Rep. Mark Pocan, D-Wis., has introduced three pieces of legislation to close tax breaks that enable U.S. multinational corporations to use so-called “inversions” in which they merge with a foreign company and move their tax domicile abroad to a low-tax country to reduce corporate taxes.
Corporate inversions are used by companies that receive a significant portion of their income from foreign sources. One of the bills, the Corporate Fair Share Tax Act, would crack down on corporate earnings stripping, a method of avoiding taxes in which U.S.-based units are loaded up with debt owed to the affiliated foreign company. The U.S. entity then pays high levels of interest on this debt, which nets them significant tax deductions or wipes out taxable income in the U.S. The bill would limit the tax deductions a corporation may claim to a level at which the U.S. entity’s share of interest on debt is proportionate to the U.S. entity’s share of earnings. The Treasury Department estimates this would increase revenue by $48.6 billion over the next ten years.
“Earnings stripping is even more costly than standard inversions,” Pocan said in a statement. “This legislation closes the loophole used by companies to shirk paying their taxes and eliminates the advantage for companies to shift debt here.”
Another piece of legislation, the Putting America First Corporate Tax Act, would curb corporate tax deferrals. Currently corporations can defer paying taxes on foreign profits until that money is repatriated back to the U.S., often via dividends to shareholders. Pocan’s proposal would change Section 956 of the Tax Code to close this tax break and require controlled foreign corporations to pay U.S. taxes on future active income beginning on Dec. 31, 2014. The Congressional Budget Office estimates that ending this tax break would increase revenue over the next ten years by $114 billion
“Today, corporations are not required to pay taxes on overseas profits immediately,” said Pocan. “This legislation closes an egregious loophole and requires companies to pay taxes on overseas profits immediately instead of postponing payments and indefinitely hide income in tax havens.”
Another of Pocan’s proposed bills, the Corporate Transparency and Accountability Act, would restore a previous requirement of corporations to disclose both their pre-tax profits and the total amount paid in state and federal taxes. The language also would mandate that this information be publicly available on the Securities and Exchange Commission’s Web site in a way that is searchable, sortable and downloadable.
“The American people deserve to know which companies are avoiding paying their taxes” said Pocan. “This legislation will increase transparency on corporate financial reports and ensure the data is easily available to the public.”
A recent report by Bloomberg found that multinational companies accumulated nearly $2 trillion in accounts outside the U.S., in 2013—an increase of 11.8 percent as corporations shift more profits to offshore tax havens.
The Obama administration is considering executive action to curtail tax benefits for U.S. companies that use inversions to reduce their tax burden. Other Democratic lawmakers have introduced legislation aimed at curbing inversions (see Congress Introduces Bill to Restrict Corporate Tax Inversions and Congressional Democrats Introduce Bill to Ban Federal Contracts to Companies Moving Abroad). In addition, Sen. Charles Schumer, D-N.Y., has drafted a proposal that would deny tax breaks to companies that did inversions as long ago as 1994 (see Schumer Draft Tax Proposal on Inversions Could Reach to 1994). Republican lawmakers have said there should be a more comprehensive overhaul of tax reform before this specific problem of inversion is addressed.
In response to a wave of inversions a decade ago, Congress passed a law in 2004, the American Jobs Creation Act, which contained provisions aimed at penalizing companies and their CEOs who move their tax addresses abroad, but companies have continued to find ways to get around the restrictions (see Companies Fleeing IRS Pay CEOs Extra as Tax Penalty Backfires). A fresh wave of inversions this year has prompted calls in the Obama administration and among Democrats in Congress for legislation or executive action to discourage further inversion deals.
“Large corporations have taken advantage of tax loopholes to hide billions in corporate profits overseas and avoid paying taxes in the United States,” said Pocan. “Enough is enough. This legislation will stop corporate deserters from abusing the U.S. tax system. Main street businesses across Wisconsin and across the United States are playing by the rules and paying their share while Wall Street corporations, with their teams of lawyers, are finding new tax loopholes to avoid paying their share of taxes; that’s just wrong.”
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