WASHINGTON — Ireland and Singapore have no natural resources that make them obvious places to manufacture the concentrate used in soda, nor have they developed innovative new soda-making techniques. Yet they have nonetheless become global capitals for making soft-drink concentrate.
In Singapore, Coca-Cola recently opened a plant with the capacity to produce the underlying ingredient for 18 billion cans of soda a year. In Cork, Ireland, PepsiCo has located its “worldwide concentrate headquarters,” which until 2007 had been in New York. More than half of all PepsiCo soda sold worldwide starts, as concentrate, in Ireland.
What Ireland and Singapore share is a low corporate tax rate. And because soda is such a simple product, with so much of its financial value stemming from the concentrate, Coke and Pepsi can reduce their overall tax rates by manufacturing it in low-tax countries.
Partly as a result, the industry paid a combined corporate income-tax rate — spanning federal, state, local and foreign taxes — of only 19.2 percent over the past six years, according to an analysis for The New York Times by the financial research group S&P Capital IQ. The average rate for the companies in the Standard & Poor’s 500 index was 29.1 percent.
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The soda industry’s success at legally avoiding taxes shows why so many economists and tax experts believe the U.S. corporate-tax code is terribly flawed. It includes a notoriously high statutory rate that causes companies to devote resources to avoiding taxes. It has so many loopholes, however, that the effective corporate tax rate in the U.S. is slightly lower than the average for rich countries.
The decline in corporate-tax collection in recent decades has contributed to budget deficits. It has also aggravated income inequality: A company’s shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who tend to be much more affluent than the average American, see their wealth increase.
“It’s clearly a broken system,” said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.
Corporate taxes were highlighted last week with the release of a Senate committee report on Apple’s tactics to reduce its tax payments. More quietly, but perhaps more significantly, the House Ways and Means Committee has begun work on a potential overhaul of the tax code.
The effort has a long way to go, but if it succeeds, liberal and conservative tax experts hope it will reduce the statutory rate while eliminating tax breaks. The net effect could be to close the gap between companies that pay relatively little in taxes and those that pay much more. The market, rather than the tax code, would then play a bigger role in determining companies’ success and failure.
Low-tax firms: Boeing, Amazon
Low-tax companies are often large, global companies with the ability to use accounting maneuvers to shift earnings around the world. Having intangible assets (such as a computer algorithm) or portable ones (such as soda concentrate and pharmaceutical ingredients) can also help.
Carnival, the cruise-ship company, paid a minuscule 0.6 percent of its earnings in taxes in the past five years, according to Capital IQ. Starwood Hotels and Resorts, which owns the St. Regis, Sheraton and W chains, paid 8 percent.
Amazon.com paid 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, Eli Lilly and Raytheon, 19 percent; and FedEx, 23 percent.
Individual executives also matter. The most creative can “play a significant role” in reducing taxes, according to a published study by accounting professors Scott Dyreng, Edward Maydew and Hanlon. They built a database of 908 top executives who switched companies and identified some who were successful at holding down taxes wherever they went.
The professors did not name names. But a few executives — such as John Samuels, head of the General Electric tax department — are famously shrewd.
Some companies with low tax rates, including Coca-Cola, have recently started a lobbying group, the LIFT America Coalition. Their main goal is to protect their advantages, if not bring down their taxes further. Other companies, such as General Electric, are also major donors to Rep. Dave Camp, R-Mich., chairman of the Ways and Means Committee, and to Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee.
On the other end of the corporate-tax spectrum are smaller companies and those whose businesses tend to be tied down and less easily moved than Coca-Cola syrup or technological know-how. The retailers Best Buy, CVS, Gap and Whole Foods each paid a combined rate of between 35 percent and 40 percent in the past five years. Wal-Mart paid 31 percent. Oil companies also pay relatively high rates, with Exxon Mobil at 37 percent.
Searching for fairness
To many economists, a fairer system would not lavish billions of dollars of tax breaks on only some industries for reasons that are almost accidental. “No one likes the current system,” said Donald Marron, a former official in the George W. Bush administration who is now at the Tax Policy Center in Washington, D.C.
Why, for example, should the government tax a retailer that sells soda at a much higher rate than a company that makes soda? Public-health experts note that the soft-drink industry is an especially odd candidate for taxpayer generosity, given its central role in increasing obesity and health costs.
Edward Kleinbard, a tax expert and former Democratic congressional aide, says the only kind of overhaul that can get through Congress is one that reduces the headline corporate tax rate, from its current 35 percent to between 25 and 28 percent. In exchange, Congress most likely would force companies to pay more taxes on their overseas profits.
Business lobbyists such as the LIFT coalition are pushing for the opposite: lower overseas taxes. They say the federal government puts U.S. companies at a disadvantage by trying (if often failing) to tax their overseas operations on top of the taxes that foreign governments collect. Instead, many companies want a territorial system, in which only the local government imposes a tax.
The weakness in such a system is that some countries allow companies to operate almost tax-free. And in a globalized economy, many companies have figured out how to put much of their operations in those countries. Thus Ireland has become the world’s cola maker.
One compromise being discussed in Congress is a version of the territorial system — but with a minimum tax for any overseas operations. If companies were not paying at least that minimum to a foreign government, they would have to pay the difference in the U.S.
So many companies are paying such low tax rates that even a modest minimum tax may result in a tax increase. Doubtless, though, the companies and their lobbyists will do the work to figure out how any proposed overhaul will affect them. If Congress is really going to reverse the long slide in corporate-tax collection, it will have to make enemies along the way.