Lawmakers push for public disclosure of where companies book profits

WASHINGTON – Sen. Al Franken of Minnesota is among a group of senators who want U.S. multinational corporations to publicly name the countries where they book profits.

In a recent letter to the secretary of the Treasury, Franken and several colleagues called for country-by-country disclosure of foreign profits as a way to head off accounting maneuvers many corporations use to redirect revenue from countries where they are earned to tax havens.

"Multinational companies tend to make these bogus transactions where they want to book as much profit in the low-tax countries and have as little profit in the high-tax countries," Franken said. "It's eroding the tax base of the developed world."

Minnesota multinationals were generally nonresponsive to Star Tribune requests for comment on the transparency measure. Medtronic, St. Jude Medical and 3M declined to comment, while an Ecolab spokesman said the company "complies with all tax regulations and pays taxes in the countries where the income is earned."

"We would prefer to see effort toward comprehensive corporate tax reform to create a system which eliminates the need for companies to keep money offshore to remain competitive," spokesman Roman Blahoski added.

Profit-shifting strategies are often blamed on the United States' 35 percent corporate tax rate, which is among the world's highest. Financial experts say that American companies now hold roughly $1 trillion in cash in foreign profits indefinitely deferred from U.S. taxes. Securities and Exchange Commission (SEC) filings show that Minnesota multinationals account for billions of dollars of that amount.

Experts on "stateless income," such as former congressional tax adviser Edward Kleinbard, say that many of these foreign profits were not earned in the countries where the profits were booked. For instance, profits from nontangible assets such as intellectual property tend to get booked where tax rates are lowest.

Franken pointed to reports showing that in 2010 U.S. companies booked profits in Bermuda that totaled more than 15 times that country's gross domestic product.

There are limits on how foreign profits can be spent in America without paying some U.S. taxes to bring them home. Lowering the U.S. corporate tax rate while closing loopholes is considered a fundamental part of comprehensive tax reform now under discussion in Washington. The Obama administration's most recent budget proposal also includes a 19 percent "repatriation" tax on foreign profits returned to the U.S.

But tax avoidance remains a costly crisis to the U.S. and much of the developed world. Globally, researchers estimate that profit-shifting costs countries $280 billion per year.

The amount continues to grow. U.S. tax revenue lost to profit shifting skyrocketed from less than $20 billion in 2001 to $111 billion in 2012, according to data compiled by Reed College economics professor Kimberly Clausing. The number remains on the rise, Clausing said in an article in the publication Tax Notes.

In response, the Organization for Economic Cooperation and Development (OECD) and the G-20, which include most of the world's biggest economies, launched a project aimed at stopping tax base erosion caused by profit shifting. The global effort culminated in October 2015 with a worldwide, voluntary plan meant to recapture revenue lost to accounting tricks. Country-by-country disclosure of profits is one part of the strategy.

The Treasury Department proposed rules last December that would require U.S. multinationals to tell the government how much profit they book in individual countries, as well as the amount of taxes they pay and the number of people they employ.

The Treasury proposal would not make the public privy to country-by-country foreign profits, Franken told the Star Tribune.

So he, along with fellow Democratic Sens. Sheldon Whitehouse of Rhode Island, Edward Markey of Massachusetts and Bernie Sanders of Vermont, called for releasing it.

"While appropriate measures should be implemented to avoid the disclosure of certain sensitive business information, in general, there is little reason that a company should not be able to publicly disclose information such as profits, number of employees, and taxes paid in various countries," they wrote to Treasury Secretary Jacob Lew and IRS Commissioner John Koskinen.

"In Europe, banks have already been required to provide similar data, and in the United States, public companies already provide some disclosures of regional information in their securities filings."

Exposing profit shifting to public scrutiny would have a deterrent effect on sketchy accounting practices, said Harvard Law School professor Stephen Shay. If companies know their foreign profits are going to be detailed by amount per country, they will "without doubt be more careful," said Shay, a specialist in corporate tax dodges.

He predicted that public access to country-by-country profits for multinationals was "inevitable," given the revenue hit that many countries, especially the United States, are taking.

The SEC currently has the power to order publicly traded companies to supply foreign profit details in their periodic public filings, Shay said.

How long that might take is anybody's guess.

Kleinbard, now a law professor at the University of Southern California, thinks it could take years. Despite the SEC's regulatory power, Kleinbard also believes it might take a new law. But Kleinbard said the erosion of countries' tax bases by profit shifting is a serious problem that must be addressed.

Franken says the disclosure initiative is "more than just a public relations thing."

"If your company has a mailbox in Bermuda and for some reason the Bermuda company owns all this intellectual property and is selling it to your companies in the U.S., there may be some real legal implications and some implications for [tax revenue] coming to this country," the senator said.

Jim Spencer • 202-383-6123