As multinational corporations and lobbyists push for a reduction in the corporate tax rate and a tax holiday on repatriated foreign profits, the tax loopholes that have encouraged companies to shift their income abroad have managed to stay largely intact.
The Obama administration and the Internal Revenue Service have made it a priority to focus on tax avoidance schemes and have ratcheted up their enforcement efforts against foreign tax shelters and secret bank accounts at UBS, Credit Suisse and other banks. But other tax avoidance schemes have proven much more difficult to stop, including abuses of foreign tax credits and the so-called “check the box” rules. A pair of eye-opening articles co-published by the Financial Times and ProPublica have focused on how the British bank Barclays has profited from foreign tax credit deals with U.S. banks and corporations, and how corporations have successfully resisted efforts by the Obama administration and the Clinton administration to clamp down on “check the box” tax schemes.
The Barclays deals involved U.S. banks like Bank of New York Mellon, BB&T and Wells Fargo. They set up transactions known as STARS, or structured trust advantaged repackaged securities, with Barclays in which they were able to claim foreign tax credits while receiving billions of dollars in financing at below-market costs. The transactions were set up in some cases with the help of Big Four accounting firms. The IRS has disallowed millions of dollars worth of the tax credits, but banks have been fighting in court to claim them.
The sophisticated structure of the tax arrangements has made it difficult to put a stop to them, or even for the authorities to recognize when they are being used. The U.S., the U.K., Canada and Australia have set up a Joint International Tax Shelter Information Center to share information about what they are seeing in their countries.
The effort to clamp down on “check the box” abuses has also been an uphill battle for the tax authorities. While the Obama administration tried several times to get Congress to pass legislation to close the tax loophole, corporations successfully fended off those attempts, despite tax losses estimated at $10 billion a year by the Treasury Department.
The rule, which dates back to the mid-1990s, allows companies to check a box on Form 8832 to specify whether a subsidiary is a corporation or a partnership. While it was originally intended to make it simpler for companies to classify their domestic subsidiaries, it has instead been used to shift money to subsidiaries in low-tax countries like the Cayman Islands or ones with favorable corporate tax regulations like the Netherlands.
Multinational corporations and their lobbyists are now pushing for a tax holiday that would allow them to repatriate an estimated $2 trillion in foreign profits they have been stashing abroad and bring it back to the U.S. at a low tax rate. They have managed to win the support of a number of influential lawmakers in Congress and presidential candidates. While the repatriated profits could pump money into the U.S. economy at a time when it’s desperately needed, it’s far from clear that the money would be used to create jobs or investment here at home.
The last time such a tax holiday was tried, back in 2004, corporations mainly used the money to buy back their own shares. Since then, they have increased the amount of money kept overseas in low-tax countries while waiting for the next tax holiday in the U.S.