The corporate tax rate in the United States stands at 21%. Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, the corporate tax rate in the U.S. was one of the highest in the world, at 35%. Starting January 1, 2018, the U.S. corporate tax rate was changed to a flat 21%. This represented a 40% decrease in the statutory federal corporate income tax rate. The TCJA eliminated the graduated corporate tax schedule and brought the U.S. rate below the average for most other Organisation for Economic Co-operation and Development countries. According to KPMG, the country with the highest tax rate is the United Arab Emirates (UAE), with a 2019 tax rate of up to 55%. Other countries that have a high corporate tax rate are Brazil (34%), Venezuela (34%), France (31%), and Japan (30.62%).
Dig a little deeper though, and many U.S. corporations pay far less than this stated rate. Although the TCJA lowered the corporate tax rate, one of its intended goals was to eliminate tax loopholes and workarounds for large companies.
However, according to a 2019 study of 379 Fortune 500 companies by the Institute on Taxation & Economic Policy (ITEP), the biggest companies in the U.S. actually enjoy an average effective tax rate of 11.3%. When examining the government's deficit spending, this low rate is one of the reasons that the deficit spending increased from $666 billion in 2017 to $779 billion in 2018 to $984 billion in 2019. Although the new law did eliminate some old tax breaks and loopholes, it introduced many new ones.
Corporate Tax Loopholes in the U.S.
Clearly, corporations have become extremely savvy at finding ways to pay less in taxes. Accelerated depreciation is one of the most significant business breaks in the U.S. tax code. Accelerated depreciation refers to the ability to write off the cost of investments in equipment more quickly than the equipment wears out. In fact, the TCJA made "full expensing" legal. With full expensing, corporations can write off the entire cost of an investment in the year it is made.
Tax deductions are also key and stem, from options to overseas operations. There are significant tax incentives for American-based corporations to shifting profits and jobs overseas, and many companies have found ways to officially incorporate outside of the U.S. and pay lower corporate tax rates in their new home countries, even though a significant portion of their operations may still reside inside the U.S. including a zero percent tax rate on many profits generated offshore.
Companies has also found ways to use stock options to reduce their taxes. Many times, companies use stock options as part of compensation packages for top employees. Employee stock options are contracts allowing the employee to purchase shares of the company’s stock at a set price (the strike price), often below the market price for a fixed period, often 10 years.
Holding cash earned from international business units is another common strategy. Repatriating it to the U.S. would mean having to pay taxes on it. A study from Greenlining Institute estimated that the leading tech firms held some $430 billion outside of the U.S. This represents billions of dollars in taxes that are being avoided. It cited overseas subsidiaries as a key way for large tech firms to avoid building up sales and profits, and subsequent domestic tax bills.
Of the largest tech firms, Greenlining estimated that Apple paid a corporate tax rate of less than 10% in 2011. Google wasn't far off, at below 12% (as was Yahoo). Xerox paid just over 7% and Amazon paid only 3.5%, according to the study. Overseas revenue plays a big part in lowering the tax rate for many of these firms.
Other corporate tax breaks exist by industry. Certain types of banking and insurance income is free from taxes if it stems from overseas. Allowable write-offs and depreciation expenses can also loom large. Interest from debt is also deductible. In its basic form, the boosting of expenses to offset revenues will lower the tax rates that corporations pay.
The Bottom Line
The actual tax rates paid by corporations could be slightly higher when figuring in the multitude of rates that these entities must pay on a worldwide basis. In the U.S., the rates come in far below the stated corporate rates, but these companies must still pay taxes to the overseas locations they do business in or have moved their technical headquarters to. But overall, it does call into question the need to reduce the stated corporate tax rate, because it appears that many domestic corporations are paying rates far below the 35% maximum rate.