A recent article in the NY Times caught our attention because it describes how many of the S&P 500 companies are drastically reducing their US taxes. Columnist David Leonhardt also discusses this issue in the Economix blog.  The story relates to the low overall rate of taxation of many of the largest US companies as disclosed in their most recent financial statements.  A study done for the NY Times by Capital IQ, a research firm, indicated that thirty-nine of those companies paid a rate less than 10 percent.  How do those companies pay such a low overall rate when the corporate tax rate here in the US is 35%?  In our experience in representing many of the world’s largest companies, the answer has several parts: 1) good tax planning and using all available credits/deductions/depreciation the law allows, 2) moving intellectual property and business activities to low tax countries, 3) taking aggressive tax positions on the corporate tax return.  Notice we didn’t say “loopholes.”  That’s another topic for another day, but in short the term “loophole” is often used for both legitimate tax reduction strategies and for improper tax avoidance or evasion techniques.  There is a big difference.

Companies arguably should exploit every legal means to reduce their overall tax rate.  If for example Congress passes a law which says businesses can write off a new solar power system over a shorter period than the solar power system will actually last them, that’s fine, every company should take advantage of that law if it applies to them.  However, if the company decides to deduct it all at once by either ignoring the law or relying on an overly technical interpretation of the law, they are improperly avoiding taxes.  Many companies gamble by taking that kind of unsupported or weak position on their corporate tax return and hope they don’t get caught before the statute of limitations expires.   

When a company takes such an aggressive position of their tax return that the securities regulators don’t allow them to recognize the tax savings on their books, the accounting rules require them to establish a “tax reserve” for this position (called an uncertain tax position).  As shown in the “Ferraro 500” list, a reordering of The Fortune 500 by tax reserves compiled by The Ferraro Law Firm, there is approximately $200 billion of uncertain tax positions for those companies alone, and those reserves will get released when the statute of limitations expires assuming they don’t get caught first.  These aggressive tax positions will remain undisclosed under the final uncertain tax position regulations. We think that whistleblowers who come forward now with information regarding these kinds of significant tax underpayments are more likely to receive awards than those who wait because awards are given to the informant who first provides the information to the IRS.

Lynam Knott