Tax avoidance in the US

Gabriel Zucman examines the evolution of taxes paid by US multinationals on their foreign profits since 1966 and comes up with two conclusions,

First, taxes paid to oil-producing States have been contained, allowing U.S. petroleum firms to earn high after-tax rates of returns... U.S. multinationals pay much lower tax rates to oil-producing states today than in the 1970s: while this rate averaged 70% from 1966 to 1990, it has averaged 45% since 1991. The foreign tax rates of U.S. oil multinationals fell significantly after the first Gulf War... Although it is not possible to know for sure what caused this decline, a possible interpretation of the fall in the taxes collected by oil-producing countries—and more broadly, of the favorable sharing of oil rents that U.S. multinationals have enjoyed in the long run—is that they reflect a return on military protection granted by the United States to oil-producing States...

Second, the effective foreign tax rate of U.S. multinationals in sectors other than oil has collapsed since the mid-1990s. While part of this decline is due to the fall of corporate tax rates abroad, by our estimates almost half of it owes to the rise of profit shifting to tax havens. In 2015, about half of the foreign profits of non-oil U.S. multinationals are made in non-haven countries where they face effective tax rates of 27%, and about half are booked in tax havens where they face effective rates of 7%. Following the Tax Cuts and Jobs Act of 2017, these profits are only liable for a small amount of residual tax in the United States—and hence profit shifting has proved to be an effective way for U.S. firms to cut their taxes and boost the after-tax returns on their foreign operations... 

Virtually all of the cross-border return differential enjoyed by the United States comes from the yield differential on direct investments, and in particular from the high post-tax yield on U.S. direct investments (DI) abroad. Here we show that about half of the DI yield differential can be explained by the favorable sharing of oil rents and the fact that U.S. non-oil multinationals have successfully avoided paying part of their foreign taxes.

The tax havens include Ireland, Luxembourg, Netherlands, Switzerland, Singapore, Bermuda, and Caribbean havens. Oil sector includes oil and gas extraction, petroleum and coal products, and wholesale petroleum.

In recent years almost half of the foreign profits of US MNCs has been booked in tax haven affiliates, with 18% in Ireland alone.

Reflecting the sudden shift post-1990, the tax rates paid by US oil MNCs to foreign governments declined sharply from over 70% to about 45%. There are perhaps multiple reasons for the decline.

On the non-oil side, the foreign tax rate (foreign corporate income tax payment divided by pre-tax profits net of interest payments and capital depreciation) paid by US MNCs declined from 32% in 2000 to about 17% in 2015. This makes the effective tax rates in non-havens almost 20 percentage points higher in 2015. As to the reasons, Zucman and Wright decompose the 15 percentage points fall to relocating of capital and labour to low-tax places (1 point), fall in foreign statutory tax rates (8 points), and the rise of profit shifting to tax havens (6 points).

Haven non-oil affiliates, with just 10-15% of the wages and tangible capital, make up almost half of all pre-tax profits, which also corresponds to a capital share of net corporate output of 75-90%! In contrast, non-haven non-oil affiliates which employ the bulk of US MNCs tangible capital and workforce, pre-tax profits to wage ratios are less than 35%, which corresponds to a capital share of net output below 25%.

These haven affiliates have pre-tax profits-to-wages ratio of 300-800%