by Amy Hamilton -- firstname.lastname@example.org
States that have enacted combined reporting regimes could collect an additional $1 billion in corporate tax revenue if they followed Montana and Oregon by maintaining in statute a list of tax haven jurisdictions, according to the U.S. Public Interest Research Group (PIRG) Education Fund.
The authors of the January 30 report, "Closing the Billion Dollar Loophole: How States Are Reclaiming Revenue Lost to Offshore Tax Havens," call the water's-edge election a "loophole" that combined reporting states need to close. They also provide state-by-state estimates for how much additional revenue each combined reporting state would have collected had it maintained a statutory list of tax havens.
California, which lost about $3.3 billion to offshore havens in 2011, could have collected potentially $246.4 million in additional tax revenue in 2012 if it had enacted a statutory list of tax havens, according to the new report. New York and Texas each could have collected an additional $141 million in 2012, while Illinois could have collected an additional $108.3 million and Massachusetts an additional $79 million, the authors write.
Report coauthor Dan Smith told Tax Analysts the most comprehensive solution to ending tax haven abuse would be for the federal government to no longer allow U.S. multinationals to indefinitely defer paying U.S. taxes on the profits they report as earned by their foreign entities.
Smith said that short of ending deferral, and without a mandatory worldwide combined reporting system in the states, keeping a statutory list of tax haven nations is the best tool combined reporting states have for limiting the most egregious profit shifting to offshore havens. U.S. PIRG in a 2013 report estimated that offshore tax havens cost states $20.7 billion in 2011 in lost corporate tax revenue.
Montana and Oregon are the only states whose tax codes enumerate a list of foreign jurisdictions to be treated as tax havens for corporate tax purposes. Montana's tax havens law, which has been in place since 2003, requires multinational corporations making the water's-edge election to include in the unitary combined tax base the income and apportionment factors of affiliates incorporated in listed tax havens. Oregon last year adopted its new law, which took effect January 1.
Alaska, West Virginia, and the District of Columbia have adopted combined reporting statutes that require the income of controlled foreign affiliates incorporated in tax havens to be included in the combined report -- but none of those states maintains its own list of tax havens directly in its code.
Smith said maintaining a statutory list of tax havens is the only way to make the policy behind those provisions work. "Without having a list, companies will be able to still shift all their profits to tax havens and avoid paying taxes on the profit they made in this country," he said.
"What we're trying to do in this report is show that states that are struggling to figure out how to pay for public priorities don't have to sit on their hands and wait for Congress to act," Smith said. "It can raise money that could go to almost anything better than sitting in a P.O. box tax haven subsidiary."
As the tax haven debate has built at the state level, the interests of U.S. subsidiaries of global companies have been represented in recent years by the Organization for International Investment (OFII). Its president, Nancy McLernon, told Tax Analysts that the fights over worldwide combination in California in the 1980s galvanized U.S. subsidiaries of foreign-based corporations to form the OFII.
The organization continues to testify and lobby at the state level. For example, the OFII worked closely with lawmakers in West Virginia and the District of Columbia to modify their respective combined reporting statutes to provide water's-edge protections for intangibles paid to non-U.S. companies in countries that have a tax treaty with the United States.
McLernon said tax issues at the state level can be tricky for foreign-based corporations, as states are sometimes not legally considered to be bound by U.S. tax treaties. "States sometimes inadvertently, sometimes deliberately, introduce proposals that would tax these companies twice on the same income," she said.
States put themselves at a disadvantage when competing with other states to attract investment by foreign-based corporations when they enact or introduce tax policy that doesn't take into account U.S. tax treaty obligations, or when they seemingly arbitrarily pull together a list of tax havens, McLernon said.
For example, McLernon said, Montana experienced a 3.2 percent decline in jobs at U.S. subsidiaries over the last three years for which statistics are available from the U.S. Department of Commerce's Bureau of Economic Analysis. By contrast, she said that in neighboring states, jobs at U.S. subsidiaries increased by 17.4 percent in North Dakota, 15.3 percent in South Dakota, and nearly 7.7 percent in Wyoming. Idaho experienced 0 percent growth.
However, Montana's tax havens law took effect more than a decade ago. Since 2002, total Montana employment by U.S. subsidiaries of global companies has increased 3 percent -- from 5,900 to 6,100 jobs -- according to the same numbers. Still, McLernon said, "The more states embrace an understanding of the global economy, global taxation, and international norms, the more competitive they can be to attract foreign investment and the jobs that come with it."
Last year, when Oregon lawmakers were considering the state's tax havens law, groups representing the interests of business and of practitioners also expressed concern about potential violations of the foreign commerce clause and foreign affairs doctrine.
The Council On State Taxation wrote that rolls of tax havens are blacklists and are arbitrary and misleading. Attorneys with Stoel Rives LLP wrote that federal legislation proposed as a result of the 1984 Worldwide Unitary Taxation Working Group headed by the U.S. Treasury secretary would have empowered the U.S. Treasury -- not states -- to determine which countries were named as tax havens, which the law firm pointed out would have eliminated the issue of whether the federal government was "speaking with one voice" in matters of foreign commerce.
Smith said those types of objections are typical when lawmakers in a state consider a proposal to maintain a statutory list of tax haven nations, and that lobbying efforts against those lists can present challenges in the states. "But that should not mean states should just let all of that income be lost to tax havens," Smith said. He added that the countries on Montana's and Oregon's tax haven lists "are, by all authoritative sources, known tax havens where these companies are just using them to avoid paying taxes, plain and simple."
"Ultimately, in the United States we have to make a decision about our tax system," Smith said. "We have to say, 'Companies should compete on the quality of their products, not how many tax attorneys they have and how clever they are.'"
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