Big firms that avoid taxes are moochers, small companies say

  @Jose_Pagliery October 3, 2012: 9:31 AM ET
spencer organ

To small companies like Spencer Organ, big firms that offshore profits to reduce their tax bill are shirking from corporate responsibilities.

NEW YORK (CNNMoney)

When big companies offshore profits to dodge taxes, small business owners say they are left footing the bill -- and they're not happy about it.

A U.S. Senate panel recently reviewed how Microsoft and Hewlett-Packard shaved billions off their taxes in recent years by moving profits offshore.

Microsoft (MSFT, Fortune 500) avoided paying nearly $7 billion by transferring almost half of its U.S. revenue to a subsidiary in Puerto Rico and moving patents to foreign subsidiaries.

Hewlett-Packard (HPQ, Fortune 500) also dodged taxes -- although the report didn't indicate how much -- by creating subsidiaries abroad and making loans to itself.

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Small business owners say they can't offshore profits and take advantage of these opportunities. The strategies require a worldwide presence and are either too complex or too costly.

But those business owners say that's not the only issue. They're bothered by the effect of depleting the government's revenue stream, which creates pressure to cut government spending that the nation's 27 million businesses rely on.

"This tax money goes to support the infrastructure that allows our businesses to be successful," said Joseph Rotella, owner of Spencer Organ, an instrument repair company in Waltham, Massachusetts.

In 2010, Spencer Organ paid $47,000 in taxes while Microsoft gave $4.4 billion. Still, they paid nearly the same effective federal tax rate of 25%.

"These big companies avoid paying their fair share," Rotella said, noting that highly profitable firms rarely pay the actual top federal rate of 35%.

U.S. powerhouses are defending their offshoring of profits by claiming the U.S. corporate tax rate is too high. Currently, a corporation is taxed abroad at the foreign country's rate, and if the United States tax rate is higher, profits heading back to the United States are taxed the difference.

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To hotel owner Sue Edgington, whose Adventure Inn is located deep in the woods of northeast Minnesota, the issue of paying taxes is one of patriotism. Like most small business owners, she's fiscally conservative and doesn't gladly fork over more in taxes. However, she said that when companies avoiding paying them, it threatens funding to public colleges like the one she attended -- and protection of wildlife like the kind that draws tourists her way.

"It angers me," she said. "It's morally wrong. That money is being pulled out of our economy. There's a moral obligation to keep it here, because they live in this country and have been able to take advantage of that."

Her frustration could be directed at several of the nation's top companies. Recent financial data reviewed by the Senate panel showed how tech companies Apple (AAPL, Fortune 500), Cisco (CSCO, Fortune 500) and Dell (DELL, Fortune 500), as well as others like American staples Johnson & Johnson (JNJ, Fortune 500), Coca-Cola (CCE, Fortune 500) and Wal-Mart (WMT, Fortune 500) all keep anywhere from 67% to 100% of their cash as "foreign cash."

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One small business group, the American Sustainable Business Council, is pushing for the passage of the Stop Tax Haven Abuse Act. The bill seeks to restrict the corporate use of havens like Bermuda and the Cayman Islands. The legislation has a long road ahead, though, as it has died in Congress several times in recent years.

Scott Klinger, tax policy director for the group's partner, Business for Shared Prosperity, said the bill would help the United States raise $1 trillion over a decade.

"When multinationals use accounting acrobatics, they not only shift the tax burden to small businesses. They also create pressure to cut spending on community development and education spending. If those workers lose their jobs to budget cuts, then Main Street loses its customers," Klinger said.

Correction: An earlier version of this story stated the Stop Tax Haven Abuse Act seeks to raise $10 trillion over a decade. The figure is $1 trillion. To top of page



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