BUSINESS
05/23/2013 10:15 am ET

SEC Loophole Lets Companies Stash Trillions Offshore

The SEC is looking the other way when it comes to offshore subsidiaries and some of America's largest corporations are taking advantage.

In recent years, many companies have reduced the number of offshore subsidiaries they’re reporting in public filings with the agency, the Wall Street Journal reports. But that doesn’t mean those subsidiaries -- which critics say often house profits so companies can avoid paying U.S. taxes on them -- have disappeared.

In fact, as companies have reduced the number of offshore subsidiaries they're publicly disclosing, the amount of corporate cash stashed overseas has soared to a record $1.9 trillion.

What's happening is corporations are taking advantage of a decades-old SEC rule that only requires a company to report a subsidiary if its holdings exceed 10 percent of the company’s assets, income or investment.

One result of this loophole is that companies don’t have to publicly disclose information about money they may be keeping offshore to shrink their tax bills. Corporations are required to pay U.S. taxes on offshore profits only if they bring the money back home. Many companies stash cash in subsidiaries housed in tax havens to avoid paying taxes on the profits at all, a practice that’s come under scrutiny in recent years.

Lawmakers slammed Apple in a Senate hearing earlier this week over its subsidiaries in Ireland, which the company allegedly used to pay almost no taxes on billions of dollars in profits.

Apple took advantage of another SEC policy to avoid telling investors how little the company actually pays in U.S. taxes, according to the Senate report lawmakers released ahead of the hearing. Apple’s move of overstating its tax bill to shareholders and regulators is common practice among corporations.

The companies are able to do it because the SEC requires they report how much they think their taxes will lower their profits, but often the companies are able to reduce that bill through a variety of perfectly legal creative accounting tactics.

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