders in these tax schemes?

Well, every industry has its perpetrators, and we see giants from tech (like Microsoft), pharmacies, investment banks (looking at you Goldman Sachs), retailers, fast-food chains, and even heavy machinery companies. Literally, almost all billion dollar corporations do their best to keep as much of their ‘hard earned’ money tax-free. Officially, the corporate tax rate in the United States is around the 35% mark, however, many corporations pay only small fraction of that. Some are even sneaky enough to get a hefty refund from the federal government – more on that later.

Let’s take a look at a few companies that take advantage of sneaky accounting, and shady (yet effective) tax practices.

The well-known General Electric (GE) has pulled in more than $80 billion in profit over the last decade. According to the average of 35% corporate tax rate, GE should have paid about $28 of those $80 billion back to the government. In reality GE only paid an average of 2.3% back in taxes over the decade, or a total of approximately $1.85 billion. Still a substantial sum, but peanuts compared to the corporate standard.

Verizon has done even better. According to a number of studies, the telecommunications giant hasn’t paid a pretty penny of tax in the last 3 years. To make this fact even better, Verizon does not only avoid being taxed, but the company also receives billions of dollars back in the form of tax subsidies. When confronted, Verizon obviously denied any tax evasion allegations.

The popular online marketplace – Amazon, also has some great tax sheltering tactics (all legal, of course). Although, Amazon didn’t reduce their taxable income by quite as much as some of the other companies listed here, the online store definitely deserves a shout-out. America’s most beloved retailer only pays back about 4.3% out of 35% corporate standard tax, while completely complying with the law.

The household names listed above are only a small fraction of the thousands of companies that practice the same shady tax principles. While the average American shells out thousands of dollars each year in taxes, legal loopholes often allow million (and billion) dollar companies to pay nothing at all.