Large corporations legally pay less than the 21% federal corporate rate by combining a handful of well-established techniques: shifting profits to low-tax countries through transfer pricing and intellectual property licensing, stripping U.S. earnings with intercompany loans, front-loading deductions through bonus depreciation and net operating losses, claiming or buying tax credits that offset the bill dollar for dollar, and, in rarer cases, moving the corporate parent abroad. So how do corporations avoid taxes in practice? Each of these levers works within the tax code, and each is bounded by a statutory floor — GILTI (now Net CFC Tested Income), BEAT, Section 163(j), Section 7874, the Corporate Alternative Minimum Tax, and the OECD’s global minimum tax framework — that limits how far any one strategy can push the effective rate down.
Shifting Profits to Low-Tax Countries
When a corporation operates through subsidiaries in multiple countries, it sets prices for internal transactions: components sold between affiliates, management services, licensing fees. These transfer prices are supposed to reflect what unrelated parties would charge in a comparable deal. Section 482 of the Internal Revenue Code gives the IRS authority to reallocate income between related entities when the pricing doesn’t reflect economic reality.1Office of the Law Revision Counsel. 26 U.S. Code 482 – Allocation of Income and Deductions Among Taxpayers
The arm’s length standard leaves wide interpretive room when the asset being priced is unique. A company that owns a proprietary algorithm or a global brand can argue almost any royalty rate is reasonable, because there is no true open-market comparison. That is where intellectual property becomes the workhorse of corporate tax planning.
The structure is straightforward. A corporation creates a subsidiary in a country with low or zero corporate taxes and transfers legal ownership of its patents, trademarks, or proprietary software to that subsidiary. The offshore entity then charges licensing fees to the rest of the group, including U.S. operations. Those royalty payments are deductible in the U.S., shrinking domestic taxable income. The royalty income lands offshore, where it faces little or no tax. The engineers and salespeople never leave the United States, but a large share of the profit does.
Intercompany Loans and Earnings Stripping
Beyond royalties, corporations use intercompany debt to move money out of high-tax countries. A foreign subsidiary in a low-tax jurisdiction lends money to the U.S. operating company. The U.S. entity pays interest, deducts it, and the interest income arrives in the low-tax country. The cash never leaves the corporate group, but the deduction is real, converting operating profit taxed at 21% in the U.S. into interest income taxed at close to zero abroad.
Section 163(j) caps how much of this a corporation can do. Business interest deductions are limited to 30% of adjusted taxable income, plus business interest income and certain floor plan financing interest. For tax years beginning in 2026, the One Big Beautiful Bill Act restored the ability to add back depreciation, amortization, and depletion when calculating that income base, loosening the cap somewhat from its 2022–2024 form.2Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Interest that exceeds the cap carries forward indefinitely, so nothing is permanently lost; it’s just delayed.
Front-Loading Deductions
Not every strategy requires an offshore subsidiary. Some of the biggest tax reductions come from timing: deducting costs sooner rather than later. A dollar of tax deferred is a dollar the company can invest before eventually settling up.
Bonus Depreciation
When a corporation buys qualifying business property, the tax code lets it deduct the full purchase price in the year the asset goes into service rather than spreading the cost over the asset’s useful life. The One Big Beautiful Bill Act made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025.3Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill The lifetime deduction is the same either way, but taking it all in year one collapses current taxable income. A $500 million equipment purchase produces a $500 million immediate deduction and roughly $105 million in current-year tax savings.
Net Operating Losses
When deductions exceed income in a given year, the excess becomes a net operating loss. NOLs arising after 2017 carry forward indefinitely, but they can offset only up to 80% of taxable income in any future year.4Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction A corporation sitting on a large accumulated NOL cannot zero out its bill entirely, but it can cut it by 80%. Because NOLs never expire, companies that went through heavy investment years or a rough stretch can work those losses off for decades. Most claims that “Company X paid zero federal taxes” trace back to this mechanic.
Domestic Research Expenses
From 2022 through 2024, research and experimental expenditures had to be spread over five years rather than deducted immediately. The One Big Beautiful Bill Act reversed this for U.S.-based research, restoring immediate deduction starting in 2025. Foreign research still has to be capitalized and amortized over 15 years, which creates a strong tax incentive to keep development teams inside the United States.5Congress.gov. H.R.1 – 119th Congress – One Big Beautiful Bill Act
Tax Credits That Cut the Bill Directly
A deduction reduces taxable income; a credit reduces the tax itself. At a 21% rate, a $1 million deduction saves $210,000, while a $1 million credit saves the full $1 million. That makes credits far more powerful per dollar, and corporations pursue them aggressively.
The Research and Development credit is the longstanding example, rewarding qualified U.S. research spending with a direct reduction in tax owed. The bigger recent shift is the emergence of transferable clean energy credits. Under Section 6418, a company that earns an eligible credit — from solar installations, carbon capture, clean hydrogen production, advanced manufacturing, and roughly a dozen other qualifying activities — can sell that credit to an unrelated buyer for cash, typically at a discount to face value.6Office of the Law Revision Counsel. 26 U.S. Code 6418 – Transfer of Certain Credits The buyer applies the credit against its own federal tax liability. For a profitable corporation looking to lower its effective rate without making the underlying clean energy investment itself, buying discounted credits is about as efficient a move as the code allows.
Moving the Corporate Home Abroad
The most structural form of avoidance is a corporate inversion: a U.S. company arranges for a smaller foreign entity to acquire it, making the foreign company the new parent. Operating headquarters and employees usually stay put. Only the legal domicile changes. The payoff is a lower corporate rate in the new home country and easier movement of foreign profits.
Section 7874 imposes guardrails tied to how much of the new foreign parent is still owned by the original U.S. shareholders:7Office of the Law Revision Counsel. 26 U.S. Code 7874 – Rules Relating to Expatriated Entities and Their Foreign Parents
- At 80% or more continuing ownership, the IRS treats the new entity as a domestic corporation, nullifying the inversion.
- Between 60% and 80%, the company is treated as foreign but loses key benefits like earnings stripping against U.S. income.
- Below 60%, the corporation secures the full tax advantages of the new domicile.
These thresholds force careful engineering of the transaction. Combined with reputational pressure and the introduction of rules that now tax foreign earnings annually, inversions have become far less common than a decade ago. The math is less compelling when the U.S. already taxes a substantial share of foreign income.
The Floors That Limit How Low the Rate Can Go
Congress has built several backstops into the code that catch profit shifting and aggressive deduction stacking before they push the effective rate too far below 21%.
Net CFC Tested Income
Since 2018, U.S. shareholders of foreign subsidiaries have had to include a portion of those subsidiaries’ earnings in U.S. taxable income each year, whether or not the money is ever repatriated. Originally called Global Intangible Low-Taxed Income and renamed Net CFC Tested Income under the One Big Beautiful Bill Act, this provision targets shifted profits directly.8Office of the Law Revision Counsel. 26 U.S. Code 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders
A special deduction brings the effective U.S. rate on this income to about 12.6% for 2026, calculated as the 21% corporate rate applied to 60% of the included income after a 40% deduction. Foreign tax credits can offset much or all of the remaining liability. If a foreign subsidiary already paid taxes at roughly 14% or higher, the credits can wipe out the additional U.S. tax. Parking profits in true zero-tax havens now triggers a real U.S. bill; routing income through countries with moderate rates in the 12%–15% range can still largely eliminate the top-up.
The Base Erosion and Anti-Abuse Tax
BEAT targets deductible payments — management fees, royalties, insurance premiums — flowing from U.S. entities to foreign affiliates. It recalculates what the corporation would owe if certain of those payments were added back, then imposes a minimum tax if that recalculated amount exceeds the regular tax bill. The 2026 rate is 10.5% of modified taxable income under the One Big Beautiful Bill Act, and BEAT applies to corporations averaging at least $500 million in annual gross receipts over the prior three years.9Office of the Law Revision Counsel. 26 U.S. Code 59A – Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts
The Corporate Alternative Minimum Tax
The Corporate Alternative Minimum Tax, enacted through the Inflation Reduction Act of 2022, imposes a 15% minimum tax on the adjusted financial statement income of corporations averaging more than $1 billion in annual book income over a three-year period.10Internal Revenue Service. Corporate Alternative Minimum Tax It is based on book income (what the company reports to shareholders), not taxable income (what it reports to the IRS).11Office of the Law Revision Counsel. 26 U.S. Code 55 – Alternative Minimum Tax Imposed Because book income reflects fewer aggressive deferrals, the CAMT catches corporations whose planning has opened a wide gap between reported profits and taxable income. A corporation calculates both its regular tax and 15% of adjusted book income, then pays whichever is higher.
The Global Minimum Tax
The OECD’s Pillar Two framework sets a 15% global minimum effective tax rate for multinational groups with annual revenue of at least €750 million. Countries that adopt it can impose a top-up tax on profits earned in any jurisdiction where the corporation’s effective rate falls below the threshold.12OECD. Global Anti-Base Erosion Model Rules (Pillar Two)
The United States has not enacted Pillar Two domestically. In 2026, the Treasury Department secured an agreement exempting U.S.-headquartered companies from Pillar Two rules in other countries, keeping them subject only to existing U.S. minimum tax provisions like GILTI/NCTI and BEAT.13U.S. Department of the Treasury. Treasury Secures Agreement to Exempt U.S.-Headquartered Companies Other countries’ adoption of Pillar Two still shapes the global environment for corporations not covered by that agreement. Between U.S. minimum taxes on shifted income and foreign governments’ authority to tax under Pillar Two, the value of pure tax havens is eroding from multiple directions. International planning still lowers effective rates; parking billions in a shell company and paying nothing is no longer available at the scale it once was.