Rep. Lloyd Doggett, D-Texas, introduced three pieces of legislation on tax deadline day to end a number of offshore tax breaks for corporations and encourage greater financial transparency.
The Stop Tax Haven Abuse Act aims to close several different loopholes by deterring the use of tax havens for tax evasion and strengthening the enforcement of our tax laws. The bill would also require SEC-registered corporations to report annually on the number of employees, sales, financing, tax obligations and tax payments on a country-by-country basis, shedding more light on the extent of use of tax havens. The bill also would provide additional penalties for failing to disclose offshore holdings and for promoting abusive tax shelters.
A related piece of legislation, the Cut Unjustified Tax Loopholes Act, or CUT Loopholes Act, was introduced in the Senate in February by Sen. Carl Levin, D-Mich., and Sen. Sheldon Whitehouse, D-R.I. The CUT Loopholes Act contains many similar legislative proposals, including the country-by-country reporting provision (see Senate Democrats Introduce Legislation to Eliminate Corporate Tax ‘Loopholes’).
Doggett also introduced two other pieces of legislation Monday. The International Tax Competitiveness Act addresses a large and growing area of tax abuse: the practice of developing a trademark, patent, or copyright in the U.S. and then transferring that intellectual property abroad to avoid taxes on the vast income it generates. The bill would treat income from the U.S. intellectual property as U.S. income and tax it accordingly.
The Fairness in International Taxation Act, also introduced by Doggett, would end the current practice of treaty shopping to avoid U.S. taxes. The U.S. has tax treaties with a number of trading partners that reduce the amount of taxes that a U.S. based entity owes on interest and royalties paid to a foreign parent. Since many of these foreign parent companies are set up in tax havens, these companies now bypass U.S. taxes by routing the payment through a tax-treaty country that then just transfers the funds to the tax-haven parent. This bill would end that legal fiction and say that you only get the tax-treaty discount if the parent company is actually located in a tax-treaty country.
During a House Ways and Means Committee hearing last week on the Obama administration’s proposed budget with Treasury Secretary Jack Lew, Doggett told Lew, “I have several pieces of legislation attempting to implement some of these budget provisions and to go a bit further than what I view as rather modest revisions. The concern I have, Mr. Secretary, is that while I think some adjustment in the statutory rate is appropriate to reduce it, that you devote every cent of that reform right back to the corporations. We know the history, this very year, is that in the fiscal cliff negotiations and the law that was finally approved, corporate America didn’t contribute a dime. In fact, some corporations got major tax cuts out of the fiscal cliff negotiations. Isn’t it reasonable to expect corporate America, having paid such low effective rates, to contribute a little to closing the budget gap and to the cost of our national security?”
Doggett’s legislation would have the effect of boosting tax revenue in the U.S. The research and advocacy group Global Financial Integrity praised the legislation for its impact on developing nations, which lose an estimated $1 trillion per year in illicit outflows of money due to tax haven secrecy.
“Adopting the Stop Tax Haven Abuse Act would be a major victory for U.S., European, and developing country taxpayers,” said GFI director Raymond Baker in a statement. “It would scrap several egregious offshore tax loopholes—helping to level the playing field between small businesses and multinational corporations, increasing information and transparency for investors, and strengthening law enforcement and tax collection abilities.”
The governments of the Czech Republic, Poland, Belgium, the Netherlands, and Romania announced over the weekend that they would be joining a multilateral initiative to exchange tax information automatically. The initiative was introduced last week by the governments of France, Germany, Italy, Spain and the United Kingdom, which were the five governments that were the first to announce they were working on tax information-sharing agreements with the U.S. as part of the effort to comply with the Foreign Account Tax Compliance Act, or FATCA.
GFI heralded last week’s announcement from the original five governments as a “resounding victory for taxpayers and transparency groups.” The new participants bring the total number of countries committed to engaging in the program up to 10.
In conjunction with his legislative proposals, Doggett released a new report from the Government Accountability Office on corporate tax expenditures, including tax preferences, deductions, credits and other provisions that allow corporations to reduce the amount that they owe in taxes. The report shows the growth in the use of these special provisions since the Tax Reform Act of 1986.
The GAO report found that in 2011 these corporate tax loopholes totaled approximately $181.4 billion, more than the total of all corporate income tax payments to the Treasury. The largest corporate-only tax expenditure—deferral of paying tax on income held by overseas subsidiaries—accounted for more than $41 billion in corporate revenue losses or nearly a quarter of the total revenue losses.
“Today, many Americans are paying their federal income taxes to contribute their fair share to the cost of our national security and of vital public services, but much of corporate America is still not doing the same,” Doggett said in a statement. “In fact, there are many of America’s largest corporations that continue lobbying the Administration and this Congress for another loophole to authorize their paying about a nickel on the dollar in taxes on a significant portion of their earnings.” Under such a “repatriation tax holiday,” such as the one they were granted in 2004, corporations would have to pay only 5.25 percent tax on any profits allegedly earned abroad.
The GAO report estimated that the tax revenue the federal government forgoes from corporate tax expenditures increased over the past few decades as did the total number of corporate tax expenditures. More than two-thirds, or 56, of the 80 tax expenditures used by corporations in 2011 were also used by individual taxpayers, such as other types of businesses not organized as corporations. Modifying any of these 56 tax expenditures as part of broader corporate tax reform would likely affect both corporate and individual taxpayers to some degree.
Corporate tax expenditures span a majority of federal mission areas, but their relative size differs across budget functions. The 80 corporate tax expenditures had estimated revenue losses in 12 of the 18 budget functions in 2011. Of the $181 billion in estimated corporate tax revenue losses in 2011, 81 percent was concentrated in the international affairs and housing and commerce budget functions, exceeding federal outlays in those budget functions. The 24 tax expenditures used only by corporations in 2011 provide support intended to encourage certain activities, such as energy production, or provide support for certain entity types, such as credit unions.
Corporate tax expenditures may have multiple purposes, the GAO noted. They could narrowly focus on a specific activity or entity, as well as broader or additional purposes pursuing national priorities or other activities. For example, 7 of the 24 corporate-only tax expenditures are aimed at encouraging or supporting specific energy sources and technologies, and these tax expenditures may also have broader national purposes such as promoting domestic energy production and energy security. In examining their narrowly focused reported purposes, one-third of the 24 corporate-only tax expenditures appear to share a similar purpose with at least one federal spending program.