Tax Enforcement & Tax Evasion News


Ireland's Soft Pedaling Tax Avoidance Crack Down


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The Irish government’s announced plans to  phase out the infamous "Double Irish" loophole represents a significant victory for tax justice advocates worldwide who have sought to end this practice, but also leaves an opening for corporations to find new tax avoidance schemes.

The loophole — used by companies like Apple and Google to dodge billions in taxes — allows multinational corporations to route international profits to Irish subsidiaries and then tell Irish authorities that these subsidiaries actually have tax residence in a tax haven such as Bermuda or, in the case of Apple, have no tax residence at all. Irish lawmakers have proposed requiring corporations registered in Ireland to also be tax residents of the country.

The move comes just two weeks after the European Commission ratcheted up pressure on the country by announcing that the special tax deal that Apple cut with Ireland could violate the European Union's trade rules. This crackdown came on top of last year's blockbuster U.S. Senate hearing, where Sen. Carl Levin laid out the breathtaking audacity of Apple's tax avoidance scheme, including its use of Irish subsidiaries to pay nothing in taxes on tens of billions in profits.

The use of Irish subsidiaries to dodge taxes is widespread. A joint 2014 report by CTJ and U.S. PIRG found that more than 30 percent of Fortune 500 companies had at least one Irish subsidiary. While not every company with an Irish subsidiary is necessarily using it to dodge taxes, IRS data indicates that the amount of income being reported as earned in Ireland by U.S. companies is laughably implausible considering that it would constitute as much as 42 percent of the country's overall GDP.

While Ireland's current move appears to be more substantive than the empty gesture it proposed last year in an effort to assuage critics, there is still much to be desired about the proposal. To start, it keeps the loophole in place for all companies currently using it until 2020, which leaves plenty of time for companies to find new tax avoidance schemes or for the country to reinstate the loophole. In addition, Ireland’s announced plans to close the loophole coincided with Irish lawmakers announcing they would enact a new "patent box" tax break, which, depending on the details, could mean creating a substantial new loophole for companies to use.

Though Ireland's decision to close its most egregious tax loophole shows that international pressure can push tax haven countries to change course, such reforms do not fundamentally change the incentive for U.S. multinational corporations to find other offshore tax loopholes to exploit. The way to end this incentive once and for all would be to end the rule allowing corporations to indefinitely defer U.S. taxes on their offshore profits. Short of ending deferral entirely, Congress should pass the Stop Tax Haven Abuse Act, which takes aim at the worst abuses of deferral. At the very least, Congress should not expand deferral by renewing the active financing exception and CFC look-through rule as part of the tax extenders package.


New Report from Global Witness: Anonymous Company Owners and the Threat to American Interests


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What do a Manhattan skyscraper secretly purchased by the Iranian government, a Louisiana Congressman hiding half a million dollars in bribes and a Russian crime boss stealing $150 million from investors all have in common? All were made possible by shell companies incorporated in the United States, according to a new report from Global Witness.

It explains that some states in the U.S. require less identification from people forming corporations than they require from those applying for a library card. We have long noted that one result is the use of anonymous corporations formed in the U.S. for tax evasion by Americans and by people from all over the world, which in turn makes it much more difficult to persuade other countries to cooperate with the U.S. in stamping out tax evasion.

On the bright side, there is a bill — with Democratic and Republican cosponsors in both the House and Senate — that would address this problem. The Incorporation Transparency and Law Enforcement Assistance Act would require that each state finds out and records who is incorporating each company and make that information available for law enforcement purposes.

Arguably this information should be made public for all, but this bill would nonetheless vastly strengthen efforts to crack down on tax evasion, money laundering, terrorist financing and other crimes.


Will the OECD's Recommendations to Stop Corporate Tax Dodging Actually Work?


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On September 16, the Organization for Economic Cooperation and Development (OECD) released the first part of its recommendations to implement its 2013 “Action Plan on Base Erosion and Profit Shifting.” Base erosion and profit shifting, or BEPS as it’s known among international tax experts, is the fancy way of describing tax dodging by corporations that use offshore tax havens. CTJ criticized the action plan in 2013 for not going far enough, and it remains to be seen how much good can be accomplished with the reforms that OECD now recommends.

At the same time, the OECD recommendations are surely a step in the right direction. This is important because many members of Congress, including the top Republicans on the House and Senate committees with jurisdiction over taxes, consider even the OECD’s mild reforms to be asking too much of corporations. Rep. Dave Camp and Senator Orrin Hatch issued a statement in June making clear that they would likely oppose enacting OECD’s recommendations into law. Neither has issued any further statement on the matter.

According to one international law expert, it will likely be five to ten years before many countries enact the recommendations into law. But some countries, like the U.K., France and Australia are expected to be early adopters of the changes, and corporations would need to change their reporting methods in order to comply at least in those countries. This could make it easier for other governments to follow.

Some of the significant recommended changes include the following:

—End the ability of corporations to take advantage of loopholes like the U.S.’s “check-the-box,” which essentially allows a company to characterize a tax haven subsidiary in different ways to different governments so that the profits funneled there are taxed by no government at all. (Such tax haven entities are often euphemistically called “hybrid instruments.”)

For example, right now an American corporation can have an Irish subsidiary that pays royalties to its own subsidiary in Bermuda, which it characterizes as a separate corporation for Irish tax purposes so that it can deduct the interest payments from its Irish taxable income. But the American parent company can tell the U.S. government that the Bermuda subsidiary is just a branch of the Irish company and the payment was a payment internal to the company, meaning there is no profit to be taxed.

—End the shifting of corporate profits through certain countries to take advantage of tax treaties in schemes like the “Dutch sandwich.” In the example above, the Irish government might apply a withholding tax to payments made to Bermuda, but not if they are first routed through a country like Netherlands that has a tax treaty with Ireland precluding such withholding taxes. In theory, developed countries have negotiated such treaties with countries they trust to not facilitate tax avoidance. But the system has obviously broken down, as parties to such treaties including Ireland and the Netherlands are now facilitating tax avoidance by huge corporations like Google and Apple.

—Require country-by-country reporting of sales, profits and taxes paid by corporations to tax authorities, who would then have a better handle on when and how these tax avoidance schemes are being carried out. While it would be helpful to have this information made available to tax authorities who do not currently have it, a much stronger reform would make this information public for all to see. In the U.S., the I.R.S. already collects this type of information (which is necessary for certain purposes like the calculation of foreign tax credits in the American system). Providing information to the government makes a difference only to the extent that corporations are doing something that is actually illegal, but the entire point of the BEPS project is that corporations are able to abuse the system legally, thanks to various tax loopholes. The success or failure of the OECD’s attempts to close those loopholes will be known only to the extent that tax reformers, lawmakers and the public can actually see where profits are booked and what taxes are paid by multinational corporations in different countries.

—Implement new rules determining how intangible assets (like patents and royalties) are valued for transfer pricing. This is intended to address one of the thorniest questions and one that the OECD may not be able to solve without more dramatic reforms. When the OECD’s action plan was first released in 2013, CTJ was skeptical that it could work because

“…the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.”

Transfer pricing rules require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should, in theory, charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But this system has broken down. As we have argued before, when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

A more dramatic reform could eliminate the problems associated with transfer pricing. For example, CTJ’s tax reform plan would end the rule allowing American corporations to defer U.S. profits on its offshore subsidiaries’ profits. With deferral repealed, an American corporation would pay the same tax rate no matter where its profits were earned and would therefore have no incentive to make profits appear as if they were earned in a zero-tax country.


Burger King Reduced Worldwide Tax Rate by 60 Percent After Private Equity Takeover


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Burger King's recent decision to pursue a corporate inversion to Canada is the culmination of years of maneuvering to dodge paying its fair share in corporate taxes. In fact, Burger King was able to cut its average worldwide effective tax rate by more than 60 percent over the past few years likely through complex accounting maneuvers.

How did Burger King accomplish such a substantial tax cut? The first key point to know is that Burger King only owns a small percentage of its thousands of restaurants worldwide, with the overwhelming majority of its restaurants owned by franchisees who pay Burger King for use of its intellectual property. From the beginning of 2010 (when private equity firm 3G Capital purchased the company) through the end of 2013, Burger King went from owning about 12 percent of its worldwide restaurants (1,422), to owning less than half a single percent of its worldwide restaurants (52).

Unlike physical properties such as restaurants, stores or even factories, it's relatively easy to shift the location of income-generating intellectual property from one jurisdiction to a different low- or no-tax jurisdiction. This may explain why, after its purchase by 3G Capital, Burger King reorganized its business structure by shedding ownership of nearly all the individual restaurants that it owned.

Because a substantial portion of Burger King's income is generated through rents and fees that it charges these franchisees for use of its intellectual property, much of its business structure is akin to infamous tax-dodging companies like Apple and Google.

A 2012 investigation by Tom Bergin confirmed that Burger King had been following in Apple and Google's footsteps by shifting the income it generates across Europe to a low-tax subsidiary (in this case in Switzerland), instead of allowing it to flow back to the United States where its income-generating intellectual property was created in the first place. While the rest of its international tax structure has not been publicly disclosed, the company does admit to having subsidiaries not only in the infamous tax haven of Switzerland, but also in Singapore, Luxembourg, Hong Kong and the Netherlands.

Burger King's strategy of profit-shifting and relying more heavily on intellectual property came to fruition in 2013, when it was able to lower its worldwide effective tax rate to a mere 11 percent. For purpose of comparison, the company's average worldwide effective tax in the three years before it embarked on its aggressive tax dodging maneuvers was nearly 28 percent, meaning that company was able to lower its tax rate by 60 percent over just a few years.

The company’s decision to merge with Canadian coffee and donut chain Tim Hortons would allow the company to continue its tax avoidance strategy by never having to pay U.S. taxes on income that it has shifted to its offshore tax haven subsidiaries and providing it even more opportunities for profit shifting in the future because Canada has a territorial tax system, which does not require companies to pay taxes on their foreign earnings.

Burger King is one of several U.S.-based companies that is under scrutiny for announcing plans to undergo a corporate inversion. These plans have stoked public outrage and even prompted legislative fixes that so far have gone no where.

At a minimum, Congress needs to enact legislation proposed by Sen. Carl Levin and Rep. Sander Levin to stop Burger King and more than a dozen other companies with plans this year to take advantage of the corporate inversion loophole. In addition to the Levin legislation, several other proposals described in a recent CTJ report would ensure the tax code does not reward companies like Burger King for inverting. 


Republican National Committee Wants to Abolish the IRS


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abolishtheirs.jpgWith the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC's new fundraising campaign is not surprising given the IRS's unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC's campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through "abolishment" or even just significant spending cuts is destructive. In fact, recent cuts in the IRS's budget have already hamstrung the organization's ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency's recent controversies in the first place. In addition, cutting the IRS's budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC's messaging saying that "closing the door" at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS's recent unpopularity to push deep cuts to the agency's budget, including a particularly short-sighted cut of a quarter of the IRS's enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency's budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.


How to Combat the Rapid Rise of Tobacco Smuggling


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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.


Tobacco Industry Games Rules to Dodge Billions in Taxes


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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


How Corps. Are Avoiding Taxes by Using Tax Rule Intended for Small Investors


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In another defection from the corporate income tax base, last Tuesday Windstream Holdings, Inc. announced that it will be spinning off part of its telecommunications assets into a Real Estate Investment Trust (REIT) after it recently received a Private Letter Ruling (PLR) from the IRS approving the transaction. The company, whose 5-year effective federal income tax rate for 2008-2012 was already a paltry 11 percent, will be able to lower its tax rate even more through use of the REIT.

A REIT is to real estate what a mutual fund is to stock and bonds: a way for smaller investors to diversify their holdings by owning a share of a large pool of assets rather than owning individual stocks or properties directly. A REIT, just like a mutual fund, doesn’t pay an entity-level tax. Instead it distributes its income to the REIT shareholders who pay tax on their respective shares.

REIT rules were added to the tax code in 1960 so small investors could invest in pools of real estate (or mortgages on real estate). To qualify as a REIT, the trust must have at least 100 shareholders. Seventy-five percent or more of the REIT’s assets must be related to real estate: real property or mortgages on real property. Traditional REITs hold property such as office buildings, warehouses, and shopping centers. Another requirement for REIT tax status is that at least 75 percent of the REIT’s income must be from real estate (such as rents or interest on mortgages).

Windstream Holdings is a Fortune 500 company that, according to its website, “is a leading provider of advanced network communications, including cloud computing and managed services, to businesses,” and offers “broadband, phone and digital TV services to consumers.”

It shouldn’t qualify as a REIT. As Windstream itself said, the company is putting its copper and fiber networks into the REIT along with “other” real estate. The Internal Revenue Service opened this can of worms with PLRs allowing wireless communications companies, billboard owners, data centers, and prisons to elect REIT status. Casinos, too. Prison operators argued they were receiving rent for holding prisoners.

Is Windstream in the business of providing communications services or owning and managing real estate? Is Corrections Corporation in the business of operating prisons or holding real property? Are casino operators in the business of real estate or emptying your wallet? The answers seems pretty clear to me.

We don't need these companies to spin off their “real estate” assets so small investors can own a piece. These companies are already publicly traded and investors can buy stock or mutual funds that hold the stock.

Many states are losing tax revenue. First, unlike corporate dividends, there’s no corporate income tax paid first. Then, after the REIT pays dividends to its shareholders, they pay tax to their resident state, say, New York, rather than in the state where the properties are located, say, prisons in Mississippi. Companies are also using REIT subsidiaries to dodge state-level income taxes. Mega-retailer Wal-Mart was assessed $33 million in 2005 by North Carolina related to its use of a 99-percent owned “captive” REIT (executives owned the other 1 percent to reach 100 shareholders); its REIT strategy cut its state income taxes by 20 percent during a four-year period.

The initial motivation behind enacting special tax treatment for REITs might have made sense. But give someone a tax break and other folks, for whom it was not intended, will try to figure out how to use it. This is why we continually argue in favor of a simple, broad-based tax system that has few exceptions. Limit the exemptions, credits, and other special rules and you limit the opportunities for taxpayers to game the system. Until we have a tax system that works like that, Congress should close as many of the loopholes as it can. This is one of them.

The Windstream ruling opens the floodgates for REIT spin-offs for all kinds of companies, from Amazon to Zynga, with AT&T, Comcast, and Verizon in between.  Congress should enact rules to prohibit REIT spin-offs from publicly-traded companies and limit the favorable REIT treatment to the types of activities it was originally intended to benefit.


On Highway Bill, Congress Moves to the Right of Grover Norquist


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On Thursday, Congress ended a chapter of its latest manufactured crisis by addressing the shortfall in the Highway Trust Fund just hours before the Department of Transportation would have been forced to cut funding for state and local projects by 28 percent, sidelining hundreds of thousands of workers.

Approved Thursday, the measure extends funding through May. The House passed it after Republicans rejected tax compliance provisions in the bill first approved by the Senate — provisions so innocuous that they were even blessed by the anti-tax zealot Grover Norquist.

Norquist, head of Americans for Tax Reform, is famous for his so-called “Taxpayer Protection Pledge,” which by signing politicians promise never to raise income taxes no matter how apocalyptic the consequences. But Norquist apparently recognized that revenue provisions in the Senate’s bill were compliance measures, meaning they would not increase taxes owed by anyone but only ensure people would pay what they owe. Nonetheless, key Republicans in the House of Representatives (who are usually quick to please Norquist) insisted that they were in no mood to “give them [the IRS] more tools to harass taxpayers.” This meant that the Senate was ultimately forced to approve the House version of the bill, which did not include the revenue provisions.

How Another Long Foreseen Problem Became a Washington Nail-Biter

How to cover the costs and how long of an extension to provide were just two of the issues that allowed a totally foreseen and easily fixed problem to become another artificial crisis.

The trust fund that finances transportation projects was set to run out, and the Department of Transportation planned to cut funding to state and local governments for these projects by 28 percent starting Friday. Nothing about this was unforeseen. The trust fund has an estimated shortfall of $170 billion over the coming decade because it relies mainly on the 18.4 cent gas tax and 24.4 cent diesel tax, which have remained the same since 1993.

A September 2013 report from the Institute on Taxation and Economic Policy found that if the nation’s federal gas tax had been maintained at the same inflation-adjusted level since 1993, the trust fund would have enjoyed more than $200 billion in additional revenues, including $19 billion in 2013.

Congress ignored this blindingly obvious solution and instead bickered about a short-term measure that would continue funding just for a number of months to provide lawmakers with more time. How could Congress possibly need more time to address a problem everyone has known about for years? That has to do with politics, of course. For example, some lawmakers wanted to provide funding until right after the election, which is when politicians often make politically difficult choices, while some Republicans preferred to extend the trust fund until next year with the expectation that their party would control the Senate and thus the details of a long-term fix.

Taking the latter approach, the House of Representatives had already approved a bill to address the funding gap through May, with an $11 billion cost that would be offset by changes in customs fees and in the timing of pension payments (and thus the tax deductions that are taken for them by employers).

The Senate, on July 30 amended that bill to provide funding only through December and to rely partly on the tax compliance provisions that Senator Wyden, chairman of the Finance Committee, had included in his own bill. In a statement on his bill, Wyden said that his revenue provisions

“… are not tax increases. In fact, the Finance Committee even received a letter from Grover Norquist and the group Americans for Tax Reform saying so. Mr. Norquist is not soft on the question of tax increases, and he has indicated that these provisions are not tax hikes. What these provisions do is crack down on tax cheats and ensure that mortgage lenders provide homeowners with more tax information than they are usually getting today.”

One of the revenue measures would require more reporting related to mortgage interest deductions, another would alter the statute of limitations for overstatements of investment costs, while other provisions would increase certain penalties. Altogether, the provisions would have raised $4.3 billion, which seems like a small sum compared to the drama that has surrounded this debate.


Yes, the Treasury Department Can Help Achieve Tax Reform, but Congressional Action Would be Far Better


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In a Tax Notes article published Monday, Harvard Law School professor Stephen E. Shay bemoans the recent wave of corporate inversions and suggests that if Congress does not take legislative action, the Obama Administration could take regulatory action to prevent them.

No longer an arcane term, a corporate inversion is when a U.S. company merges with a foreign company and, for tax purposes, subsequently restructures to claim the address of the foreign company as its headquarters even while maintaining operations in the United States. This practice has made headlines lately in part because inversions are another way for companies to avoid U.S. taxes and in part because of the volume of large companies who have announced plans to do so.

Shay, a former tax lawyer for the Obama Administration, made headlines because he said the Treasury Department could stop inversions by using its regulatory powers rather than waiting for Congress to enact changes in the tax laws. Specifically, Shay argued that Treasury could prevent inverted companies from taking interest deductions against their U.S. profits, and could also make it harder for inverted companies to bring their offshore cash back to the United States tax-free.

It probably doesn’t matter much whether Shay is technically correct. His assertion is contrary to Treasury Secretary Jacob Lew’s recent assessment that the Obama Administration simply doesn’t have the authority to prevent inversions through regulatory action. And, of course, in the face of House Speaker John Boehner’s recent effort to bring suit against the Obama administration for allegedly “encroach[ing] on Congress’s power to write the laws,” any effort by the Treasury Department to end inversions by administrative fiat likely would create a firestorm of criticism.

Critically needed revenue is at stake. Executive action on inversions would be welcome but is no substitute for legislative action.

In any case, if neither the Obama administration nor its congressional foes think highly of an administrative approach to ending inversions, Shay’s recommendations are unlikely to see the light of day anytime soon.

To be clear, federal regulations are a vital component to every tax reform effort.  Every day in Washington and the states, tax administrators must find ways to implement tax laws enacted by lawmakers. These laws are often poorly specified or even internally contradictory, and it’s up to the Treasury Department and their state equivalents to write regulations that translate these laws into a properly functioning tax system.

In fact, just in the past week we’ve identified two other areas in which clearer and better-enforced regulations could help to achieve corporate tax reform: requiring more complete disclosure of corporations’ foreign subsidiaries , and requiring companies with offshore profits to admit whether those profits are being held in foreign tax havens. These are important steps, and it’s entirely within the authority of federal regulators to make these changes.

But whenever the proper scope of this federal regulatory power is murky, the best approach is for Congress to clarify the laws rather than having tax administrators attempt to interpret the laws.

Shay’s ideas should be taken seriously. If the current regulations governing corporate inversions are too poorly specified to do the job they are supposed to do, the Treasury Department should rewrite them. But administrative or executive action is not the only answer. Congress could eliminate any uncertainty about whether Shay’s specific recommendations are within Treasury’s powers by taking immediate legislative action. And as we’ve noted, President Obama has laid out a very straightforward set of reforms that could halt inversions. 


Nike's Disappearing Tax-Haven Subsidiaries: Lost at the Beach?


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It’s far more common to see bare feet than sneakers on the streets and beaches of Bermuda, but major athletic footwear manufacturer Nike reports having six subsidiary companies on this island nation with population of about 65,000 people.

That’s six less than the dozen it reported last year, but it’s still a lot. If it sounds a bit fishy, it’s because it is.

As CTJ documented in a June report, the vast majority of Fortune 500 companies (72 percent in 2013) disclose having subsidiaries in tax havens—countries that levy little or no tax on at least some corporate profits.  

Nike is one of the more entertaining examples of this. CTJ noted last year that Nike admitted having a dozen subsidiaries in Bermuda—and had named almost all of them after specific brands of Nike shoes. One plausible explanation for this naming convention is the company has shifted ownership of intangible property (patents, etc.) related to these shoes into the Bermuda subsidiaries. We can’t know this, of course, but the obvious question to ask is this: if you’re a sneaker manufacturer with a dozen subsidiaries located in a tiny country where the most popular footwear is flip-flops, what legitimate economic rationale can there be for this?

CTJ’s analysis of Nike’s Bermuda subsidiaries drew a little attention last year, so we were eager to see whether Nike’s newest annual report would continue disclosing these subsidiaries, especially since some of the biggest offshore tax avoiders have discreetly scaled back their disclosure of tax haven subsidiaries in recent years. Unfortunately, a loose accounting rule allows companies to get away with only disclosing subsidiaries that are “significant.” So it was no big surprise that when Nike released its 2014 financial report late last Friday, fully half of the Bermuda subsidiaries they company reported owning last year had disappeared from their subsidiary list.

So what happened to the missing Nike subsidiaries? It’s possible that they were sold. But it’s also possible that the company simply hopes it can get away with not disclosing this potentially-embarrassing information going forward.

One thing is clear: whatever else may have changed in the past year, Nike definitely still has substantial foreign cash stashed in low-tax havens. We know this because Nike is one of the relatively-few Fortune 500 companies that disclose how much tax it would pay on repatriation of its permanently reinvested earnings (PRE). The company estimates that if it repatriated its offshore cash, it would have a $2.1 billion tax bill on their $6.6 billion in PRE. This is a 32 percent tax rate, the implication of which is that they’ve paid about 3% on their offshore profits so far. And it’s hard to find a foreign tax rate that low outside of, say, Bermuda.

The waters of international corporate tax avoidance are murky. It’s usually impossible for the layperson to have any idea what sort of tax dodges big multinationals engage in, especially since they cannot convene a special congressional investigation. Data on foreign subsidiaries are one of the few easily available indicators of likely tax avoidance. We should have more access to this data, not less.


Stop the Bleeding from Inversions before the Corporate Tax Dies


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If you were listening to last week’s Senate Finance Committee hearing on corporate inversions, you might have thought you’d accidentally stumbled into a HELP (Health, Education, Labor & Pensions) Committee hearing on some strange new epidemic. Finance Chairman Ron Wyden (D-OR) and several witnesses used medical analogies to talk about the wave of corporate mergers that are allowing U.S. companies to invert into foreign-based companies and avoid U.S. taxes.

In his opening remarks Sen. Wyden noted that inversion virus, multiplying every few days, is the latest outbreak of a tax code infected with the chronic diseases of loopholes and inefficiencies.

But witness Allan Sloan, senior editor at Fortune Magazine and author of the recent Fortune cover story on inversions, put it best—comparing the inversions to an emergency-room patient who is bleeding out. First you put on a tourniquet, stabilize the patient, and then deal with the underlying problem.

No doubt about it, the patient—the U.S. corporate tax code—is losing massive amounts of blood through corporate inversions. If we don’t deal with it soon there will be nothing left for Congress to fix when it finally gets around to tax reform. The corporate tax base will have been mostly eviscerated.

President Obama, in a Los Angeles appearance on Thursday and in his Saturday weekly address, also called on Congress to close the loophole now. Jack Lew, Secretary of the Treasury, followed with an op-ed in today’s Washington Post.

The recent wave of inversions is being driven by Wall Street: advisers are telling their corporate clients they’ve got to do this now. The iconic American drugstore Walgreens is considering an inversion in its merger with Alliance Boots, moving the corner of happy and healthy to somewhere in the Swiss Alps. Investment firms, hedge fund managers, and private equity investors are pressuring the company to do the inversion.

We’ve got an emergency here: it’s a Wall Street mania. The Wall Street that gave us massive indigestion with the dot-com bubble and a financial meltdown with toxic sub-prime mortgages that left us with an anemic economy is the same Wall Street that is puncturing what’s left of the U.S. corporate tax base.

Congress needs to stand up to Wall Street and the multinationals and stop the bleeding before it’s too late.


Simply Changing One Rule Could Yield More Transparency Regarding Corporate Profits/Taxes


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While most of us consider ourselves upstanding, taxpaying citizens, imagine if Uncle Sam had a rule that stated individuals must report all their income to the IRS–unless it’s “not practicable” or too difficult to do so. And imagine if the government left it entirely up to taxpayers to decide what “too difficult” means.

Under such loose standards, federal revenue from individual taxes likely would plummet and more taxpayers would take advantage and stash their income in such a way that they could claim it would be impractical to report it to Uncle Sam.  The problem is that this “not practicable” standard is not imaginary. It actually exists and is applied to corporations’ offshore income.

While much media attention recently has focused on the tax loophole that permits inversions, or corporations changing their business address to a foreign postal code to avoid U.S. taxes, an equally toothless regulation from the Financial Accounting Standards Board (FASB) allows hundreds of Fortune 500 corporations and other highly profitable companies to avoid telling Uncle Sam how much money they have parked offshore and whether or how much they have paid in taxes to foreign governments on this cash. It’s an important issue to examine because rules that allow corporations to permanently hoard earnings offshore and technically never bring them to the United States means the U.S. Treasury is missing billions in needed tax revenue.

While loose rules mean we will never know exactly how much money all U.S. companies all holding offshore to avoid U.S. taxes, accounting rules require publicly traded companies to report their offshore earnings to shareholders. Among the Fortune 500, $2 trillion is parked offshore. A CTJ analysis of their financial filings finds that if this money were brought to the United States, these companies would owe $550 billion in taxes.

It’s worth taking a step back to discuss how we got here and what we can do to fix this. Regarding offshore profits, FASB rules state companies must either estimate the tax bill that it would pay on repatriation of their foreign profits, or must state that they are unable to calculate this bill. Not surprising, the vast majority of companies disclosing offshore cash take advantage of this loophole and claim, following the exact wording of the FASB rule, that it is “not practicable” to calculate their tax bill on repatriation. A recent CTJ report found that of the 301 Fortune 500 corporations that disclose holding offshore case, 243 use the “not practicable” loophole.

Tax experts long have suspected that this claim is absurd: multinationals typically employ an army of accountants to help monitor their tax strategies at home and abroad, and they very likely have a good idea of the potential tax hit from repatriating offshore cash. A recent informal disclosure by Medtronic—one of the companies currently attempting an inversion—backs this up. A Medtronic representative recently told the Minneapolis Star Tribune that the company has paid a foreign tax rate of between 5 and 10 percent on its “permanently reinvested” foreign income, which means the company would face a tax rate of 25 to 30 percent on repatriation. This disclosure is notable because it’s completely at odds with what the company has officially told shareholders in its annual reports (including the one released the same week as this informal disclosure): that it is unable to make this calculation.

The simultaneous disclosure and non-disclosure on the part of Medtronic illustrates perfectly what many have long suspected: that many if not all companies that refused to disclose the potential tax bill on repatriation know full well what they would pay, and choose not to disclose this information because FASB rules give them an easy way out.

But there’s an easy fix here. FASB could easily rewrite its regulations in a way that would require Fortune 500 corporations to disclose whether their offshore profits are in tax havens.

Regulations currently require companies to disclose “[t]he amount of the unrecognized deferred tax liability […] if determination of that liability is practicable or a statement that determination is not practicable.”

Removing the “if practicable” clause and simply requiring companies to disclose “the amount of the unrecognized deferred tax liability” would end the spectacle of companies like Medtronic concealing their use of tax havens from Congress and the public.

Improving disclosure of the potential tax bills on the offshore profits of multinationals is not an academic exercise: better information on this important topic would benefit millions of shareholders in these corporations and federal policymakers who are being asked to enact even more tax breaks for the biggest multinationals.

Disclosure of potential tax bills is equally vital for decisions currently being made in the halls of Congress. Corporations continue to lobby for all kinds of exceptions to the tax rules, including a tax holiday that would allow them to bring their offshore profits to the United States tax free. Congressional tax writers would presumably be much less interested in granting a so-called tax holiday for foreign profits if full disclosure revealed that much of these profits were being held in low-tax havens such as Bermuda and the Cayman Islands. 


Hedge Fund Managers in the Hot Seat


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What the heck is a derivative and why do we care?

A derivative is a financial instrument whose value and performance depends on another asset. For example, let’s say a lender owns mortgages worth $100 million. The lender can bundle those together and sell interests in the mortgage pool until all $100 million worth is sold. But if, instead, he sells derivatives contracts whose performance is tied to the performance of the mortgage pool, the lender can sell many times the original face value of the mortgages. As a result, he magnifies the return and also the risk of the pool of mortgages. Anyone remember AIG and the 2008 financial crisis?

The advantages and disadvantages of derivatives are many, but I’d like to focus on just two:

1)      the use of derivatives to game the tax system, and

2)      how derivatives contribute to the financialization of our economy.

On Tuesday the Senate Permanent Subcommittee on Investigations questioned hedge fund managers about their use of a complicated financial derivative known as “basket options” to avoid both taxes and regulatory limits on excessive borrowing. Representatives from Barclays and Deutsche Bank, which developed the strategy that they sold to hedge funds, also testified.

It’s just the latest in a series of investigations about the misuse of derivatives for tax purposes. See, for example, earlier reports about the J.P. Morgan Whale Trades and how offshore entities use derivatives to dodge taxes on U.S. dividends. While there are plenty of reasons why financial managers use derivatives, chief among them is avoiding taxes.

Tax-avoidance derivatives are created to take advantage of loopholes that give some special treatment to particular taxpayers, industries, or types of income. For example, if I own a partnership interest, part of the income I receive may be ordinary income subject to my highest marginal tax rate and some of it may be long-term capital gains that are taxed at a maximum income tax rate of 20 percent. On the other hand, if I own a derivative tied to the performance of a particular partnership and I keep the derivative for at least a year, all of my income may be treated as long-term capital gains. When Congress got wind of this game, they shut it down some years ago.

Unfortunately, Congress just can’t keep up with all of the derivatives that the financial industry invents to game the tax system. That’s the main reason why we need a tax system that taxes all kinds of income at the same rates. Whenever Congress passes a special rule that benefits a certain type of transaction or taxpayer, tax attorneys and accountants quickly come up with ways for their wealthy clients to qualify for the tax break in ways that Congress never intended.

Derivatives also contribute to the financialization of the economy—an increase in the size and importance of the financial sector relative to the overall economy. In 1950, financial services accounted for 2.8 percent of the U.S. gross domestic product. By 1980, that number was up to 4.9 percent and in 2008 in was 8.3 percent.

At some point—and many believe we are there or way past there—continued financialization of the economy has major negative consequences: rising inequality, reduced investment by other sectors, and risk magnification, just to name a few. Derivatives not only add to but compound these negative consequences because there is no limit to the amount of derivatives that can be issued.

Derivatives have another ugly side: many are created in offshore tax haven jurisdictions because they cannot be legally used in the U.S. (or other real countries). The derivatives that contributed to the collapse of Enron at the turn of the millennium and the staggering losses of AIG and other financial institutions in the 2008 financial meltdown were mostly related to transactions in offshore jurisdictions.

Kudos to Sen. Levin and the Permanent Subcommittee on Investigations for putting the spotlight on this important issue. A functioning Congress would take quick action to fix the problem. Sadly, however, too many of our legislators are fervent supporters of evil behavior when it comes to taxes.


New Report: Addressing the Need for More Federal Revenue


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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 


Foreign Account Tax Compliance Act Goes Into Effect - Bank Secrecy Goes Out the Window


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FATCA, the Foreign Account Tax Compliance Act, finally became effective last week. The Treasury Department had repeatedly delayed implementation of the legislation which was enacted in 2010. Beginning July 1, payments made to foreign banks who don’t comply are subject to a 30 percent withholding tax.

FATCA requires foreign banks and foreign branches of U.S. banks to file information returns with the IRS disclosing the accounts of U.S. citizens and residents. Rather than report to the IRS directly, many countries have signed agreements to have the banks file the information with their home governments which will then share it with the IRS.

Although FATCA has many critics and some lawmakers have voted to repeal it, the global community has lined up to comply with the law. Over 77,000 banks and 80 countries, even China and Russia, have registered and many countries are considering enacting similar laws. Someday soon, having a Swiss bank account will no longer suggest mystery and intrigue—or tax evasion.


The Consequences of Woefully Underfunding the IRS


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Following up on their efforts to enact dramatic cuts to the IRS's funding last year, Republican members of the House Appropriations Subcommittee on Financial Services voted to slash IRS funding by $341 million, pushing the agency's budget to its lowest level in more than five years. What makes these proposed spending cuts so ridiculous is that every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200 and every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

From fiscal year 2010 to 2014, the IRS has seen its overall funding cut by as much as 14 percent (adjusting for inflation) and its staff cut by 11 percent. Making matters worse, these cuts come even as the IRS takes on increasing numbers of tax returns and the substantial new responsibilities of enforcing the Foreign Account Tax Compliance Act (FATCA) and the tax subsidies in the Affordable Care Act (ACA).

Because the IRS's job is to collect taxes that pay for the rest of the government, it is unique in that cuts to its budget have the effect of substantially increasing the deficit. In fact, the Treasury Inspector General for Tax Administration (TIGTA) found that the 14 percent reduction in enforcement personnel from fiscal year (FY) 2010 to 2012 forced by budget cuts resulted in a loss of $7.6 billion in revenue in FY 2012 alone.

A new must-read report by the Center on Budget and Policy Priorities (CBPP) catalogues the variety of ways that this decrease in funding has hamstrung the agency’s ability to do its basic duties. For example, the CBPP notes that budget constraints have contributed to the delays of critical computer infrastructure created to combat identity theft and the filing of fraudulent tax returns. As it stands now, the new system has still not come into place, meaning that victims of identity theft have to wait longer than six months for a resolution to their case.

While the recent IRS scandal is driving many House Republicans to push deeper cuts to the agency, the scandal is really just further evidence that the IRS needs a larger budget to get its job done right. The latest blowup over the IRS's failure to keep extensive email records, for instance, appears to be driven in part by the fact that the IRS could not afford the $10 million required to increase the capacity of the server where it stores emails. The non-partisan and well-respected National Taxpayer Advocate perfectly explained the fundamental problem with the IRS when she noted in a speech that while "the IRS can improve its policies and procedures," the recent cuts to the agency are "just plain nuts."

The Senate for its part has proposed increasing the agency’s budget by $236 million, which is $950 million lower than the increase the Obama administration requested. While this would be a significant step in the right direction, even the administration's request would not even restore IRS funding to its 2010 level if you take inflation into account. 


Even the Weak Anti-Abuse Measures Contemplated by OECD Are Too Much for Republican Tax Writers


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Representatives of Organization for Economic Co-operation and Development (OECD) countries are meeting in Washington this week to determine what reforms they should recommend to address offshore corporate tax avoidance. Such recommendations would implement the Action Plan on Base Erosion and Profit Shifting (BEPS), which OECD issued last summer. The plan doesn’t go far enough, but the Obama administration has recently indicated that it is restraining OECD talks from resulting in more fundamental reforms, and the top Republican tax writers in Congress issued a statement on June 2 that seems even more opposed to reform.

As we wrote about the Action Plan last summer,

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of funds they need to make public investments, the plan fails to call for fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes. Both tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

In April, we noted that the Obama administration seems to be blocking any more fundamental (more effective) reform and is clinging to the “arms length” principle that supposedly prevents subsidiaries owned by a single U.S. corporation from over-charging and under-charging each other for transactions in ways that make profits disappear from one country and magically reappear in another. As we explained,

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

This week, just to kill any lingering possibility that the OECD will do some good, Rep. Dave Camp and Senator Orrin Hatch, the Republican chairman of the House Ways and Means Committee and the ranking Republican on the Senate Finance Committee, issued a statement claiming they are “concerned that the BEPS project is now being used as a way for other countries to simply increase taxes on American taxpayers [corporations].”

Of course, major multinational corporations from every country will, in fact, experience a tax increase if the OECD effort is even remotely successful. American corporations are using complex accounting gimmicks to artificially shift profits out of the U.S. and out of other countries into tax havens, countries where they will be taxed very little or not at all. There is no question this is happening. As CTJ recently found, American corporations reported to the IRS in 2010 that their subsidiaries had earned $94 billion in Bermuda, which is obviously impossible because that country had a GDP (output of all goods and services) of just $6 billion that year.

In their statement, Camp and Hatch complain that “When foreign governments – either unilaterally or under the guise of a multilateral framework – abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”

But what exactly have these long-standing principles, like the “arm’s length” standard accomplished? They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the Cayman Islands had profits of $51 billion even though that country had a GDP of just $3 billion. They’ve allowed American corporations to tell the IRS that in 2010 their subsidiaries in the British Virgin Islands had profits of $10 billion even thought that country had a GDP of just $1 billion.

Camp and Hatch have claimed in the past that the solution for our corporate income tax is to essentially adopt a “territorial” tax system that would actually increase the rewards for American corporations that manage to make their U.S. profits appear to be earned in Bermuda, the Cayman Islands, the British Virgin Islands, or any other tax haven. Congress needs to move in the opposite direction, as we have explained in detail. 


Credit Suisse Gets Off Easy for Aiding Tax Evasion


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On Monday, the Department of Justice announced that Credit Suisse, the second largest bank in Switzerland, has agreed to plead guilty to criminal charges for helping Americans open secret bank accounts and use them to evade U.S. taxes. The bank will pay $1.9 billion to the federal government and $715 million to the state of New York in restitution and fines. 

Surprisingly, the agreement does not require the bank to hand over the names of its U.S. customers. In a statement issued the same day, Senator Carl Levin remarked “it is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts. More than 20,000 Americans were Credit Suisse accountholders in Switzerland, the vast majority of whom never disclosed their accounts as required by U.S. law. This leaves their identities undisclosed, with no accountability for taxes owed.”

This is in stark contrast to the 2008 deferred prosecution agreement with UBS, the largest Swiss bank. The financial giant agreed to pay $780 million in penalties and, unlike Credit Suisse, handed over 4,700 names of American account holders.

The Credit Suisse agreement comes after years of investigations into the bank’s illegal activities aiding tax evasion which were detailed in a February report by the Homeland Security Permanent Subcommittee on Investigations. The report lambasted the American and Swiss governments for dragging their feet in efforts to stop it.

The report noted that Switzerland has bank secrecy laws that prevent banks from disclosing the identities of account holders to U.S. tax enforcement authorities. Switzerland enacted a law specifically allowing UBS to provide that information to the U.S. government, but no such law was enacted this time around for Credit Suisse. Instead, the Department of Justice relied on the convoluted process outlined in a U.S.-Swiss treaty to get the information. That process has given greater power to the Swiss government and Swiss courts that have provided as little cooperation as possible.

Although the agreement imposes big fines, it does not revoke Credit Suisse’s license to continue to operate in the U.S. Apparently some fear the repercussions of taking a harder line against the big banks, apprehensive that stronger actions might precipitate a financial crisis. The possibility that the Department of Justice wanted to avoid this and did not push as hard as it might (for example, by demanding the disclosure of account holders) may mean that some banks really are “too big to jail.”

Switzerland has long been known as a tax haven for individuals from all over the world who want to hide their income from tax authorities with the help of banks like UBS and Credit Suisse. It has also been known as a tax haven for corporations like Alliance Boots that want to artificially shift profits there to avoid paying taxes in the countries where their profits are really earned. One might think it would be easier to solve the problem of individuals using tax havens to evade taxes, since that is illegal, whereas the tax avoidance of big corporations like Alliance Boots is not actually illegal (but should be). But the laws against tax evasion by individuals using Credit Suisse and other banks to hide their income are only as strong as the will of governments to enforce them.

A commonsense bill introduced today would prevent American corporations from pretending to be "foreign" companies to avoid taxes even while they maintain most of their ownership, operations and management in the United States.

Sponsored by Sen. Carl Levin and Rep. Sander Levin, the Stop Corporate Inversions Act requires the entity resulting from a U.S.-foreign merger to be treated as a U.S. corporation for tax purposes if it is majority owned by shareholders of the acquiring American company or if it is managed in the U.S. and has substantial business here.

These are common sense rules and many people might be surprised to learn that they are not already part of our tax laws. In fact, the law on the books now (a law enacted in 2004) recognizes the inversion unless the merged company is more than 80 percent owned by the shareholders of the acquiring American corporation and does not have substantial business in the country where it is incorporated.

The current law therefore does prevent corporations from simply signing some papers and declaring itself to be reincorporated in, say, Bermuda. But it doesn’t address the situations in which an American corporation tries to add a dollop of legitimacy to the deal by obtaining a foreign company that is doing actual business in another country.

The management of Pfizer recently attempted to acquire the British drug maker AstraZeneca for this purpose and a group of hedge funds that own stock in the drug store chain Walgreen have been pushing that company to increase its stake in the European company Alliance Boots for the same purpose.

The Stop Corporate Inversions Act is based on a proposal that was included in President Obama’s most recent budget plan, which is projected by the administration and the Joint Committee on Taxation to raise $17 billion over a decade. The only difference between the House and Senate version of the bill is that the House version is permanent while the Senate version is effective for just two years. Apparently the Senate cosponsors include some lawmakers who believe that the issue of inversions can be addressed as part of tax reform at some point over the next two years and a stopgap measure is needed until then.

Either way, Congress needs to act now. House Ways and Means Committee chairman Dave Camp and Senate Finance Committee ranking Republican Orrin Hatch have both suggested that Congress should do nothing at all except as part of a major comprehensive tax reform. Given that the only tax reform plan Camp has been able to produce was a regressive $1.7 trillion tax cut that didn’t even meet his own stated goals of revenue and distributional neutrality, it’s obvious that Congress is a long way off from settling all the issues related to tax reform. In the meantime, how often will we be asked to play along as major American corporations pretend to be “foreign” in order to avoid paying taxes?


Shareholders Urge Google "Don't Be Evil"


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Many companies claim they are forced by shareholders to dodge taxes in order to maximize profits, but what would a company do if its shareholders insist that it actually pay its fair share in taxes?

A group of Google shareholders, headed up by Domini Social Investments, may soon find out. The group has filed a proposal for consideration at the shareholder annual meeting asking the company to adopt a set of principles regarding taxes. The shareholders are recommending that the principles include consideration of any “misalignment between tax strategies and Google’s stated objectives and policies regarding social and environmental sustainability.”

The proposal comes after several widely publicized stories about Google’s aggressive tax planning which moves billions of dollars annually to offshore tax havens. In 2012 alone, Google dodged an estimated $2 billion in income taxes by shifting an estimated $9.5 billion to offshore tax havens.

Last year Google was called before the UK House of Commons Public Accounts Committee to explain its cross-border tax avoidance. The committee chair called the company’s behavior “devious, calculated, and … unethical.” French tax authorities, having raided Google’s offices in Paris in 2012, just delivered the company a $1.4 billion tax bill.

The shareholder group points out that Google’s tax dodging not only gets it in trouble with tax authorities, but damages the company’s brand and reputation that has long been associated with its motto "Don't Be Evil." Its tax avoidance has other social and human rights consequences that the shareholders urge the company to consider.

Over the long term, the best way to ensure that all American corporations like Google pay their fair share would be to end offshore tax loopholes like the active financing exception and the CFC look-thru rules or to simply end deferral of U.S. taxes on foreign profits. Unfortunately, Congress seems to be moving in the opposite direction, with the House Ways and Means Committee voting last week to make the active financing exception and the CFC look-thru rules permanent.

If this new shareholder initiative is any indication, many tax dodging multinational corporations may soon find that the pressure to pay their fair share is not only coming from the public, but increasingly from stakeholders within the company as well.


Why Does Pfizer Want to Renounce Its Citizenship?


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After years of being a bad corporate citizen, Pfizer is now seeking to renounce its U.S. citizenship entirely by reincorporating in Britain as part of its hoped-for purchase of British pharmaceutical company AstraZeneca. While the deal would allow Pfizer to claim on paper that it’s a British company, it would not require the company to move its headquarters abroad.  In fact, the main effect would be to allow Pfizer to reduce its taxes to an even lower level than they already are.

While the audacity of this newest maneuver by Pfizer is striking, it’s not shocking. The company has a history of engaging in offshore income-shifting games. Over the past five years for example, the company has reported that it lost about $14.5 billion in the United States, while at the same time it earned about $75.5 billion abroad. Is the United States just a really bad market for Pfizer? It’s unlikely given that Pfizer also reports that around 40 percent of its revenues are generated in the United States. The more realistic explanation is that Pfizer is aggressively using transfer pricing and other tax schemes to shift its profits into offshore tax havens.

Despite its already low U.S. taxes, Pfizer has been aggressive in pushing Congress to preserve and expand loopholes in the corporate tax code. Over the past five years, Pfizer spent more than $72 million lobbying Congress. It reports that “taxes” are second only to “health” among issues it lobbies on. In addition to its own efforts, Pfizer has helped sponsor four different business groups (Alliance for Competitive Taxation, Campaign for Home Court Advantage, LIFT America and the WIN American Campaign) pushing for lower corporate taxes.

Over the years, Pfizer’s aggressive lobbying efforts have taken billions of dollars out of the U.S. Treasury, at the expense of ordinary taxpayers. Its biggest coup was the passage of a repatriation holiday (PDF) in 2004, for which it was the largest single beneficiary and ultimately saved the company a whopping $10 billion. On the state and local level Pfizer has also done very well for itself, receiving over $200 million in subsidies and tax breaks over the past couple decades.

What makes Pfizer’s tax avoidance efforts particularly galling is how it’s also happy to take full advantage of U.S. taxpayer assistance via government spending. From 2010 to 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefited from taxpayer funded research to develop drugs like Xelijanz, which was first discovered by government scientists at the National Institutes of Health (NIH). Finally, it’s worth remembering that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.

All this begs the questions of why Pfizer thinks it is worthy of profiting from taxpayer-funded research, corporate tax subsidies, and federal health care spending,  but feels no corporate responsibility to pay its fair share of U.S. income taxes.

Congress, should it decide to do so, can easily put a stop to Pfizer’s offshore shenanigans. To prevent Pfizer, as well as companies like Walgreens, from relocating to another country to avoid taxes, Congress could pass a proposal by the Obama administration that would limit the ability of domestic companies to expatriate. It would nix any repatriation if a company continues to be controlled and managed in the United States or if at least 50 percent of the shareholders stay the same after the merger. To address Pfizer’s broader tax dodging, Congress should also require that companies pay the same tax rate on both their offshore and domestic profits, by ending deferral of taxes on foreign profits.

Photo of Pfizer Pill via Waleed Alzuhair Creative Commons Attribution License 2.0


Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits


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More than a decade ago, a Republican-led Congress held a series of “show trials” designed to paint a picture of the Internal Revenue Service as intrusive, jackbooted thugs. It worked — at least well enough to convince Congress, which has since embarked on a decade-long trend of gradually defunding the IRS’s enforcement capabilities. But a new report from the General Accounting Office  (GAO) is the latest indicator that the pendulum has swung too far toward defanging the IRS’s enforcement capabilities. The GAO report shows that a business form known as “widely held partnerships” is growing dramatically — and that the IRS is able to audit less than 1 percent of the very largest such firms.

Businesses that are partnerships are not subject to the corporate income tax. Instead, the profits are passed along to the partners, who pay personal income taxes on them. Under current rules, this means that when the IRS wants to audit the partnership’s tax filings, it must examine the tax returns of each of the organization’s partners — and levying an adjustment is similarly burdensome for the IRS. The largest such partnerships, including hedge funds and private equity firms, can have hundreds or even thousands of partners. Even an adequately funded IRS might understandably find it difficult to audit even the most blatant partnership tax dodger.

But of course, the IRS is not adequately funded.The agency has lost 10,000 employees since 2010, more than 30 percent of which worked in enforcement areas.

If the prospect of large partnerships being able to bank on the inability of the IRS to audit them sounds like trouble, it is: the revenue stakes are potentially huge. The GAO estimates that the largest partnerships had $69.1 billion in total net income in 2011 alone. Any aggressive tax avoidance practiced by these firms will have a real effect on our nation’s budget deficit.

In a statement on the report, Senator Carl Levin from Michigan said, “Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money. It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free.”

Astonishingly, both President Barack Obama and outgoing House Ways and Means Chair Dave Camp have proposed sensible (partial) solutions to this problem. Both propose to allow the IRS to audit partnerships at the entity level, the same way they audit publicly traded corporations. Sadly, neither has proposed to completely reverse the damaging loss of IRS audit capacity caused by recent budget cuts.

Unfortunately, Camp’s proposal is embedded within a larger tax plan that altogether would result in a massive $1.7 trillion dollar deficit and make the tax code more regressive. Congress should enact the specific reform that would address the problem with partnerships now, on its own.

According to the Daily Tax Report (subscription only) a Treasury Department official said publicly on April 8 that the government’s goal in international negotiations over corporate tax dodging is to prevent dramatic change and preserve the “arm’s length” standard that has proven impossible to enforce.

Last summer, the Organization for Economic Co-operation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting” in response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business.

At that time, CTJ criticized the plan as too weak, arguing that:

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The rules that are supposed to address this today (but that fail miserably) require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

It turns out that some of the OECD governments are proposing reforms that challenge the arm’s length concept at least to some degree, but the US government is pushing a line that is more favorable to the multinational corporations.

Robert Stack, the Treasury Department deputy assistant secretary for International Affairs in the Office of Policy, is quoted by the Daily Tax Report as saying that the “main challenge for the U.S. is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable, and reach the right technical tax results.”

Stack also said that the “United States feels very strongly that the 2014 deliverable should be a clear articulation of intangibles under the arm's-length principle—and should reserve on the evaluation of potential special measures to treat BEPS [base erosion and profit-shifting] that depart from the arm's-length principle.”

The international tax system needs reform that is more fundamental than anything that either the OECD or the US is contemplating. Any system that relies on the artificial boundaries between the dozens (or hundreds) of entities in a multinational group and the ways they price transactions between them is unworkable. The US’s “deferral” system and Europe’s “territorial” system, which both require transfer-pricing rules and the hopeless “arm’s length” standard, should be eliminated. CTJ has proposed its own tax reform plan that would provide fundamental solutions. 


New CTJ Reports Explain Obama's Budget Tax Provisions


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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses


Tax Preparers Should Be Regulated


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When individuals fill out their tax returns, billions of dollars -- both for individual taxpayers and for the federal government -- are at stake. This is one reason why more than half of U.S. taxpayers rely on paid tax preparers to help them.

And yet, there are no national standards to ensure tax preparers are well qualified to play this critical role (only four states have taken licensing into their own hands) despite the fact that many preparers are error-prone, or worse. When the Treasury Inspector General for Tax Administration sent auditors into the field to pose as taxpayers seeking preparer services in 2008, 61 percent of the resulting tax returns were found to be flawed. While 65 percent of the mistakes were honest lapses, the other 35 percent were “willful or reckless” misstatements or omissions. The Government Accountability Office reached similar conclusions in a 2006 study, and the National Taxpayer Advocate has been sounding the alarm on this issue for years.

The IRS recently found that the net "tax gap" (the difference between taxes owed and taxes paid after enforcement measures are taken) was $385 billion in 2006, and that $235 billion came from individual income tax underreporting. Tax preparers certainly had a great deal to do with this.

And even relatively small parts of this problem -- like underreporting related to income tax credits, which accounted for $28 billion of the tax gap -- can have huge implications for the individual families affected. For example, the Earned Income Tax Credit (EITC) involves complicated rules and steep penalties for the taxpayer if any misrepresentations are identified, even if the mistakes are inadvertent or caused by preparer error. Roughly half of returns claiming an EITC in 2011 were filed with the help of an unregulated preparer.

While the rate of EITC overpayments has been greatly overstated, the truth is that there are too many overpayments and underpayments of EITC benefits and incompetent or nefarious preparers are partly to blame. Some have been known to offer EITC refunds in the form of deceptive loan products with exorbitant fees.

In reaction to these concerns, the IRS issued regulations in 2011 that would require unenrolled paid preparers to pass a certification exam, pay fees, and take continuing education courses. These regulations are not unprecedented. Some paid preparers who also represent taxpayers before the IRS during appeal proceedings -- like attorneys, certified public accountants, and “enrolled agents” -- are already regulated. And similar requirements currently apply to volunteer tax preparers who work through the Volunteer Income Tax Assistance (VITA) program.

Unfortunately, the 2011 regulations were never implemented because commercial tax preparers attempting to avoid the certification requirements brought suit and won in federal district court. The challengers claimed that the IRS only had statutory authority to regulate preparers that assist taxpayers in their dealings with the IRS after their returns have already been filed (the aforementioned “enrolled” agents), not those who help prepare the return before filing. While it may not seem like a meaningful distinction, federal judges have now ruled against the IRS twice. The latest rebuke came this week from the D.C. Circuit Court of Appeals.

Assuming the Supreme Court does not take up the case (the IRS has not yet announced if it will appeal), the burden will fall on Congress to give the IRS the explicit authority to pursue these important reforms. As the National Community Tax Coalition and the National Consumer Law Center wrote in their amicus brief to the DC Circuit Court, “Without such regulation, consumers are at the mercy of an industry with no minimum training or competency standards for one of the most critical financial transactions that consumers engage in every year.”


IBM's Nonsensical Response to CTJ's Finding that It Paid a 5.8 Percent Effective Federal Tax Rate


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Last week, CTJ published its finding that International Business Machines (IBM) has paid U.S. federal corporate income taxes equal to just 5.8 percent of its $45.3 billion in pretax U.S. profits over the five year period from 2008 through 2012. Today IBM responded by trying to change the subject to what it paid in one single year, and what it may or may not pay in future years.

To understand IBM’s evasive argument, first remember that CTJ’s corporate tax numbers are from the form 10-K, the document corporations file with the Securities and Exchange Commission (SEC) to disclose relevant information to shareholders. We report what are recorded on the 10-K as “current” U.S. income taxes (the federal income taxes paid by the corporation in a given year) and the profits earned by the corporation in the U.S. that year. The current taxes paid over a five-year period divided by the U.S. profits earned over a five-year period is the effective federal corporate tax rate over a five-year period.

Here the description from Politico’s “Morning Tax” of what happened when IBM was asked about CTJ’s analysis:

IBM argues that the CTJ analysis does not take into consideration the fact that the tech company heavily relies on deferrals to lower their year-to-year income tax bill noting that, according to its calculations, the company paid more than $2.5 billion in taxes for its 2012 domestic operations. That comes out to a tax rate of 27 percent, a spokesperson for the company told Morning Tax.

First, IBM focuses only on its U.S. effective tax rate in 2012, which our own figures show was in fact higher than in the previous four years. But IBM’s federal tax rate wasn’t 27 percent; it was only 14 percent. In the previous four years, IBM’s federal tax rate was only 3.5 percent, which is why IBM’s five-year effective rate is 5.8 percent.

Second, IBM seems to think that we should give the company credit for taxes that it did not pay, specifically the “deferred” taxes that it may or may not pay in the future. But quite reasonably, we count such “deferred” taxes only when and if they are actually paid.

“IBM is happy to minimize its federal tax bill, but apparently not so happy for the public to know just how little it pays to support our country,” said CTJ director Bob McIntyre. “If and when IBM starts paying its fair share in taxes, we’ll be pleased to report it. But that hasn’t been the case for at least the past 12 years.” 


US PIRG Report: States Can Crack Down on Corporations that Shift Profits to Tax Havens


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Citizens for Tax Justice has long argued that offshore tax avoidance by corporations will never be fully addressed until Congress reforms our laws to tax the domestic profits and the offshore profits of our corporations at the same time and at the same rate. Only then will corporations have no incentive to make their U.S. profits appear to be generated in tax havens like Bermuda and the Cayman Islands. But a new report from US PIRG explains that state governments can at least protect state corporate income taxes from the worst offshore abuses with reforms newly adopted by Montana and Oregon.

As PIRG explains, these two states

“simply treat profits that companies book to notorious tax havens as if it were domestic taxable income. This simple loophole closing uses information that multinational companies already report to states. The reform could be introduced anywhere, but is readily available to the 24 states and District of Columbia that have already modernized their tax codes by enacting “combined reporting,” which requires companies to report on how profits are distributed among jurisdictions so that they are taxed based on how much business activity they do in those places. All told, closing this tax haven loophole could save the remaining 22 states and District of Columbia over a billion dollars annually.”

Read the US PIRG report.


Republican Platform Now Endorses Gutting Laws that Stop Offshore Tax Evasion


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(Updated 1/24/2014 to reflect the fact the resolution passed.)

At its yearly winter meeting, the Republican National Committee approved a resolution calling for the repeal of the Foreign Account Tax Compliance Act (FATCA), a major law enacted in 2010 (as part of the HIRE Act) to clamp down on offshore tax evasion.

FATCA was enacted in the wake of revelations that the Swiss bank UBS had helped American citizens evade U.S. income taxes by illegally hiding income in offshore accounts. The most important provisions of FATCA basically require Americans, including those living abroad, to tell the IRS about offshore assets greater than $50,000, and apply a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

Those who are directly affected by FATCA are likely to be few in number and they certainly have the means to fill out the disclosure form required with their federal income tax return under its provisions. The $50,000 threshold excludes housing and other non-financial assets. That means that even a relatively well-off American who works for a few years abroad and even someone who owns a house abroad will not be affected unless they hold over $50,000 in cash or financial assets in the other country.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation. (JCT does have a history of underestimating tax enforcement measures.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, this seems like a modest reform.

In May 2013, Senator Rand Paul introduced legislation to repeal the important parts of FATCA, claiming that this is necessary to protect privacy. But there simply is no right of Americans to hide income from the IRS. As we explained at that time, for a country with a personal income tax (like the U.S.), that kind of information sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

“Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.”

Other opponents of FATCA, like the Wall Street Journal, have claimed that it is causing Americans living abroad to renounce their U.S. citizenship, but as we have pointed out, those renouncing citizenship make up a tiny fraction of one percent of the six million Americans living abroad.


The Bennet-Blunt Corporate Tax Amnesty Must Be Stopped


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On January 17, Senators Michael Bennet (D-CO) and Roy Blunt (R-MO) and nine of their colleagues introduced the Senate version of Congressman John Delaney’s proposal providing a tax amnesty for profits that corporations officially hold offshore on the condition that they purchase bonds to fund an infrastructure bank.

Instead of tapping corporate profits that are “locked” offshore as supporters claim, this proposal would provide an enormous tax break for profits that already are in the U.S. economy but which are booked in offshore tax havens in order to avoid taxes, a practice that will be more common  if this proposal is enacted. In fact, the net effect of this bill could be to reduce employment.

Background of Delaney Bill

In the spring of 2013, Congressman John Delaney, a Democrat from Maryland, proposed to allow American corporations to bring a limited amount of offshore profits to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.

Rep. Delaney and the 50 House cosponsors to his bill seem to believe they can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which they believe would create jobs in America. How much a corporation could repatriate tax-free would be determined through a bidding process, with a maximum cap of six dollars in offshore profits repatriated tax-free for every one dollar spent on the bonds. Unfortunately, as explained below, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure.

So-Called “Offshore” Corporate Profits Are Largely Invested in the U.S.

Many lawmakers seem to mistakenly believe that the $2 trillion in “permanently reinvested profits” that American corporations officially hold abroad are locked out of the American economy. This has led many to support proposals to exempt American corporations’ offshore profits from U.S. taxes, either on a permanent basis (through a so-called “territorial” tax system) or a temporary basis (with a tax amnesty for repatriated offshore profits).

But the premise is wrong. As a recent report from the Center for American Progress explains, American corporations’ offshore profits are actually invested in the U.S. economy already because they are deposited in U.S. bank accounts or invested in U.S. Treasury bonds or even corporate stocks. The real problem is that our tax system traps badly needed revenue out of the country by allowing American corporations to “defer” (delay) paying U.S. taxes on profits characterized as “offshore” — even if they are really earned here in the U.S.

A study from the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin of Michigan) that examined the corporations benefiting the most from the repatriation amnesty enacted by Congress in 2004 found that almost half of their offshore profits were actually in U.S. bank accounts, Treasury bonds, and U.S. corporate stocks. Corporations are, in theory, restricted by law from using their offshore profits to pay dividends to shareholders or to directly expand their own investments. But even these rules can be circumvented when the corporations borrow money for these purposes, using the offshore profits as collateral.

Biggest Benefits Would Go to Corporations Disguising their U.S. Profits as Tax Haven Profits

The proposal would provide the biggest benefits to the most aggressive corporate tax dodgers. Often, an American corporation has offshore profits because its offshore subsidiaries carry out actual business activity. But a great deal of the profits that are characterized as “offshore” are really U.S. profits that have been disguised through accounting gimmicks as “foreign” profits generated by a subsidiary (which may be just a post office box) in a country that does not tax profits (i.e., an offshore tax haven). These tax haven profits are the profits most likely to be “repatriated” under such a proposal for two reasons.

First, offshore profits from actual business activities in foreign countries are often reinvested into factories, stores, equipment or other assets that are not easily liquidated in order to take advantage of a temporary tax break, but profits that are booked as “foreign” profits earned by a post office box subsidiary in a tax haven are easier to “move” to the U.S.

Second, profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. The U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

Not a Way to Create Infrastructure Jobs

While infrastructure spending is economically stimulative, this plan is an absurdly wasteful and corrupt way to fund job creation. First, the proposal is designed to give away two dollars in tax breaks for every one dollar spent on infrastructure (and the jobs to build infrastructure) — to give away up to $105 billion in corporate tax breaks in order to raise $50 billion to finance the infrastructure bank. Because up to six dollars could be repatriated tax-free for every one dollar corporations spend on the bonds, up to $300 billion would be repatriated tax-free to raise $50 billion for the infrastructure bank. As already explained, the profits most likely to be repatriated have not been taxed at all by any government so under normal rules the full 35 percent U.S. tax rate would apply, and 35 percent of $300 billion is $105 billion.

Second, this proposal would be the second tax amnesty for offshore profits (the first was enacted in 2004), and once Congress signals its willingness to do this more than once, corporations could be encouraged to shift even more profits (and even jobs) offshore in hopes of benefitting from another tax amnesty in the future. In other words, the proposal’s net effect on U.S. job creation could be negative.


The Dumbest Spending Cut in the New Budget Deal


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The newly passed $1.1 trillion bipartisan budget appropriations bill includes myriad spending cuts, but the $526 million cut to the Internal Revenue Service (IRS) has to be the most foolish. Under the new budget, the IRS's 2014 budget will be $11.3 billion, which is $1.7 billion less than the administration requested and about $2.5 billion higher than the radical 25 percent cut proposed by some House Republicans earlier this year.

As Nina Olsen, the non-partisan United States Taxpayer Advocate, notes in her recent annual report, cutting the IRS budget makes very little sense since every "dollar spent on the IRS generates more than one dollar in return - it reduces the budget deficit." In fact, as we've noted before, every dollar invested in the IRS can generate as much as $200 in deficit reduction.

Unfortunately, lawmakers have not seen it this way in recent years. Since 2010, the IRS has been forced by an 8 percent cut in its budget (adjusting for inflation) to reduce its staff by 11,000 people and its spending on training its employees by 83 percent. These cuts have taken place even though there are now 11 percent more individual and 23 percent more business tax returns for the agency to handle.  As IRS Commissioner John Koskinen testified at his confirmation hearing in December, a recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that at least $8 billion had been lost in compliance revenue due to budget cuts.

The impact on customer service has also been dramatic. In 2013, customer service representatives from the IRS were only able to answer 61 percent of the calls made from taxpayers seeking help, which is a substantial drop from the 87 percent that were answered ten years ago. In other words, some 20 million calls by taxpayers seeking help went unanswered last year, even before this new round of budget cuts.

Ironically, many lawmakers have used the IRS “scandal” (the agency’s targeted scrutiny of organizations seeking tax-exempt status by screening for political words in their names) to argue that it be punished with these and even larger budget cuts. The reality is that the lack of budgetary resources was a major driver of the short-cuts that created the “scandal.” Further budget cuts will only create more problems at the agency.

If Congress is really interested in making the IRS work more effectively and in reducing the deficit, it should substantially increase the IRS's budget. When Congress cuts the IRS's budget, the only people who are really punished are the honest American taxpayers. 

The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.


New CTJ Report: Congress Should Offset the Cost of the "Tax Extenders," or Not Enact Them At All


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Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.

The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.

Read the report.


Why Everyone Is Unhappy with Senator Baucus's Proposal for Taxing Multinational Corporations


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Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.  

The Need for Revenue-Raising Corporate Tax Reform

Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.

Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.

There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”

Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.

A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.

CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.

The Need to Stop Corporations from Shifting Jobs and Profits Offshore

While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.

CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly. 

These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).

CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.

The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.

Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.

But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.

Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)

The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate. 

The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.

Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.

Senate Finance Committee Chairman Max Baucus (D-Mont.) today released a draft proposal for changing the way the United States taxes multinational corporations. Robert McIntyre, the director of Citizens for Tax Justice, made the following statement about the draft:

"Senator Baucus promises that his proposals will not increase the paltry federal income taxes that multinational corporations now pay. He also promises that he will later propose changes to the taxes on domestic corporations, which will also be 'revenue-neutral.' And he also says that he 'believes tax reform as a whole should raise significant revenue.'

"That must mean that Baucus plans to propose 'significant' increases in personal income taxes (or some new tax). Will this mean higher taxes on the rich? That seems unlikely, since Baucus is expected to propose a considerably lower top personal income tax rate. So that apparently will leave the middle class and maybe the poor holding the bag.

"That is certainly not what most Americans think tax reform should be about. Lawmakers should instead reform the corporate income tax in a way that raises significant revenue."


Let's Face It: Delaware and Other U.S. States Are Tax Havens


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On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.

“I trained foreign police forces to “follow the money” and track the flow of capital across borders.

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”

The question embarrassed me. There was nothing I could do.

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”

Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”

This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.

The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.

Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.

In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.


New Comprehensive Tax Reform Plan from Citizens for Tax Justice


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Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013


Ireland's Empty Gesture on Curbing Offshore Tax Abuses


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Responding to growing international pressure over his country’s role in facilitating international tax avoidance, Ireland's Minister of Finance, Michael Noonan, proposed a new measure that would end the ability of companies to avoid taxes by incorporating in his country without declaring any country of residence for tax purposes. The move comes after a Senate investigation in the U.S. that revealed Apple’s massive tax avoidance involving subsidiaries in Ireland.

But this move will not make any difference in the ability of Apple and other companies to avoid Irish, and by extension, other countries’ taxes. The law, as proposed, would continue to allow a company incorporated in Ireland to select any country to be its “residence,” the place where it is technically managed. In other words, a subsidiary company incorporated in Ireland can declare a tax haven as its residence and pay zero taxes on its profits and on profits funneled to it from related companies in other countries.

In fact, this approach is already being used by Google, which reportedly routed $12 billion in royalty payments to Bermuda, an infamous tax haven, using the "Double Irish with a Dutch Sandwich" technique. This strategy involves shifting profits (on paper) through subsidiaries that are shell companies in several jurisdictions until they are officially in an Irish shell company that legally “resides” in a country like Bermuda or the Cayman Islands which has no corporate income tax. The U.S. and many other countries have rules that would immediately tax certain payments made directly into a shell company in Bermuda or the Cayman Islands, so this complicated strategy takes advantage of the treaties between Ireland, the Netherlands, and many other countries that waive those taxes.

While it would fail to block this sort of tax avoidance, Ireland’s new proposal has succeeded so far in generating headlines that suggest the country is taking action and doing its part in international efforts to crack down on tax avoidance. Most reporting does, however, note somewhere in the text of the article, if not the headline, the fact that the change would likely have no material effect on tax avoidance (unlike some of the fumbled reporting on the end of the Securities and Exchange Commission investigation into Apple).

The leaders of the U.S. Senate investigation into Apple's tax practices, Senators Carl Levin and John McCain, noted in a statement that in order for Ireland to demonstrate that it’s truly "ready to close the door on these egregious corporate tax abuses," it must ensure that the new rules truly prevent companies from excluding substantial income from the Irish corporate tax by declaring residency in a tax haven. In other words, unless this recent proposal is followed up with changes that would actually impact tax avoidance, then it may be nothing more than a PR move.

Congress can end Apple's and other U.S. companies’ avoidance of U.S. taxes right now, without waiting for Ireland to do the right thing. The best way is to simply repeal the rule that allows American corporations to defer paying (PDF) U.S. taxes on their offshore profits.  American corporations only use gimmicks like the “Double Irish with a Dutch Sandwich” so that they can defer (for years or forever) U.S. taxes on profits they claim are earned offshore. If Congress fails to repeal deferral, it can at least curb the worst abuses of deferral by enacting the Stop Tax Haven Abuse Act which Senator Levin has introduced.


How Congress Can Fix the Problem of Tax-Dodging Corporate Mergers


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On Wednesday, the New York Times examined the practice of some U.S. corporations inverting (reincorporating in another country) by merging with foreign companies, and the extent to which this is done to avoid U.S. taxes. This problem is probably somewhat overblown, but to the extent that it exists, there are straightforward ways Congress can address it.

It used to be that U.S. tax law was so weak in this area that an American corporation could reincorporate in a known tax haven like Bermuda and declare itself a non-U.S. corporation. (Technically a new corporation would be formed in the tax haven country that would then acquire the U.S. corporation.) In theory, any profits it earned in the U.S. at that point should be subject to U.S. taxes, but profits earned by subsidiaries in other countries would then be out of reach of the U.S. corporate tax.

But what sometimes happened in practice was that even the profits earned in the U.S. were made to look (to the IRS) like they were earned in the tax haven country through practices like “earnings stripping,” which involves loading up the American subsidiary company (the real company) with debt owed to the foreign parent (the shell company). That would reduce the American company’s taxable profits and shift them to the tax-haven parent company, which wouldn’t be taxable. A 2007 Treasury study concluded that a section of the code enacted in 1989 to prevent earnings-stripping (section 163(j)) did not seem to prevent inverted companies from doing it.

This problem was to some extent addressed by the “anti-inversion” provisions of the American Jobs Creation Act (AJCA) of 2004, resulting in the current section 7874 of the tax code. The problem highlighted in the Times article is that American corporations today can sometimes get around section 7874 by merging with an existing foreign corporation.

It’s a safe bet that some of these mergers really are motivated partly by a desire to avoid U.S. taxes on profits earned in other countries and also to avoid U.S. taxes on what are really U.S. profits but which are shifted into tax havens through earnings stripping. This may well be the case in the three examples cited of American corporations merging with Irish corporations, as Ireland has a low corporate tax rate and has featured prominently in tax schemes used by Apple and other companies.

In other cases, tax avoidance may not be the only factor in firms deciding to merge — as in the examples cited in the article of an American company merging with a French firm and another merging with a Japanese firm. But even in both of these cases, the new companies are to be incorporated in the Netherlands, which has also featured in tax avoidance schemes used by companies like Google, which suggests that tax avoidance is certainly a sweetener in the deal.

One question not addressed is the extent to which an Obama administration proposal to crack down on earnings stripping by inverted companies would resolve this problem. This proposal would basically apply a stricter version of section 163(j), the provision that is supposed to stop earnings stripping, to inverted companies that manage to avoid being treated as a U.S .corporation under section 7874, the anti-inversion provision enacted in 2004.

Specifically, section 7874 treats an ostensibly foreign corporation as a U.S. corporation for tax purposes if (1) it resulted from an inversion that was accomplished (meaning the U.S. corporation became, at least on paper, obtained by a corporation incorporated abroad) after March 4, 2003, (2) the shareholders of the American corporation own 80 percent or more of the voting stock in the new corporation, and (3) the new corporation does not have substantial business activities in the country in which it is incorporated.

Section 7874 provides much less severe tax consequences for corporations that meet these criteria except that shareholders of the American company now own between 60 percent and 80 percent (rather than 80 percent or more) of the voting stock in the newly formed corporation. Section 7874 does not treat these corporations as U.S. corporations, and that may allow them to save a lot of money by stripping earnings out of their American subsidiary companies. The President’s proposal would apply a stricter version of section 163(j), the provision that is supposed to prevent earnings stripping, to these companies (and to companies that inverted before 2003).

Tax avoidance by the corporations resulting from the mergers discussed in the Times article might be curbed by the Obama proposal. To be affected, the new corporations need to be at least 60 percent owned by the shareholders of the American company and also have no substantial business activities in the country where they are incorporated. For example, the merger between an American company and a French company and the merger between an American company and a Japanese company both resulted in companies incorporated in the Netherlands. They may be over 60 percent owned by the American shareholders and it’s likely that they have no substantial business in the Netherlands, a notorious tax-haven conduit.

But even if the resulting company does not meet these tests, Congress should subject them to the stiffer earnings stripping rule. In other words, the administration’s proposal is arguably too weak. For example, even if one of these mergers results in a company that does have substantial business activities in the country where it is incorporated, why should that company be allowed to strip earnings from its American subsidiary companies?

For that matter, the stricter earnings stripping standard that would be imposed under the President’s proposal is one that reasonably should apply to any foreign-owned company. Among other things, it would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus most certain significant deductions that corporations are allowed to take.

This seems like a reasonable standard to apply regardless of whether or not an inversion has taken place. In other words, Congress should enact an expanded, stronger version of the President’s proposal.


When Congress Turns to Tax Reform, It Should Set These Goals


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Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.

Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.

When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Read CJT’s new report —
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters

 

 


Stop Tax Haven Abuse Act Would Curb Some of the Worst Multinational Corporations' Tax Dodges


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Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.

Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.

The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.

Among the key features of the “Stop Tax Haven Abuse Act” are the following:

■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.

■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.

■ Current tax rules allow U.S. corporations to tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.

■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.

For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.


An Underfunded IRS Means More Tax Avoiders Get a Pass


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A troubling new report (PDF) released by the Treasury Inspector General for Tax Administration (TIGTA) has revealed that the substantial budget cuts imposed on the IRS meant that it recovered $5 billion less in revenue from enforcement efforts in 2012 compared to 2011. That is, while law abiding citizens and businesses paid the taxes that make up the bulk of our federal revenues, more non-payers, late-payers and under-payers are getting a pass because there aren’t enough IRS staffers to follow up with them.

This drop in revenue should come as no surprise given that the IRS's annual budget was actually cut by some $329 million dollars from Fiscal Year 2010 to 2012. To absorb these cuts, the IRS was forced to get rid of 5,000 front-line enforcement workers – a 14 percent reduction of its enforcement personnel. Not so coincidentally, the TIGTA report notes that this 14 percent reduction in personnel correlates with the 13 percent reduction in revenue from enforcement over the past two years.

As we've noted before, cutting spending on the IRS budget is about the most counterproductive (and we’re being polite – other words are more fitting) ways to reduce the deficit because every one dollar invested in the IRS’s enforcement, modernization and management system saves the federal government as much as $200 in the long run.  So that loss of $5 billion in tax revenue in the TIGTA report amounts to this: every dollar the government cut under the guise of savings actually increases the deficit by $15. How's that for bad math?

Rather than reversing the budget cuts to the IRS in Fiscal Year 2013, Congress allowed the sequester to cut an additional $600 million from the agency’s budget. Looking ahead to Fiscal Year 2014, House Republicans are pushing to carve an additional $3 billion from the IRS, which would represent a cut of almost 25 percent of its entire budget.

Meanwhile, some of those pushing for these cuts view them as somehow a way to fix the IRS after the recent (trumped up) scandal over the process of granting tax exempt status to certain political groups. The reality that these anti-tax conservatives seem to be missing is that that the lack of resources at the agency was one of the main causes of the administrative issues surrounding the scandal, according to the National Taxpayer Advocate (PDF). In other words, cutting the IRS's budget further will almost certainly generate more problems within the agency, not fewer. 

Considering that the $50 billion recovered through enforcement in 2012 is only a fraction of the estimated $450 billion total tax gap, Congress should not only restore the funding lost to years of budget cuts, but significantly increase funding to help us reduce the deficit and pay for critical government investments.   


New CTJ Report Explains How Congressman Delaney Misinforms about His Proposed Repatriation Holiday


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In July, a letter signed by thirty national organizations and a report from Citizens for Tax Justice (CTJ) both warned members of Congress about a proposal from Congressman John Delaney of Maryland that would have the effect of rewarding corporations that use offshore tax havens to avoid U.S. taxes. Rep. Delaney’s staff responded with a “rebuttal” that is itself based on misinformation about corporate tax law and about the likely effects of the proposal, which would provide a tax amnesty for offshore profits (often euphemistically called a “repatriation holiday”) for corporations that agree to finance an infrastructure bank.

A new report from Citizens for Tax Justice addresses each point made by Rep. Delaney's "rebuttal" as well as the myth that a huge amount of money is "locked offshore" and waiting for a tax break to lure it back into the U.S. economy.

Read the report.


Remembering an International Tax Expert and Voice for Tax Justice


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Michael McIntyre, an international tax professor at Wayne State University, former consultant to the United Nations, OECD, and several governments, and the brother of CTJ director Robert McIntyre, passed away on August 14 at the age of 71.

An obituary published in Tax Notes allows Michael McIntyre’s colleagues, among them his brother, to share their thoughts:

“My older brother, Mike, was my mentor and best friend,” said Citizens for Tax Justice Director Robert McIntyre. “He's the reason that I've spent my career in tax policy.”

“Over the past four decades, we collaborated on tax reform proposals that ran the gamut from international, to federal, to state and local, to American Indians. We were soul mates both in tax policy and in life,” Robert McIntyre said. “He made the world a better place, not just for me, the rest of his large extended family, and his many friends, but also for the countless people here in the U.S. and around the world who benefited from the tax policies he promoted.”

Michael McIntyre published a multitude of books and articles on a variety of tax topics. He served as a senior adviser to the Tax Justice Network (TJN) and was the editor of a Web page dedicated to taxation and policy issues for developing countries.

“Mike played a major role in shaping TJN's research and advocacy programs,” said TJN Director John Christensen.

“He has been a trenchant critic of the OECD's dismal lack of progress over umpteen decades, while setting out a cogent case for more radical reform, especially in the direction of combined reporting,” said Christensen. “Mike gave his time and expertise generously, and he'll be remembered fondly for his permanent smile and constant good humor.”

Read the Tax Notes obituary in full.


Surge in Tax-Wary U.S. Expats Renouncing Citizenship? Not Really.


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In its latest attack on the Foreign Account Tax Compliance Act (FATCA), the Wall Street Journal describes in ominous tones the “record” number of individuals who renounced their U.S. citizenship in the last quarter, supposedly driven by FATCA’s reporting requirements, which are designed to prevent tax evasion.

What scary headlines about a “surge” in expatriations leave out, however, is what a miniscule number it really is. Even the six-fold increase this quarter compared to the second quarter of last year meant that only 1,130 people renounced their citizenship in the second quarter of this year. To give some context, this number represents less than 0.02 percent of the estimated six million Americans that live abroad.

Surge in Expatriations to Avoid Taxes!” “US expatriates renounce citizenships at record rate!” Pretty alarming headlines. News coverage of what complying with FATCA actually entails has been misleading and would make you think that the rise in renunciations is driven by the "overly burdensome" rules that are financially crippling US citizens living abroad. The fact is, the primary component of FATCA affecting individuals is the requirement that U.S. citizens with $50,000 or more in foreign financial assets (which does not include housing or other basic non-financial assets) simply have to attach a disclosure statement about their accounts in their yearly tax return.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA's anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation (and JCT has a history of  underestimating such tax enforcement measures, too.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, rather than seeking to curtail FATCA, Congress should expand on these efforts through legislation like the Stop Tax Haven Abuse Act in the House or the CUT Unjustified Loopholes Act (PDF) in the Senate.

While the emigration of every single wealthy person abroad is makes big news (see, for example, coverage of Facebook billionaire Eduardo Saverin or singer Tina Turner), the reality is that the number of renunciations is negligible – especially compared to the number of new citizen naturalizations each year. In fact, 503,104 people have been naturalized in the US since the start of Fiscal Year 2013, which means well over 250 people embracing US citizenship for every one person renouncing it over the past several months.

Asking the few and largely wealthy Americans with substantial offshore financial assets to do a little extra paperwork is not unreasonable when we know that cracking down on offshore tax evaders will bring in revenues to invest in things like roads, schools, healthcare and a quality of life that make the US so attractive to aspiring U.S. citizens.


Nike's Tax Haven Subsidiaries Are Named After Its Shoe Brands


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Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0 


CTJ Presents the Nuts & Bolts of Corporate Tax Reform


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On July 19, CTJ’s Steve Wamhoff made a presentation to members of the Alliance for a Just Society on the details of corporate tax reform. Because several of the audience members were small business owners, the presentation partly focused on the offshore tax loopholes that give large multinational corporations an unfair advantage over domestic businesses, which are often smaller businesses.

The presentation makes the following points:

1. The U.S. needs more revenue.

2. New revenue must come from progressive sources.

3. The corporate tax is a progressive revenue source.

4. American corporations are undertaxed.

5. One way to get more corporate tax revenue is to close tax loopholes related to offshore tax havens.

6. We must stop current proposals to expand these loopholes (territorial tax system, repatriation holiday).

Needless to say, corporate lobbyists and many of their friends in Congress and even in the Obama administration disagree with many of these points, so the presentation provides a detailed argument for each.

See the slideshow from the presentation, providing details on each of these points.

In response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business, the Organization for Economic Co-operation and Development (OECD) has released an “Action Plan on Base Erosion and Profit Shifting.” While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The OECD’s action plan does make several suggestions that would make it harder for corporations to pretend their profits are all earned in Bermuda, the Cayman Islands or other tax havens, many of which echo proposals offered by President Obama and Senator Carl Levin. For example, the plan clearly targets rules allowing corporations to immediately take deductions for expenses of doing business offshore, when they will not pay taxes on their offshore profits for years or ever. The plan seems to target rules like the U.S.’s “check-the-box,” which allow corporations to give different governments conflicting information about the nature of offshore entities so that their profits are not taxed by any government anywhere.

But we will never really end the ability of corporations to pretend their profits are all “earned” in offshore tax havens so long as developed countries continue to rely on “territorial” tax systems or a “deferral” tax system like the U.S. has.

In his comment on the OECD action plan, Professor Sol Picciotto, a Senior Adviser to the Tax Justice Network, sums it up well:

“The Action Plan contains some ambitious measures, which would produce some benefits if implemented. But its approach is like trying to plug holes in a sieve. The OECD has chosen a road that is strewn with obstacles, and leads in the wrong direction. The OECD has missed this big opportunity to crack open the door to the big reform that the world’s citizens need...”


Citizen Groups Oppose Rep. Delaney's Tax Amnesty for Offshore Corporate Profits


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In a July 16 letter, 30 national organizations asked members of Congress to reject a proposal by Congressman John Delaney of Maryland because it rewards the most aggressive corporate tax dodgers with tax breaks and even gives them control of a new bank that would be created to fund American infrastructure. The plan is one in a history of Congressional schemes to hand corporations a massive tax break under the pretense that it will help the U.S. economy.

Delaney’s proposal would allow a “repatriation holiday,” meaning American multinational corporations could bring their offshore profits to the U.S. without paying the U.S. taxes that would normally be due, on the condition that they purchase bonds to finance a new bank that would be set up to fund infrastructure projects.

A CTJ report released in June explains that much (and perhaps most) of the profits that American corporations claim to hold “offshore” are actually already invested somehow in the American economy.  So, these profits are not truly “offshore,” and the argument that the U.S. economy is somehow deprived of these dollars doesn’t really hold up. 

As the CTJ report explains, the corporations most likely to benefit from Delaney’s proposed “holiday” are not those with actual business activities offshore, because those companies have their offshore assets tied up in things like factories and equipment. The benefits are much more likely to go to those American corporations that have made their U.S. profits appear to be foreign profits by artificially shifting them to subsidiary companies in offshore tax havens. These subsidiaries are often nothing more than a post office box, and the profits they claim to generate are easy to shift around using accounting gimmicks. 

Incredibly, Rep. Delaney’s proposal would allow those corporations repatriating the most offshore profits — that is, those corporations that are most aggressive and successful at tax dodging — the right to nominate the majority of the members of the board controlling the infrastructure bank.

As the report and letter point out, the last tax amnesty for offshore corporate profits, enacted in 2004, did nothing to create jobs and actually benefitted many corporations that cut their American workforces. The Joint Committee on Taxation found that a repeat of this type of measure would lose revenue partly because it would encourage American companies to shift (on paper, using accounting gimmicks) even more profits into offshore tax havens where they are not subject to U.S. taxes.

In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don't want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.


U.S. and Other G8 Governments Move to Prevent Tax Evasion and Avoidance, But Is It Enough?


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On June 18, the leaders of the G-8 countries meeting in Northern Ireland released a declaration that included cracking down on the use of shell corporations for tax evasion and principles related to this goal, while the White House released a national action plan to implement these principles.

Shell Corporations Facilitate Tax Evasion, Money Laundering and Terrorism

Certain countries and certain U.S. states (Delaware most of all) allow individuals to form shell companies that carry out no real business but only serve to hide money and the owners of money from our government or a foreign government.

This is a problem for tax enforcement and other types of law enforcement, because the motivation for forming a shell company is often to evade income taxes owed to the U.S. government or a foreign government or to launder money generated by criminal activity or even to funnel money to terrorists. 

If you think that sounds far-fetched, think again. Viktor Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists. As Senator Carl Levin (D-MI) explained in a 2009 hearing:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Of course, it’s much more difficult to convince other governments to cooperate with our efforts to stop tax evasion, money laundering and terrorist funding when we allow their citizens to establish shell companies in the U.S. that are used for these very purposes.David Cameron, Prime Minister of the United Kingdom, which is currently the president of the G-8

In 2009, Senators Carl Levin (MI-D), Chuck Grassley (R-IA) and Claire McCaskill (D-MO) introduced a bill that would require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation.

Unfortunately, this legislation, the Incorporation Transparency and Law Enforcement Assistance Act, was stymied by Senator Tom Carper of Delaware, who introduced an alternative bill that would defeat the entire purpose of the reform. (Among other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being.)

The White House action plan released during this week’s G-8 summit proposes to “advocate for comprehensive legislation” which “could” include several possible provisions, one of which would “define beneficial owner as a natural person…” In English, that means that states would have to record the actual human being who ultimately owns the company being formed. 

The bill previously promoted by Senator Levin and his allies in 2009 would accomplish this, and hopefully they will soon reintroduce their proposal with White House backing to implement the action plan. But, the organization Global Financial Integrity points out that the action plan is “essentially the same action plan the White House has had for two years under the Open Government Partnership, and the administration has yet to really ‘advocate for comprehensive legislation’” like Senator Levin’s proposal.

Some organizations addressing exploitation and impoverishment of developing countries, which suffer disproportionately from illegal outflows of capital into offshore tax havens, praised the move by the G-8 and the member countries that have released action plans.

Global Witness noted that part of the G-8’s success today can be attributed to the government of the United Kingdom, which has historically turned a blind eye to tax evasion in its territories but used its current presidency of the G-8 to push for reform. UK Prime Minister David Cameron has said that he would prefer to go even farther than the reforms being discussed today and make the owners of all incorporated entities known to the public, rather than just to law enforcement officials, an idea supported by Global Financial Integrity.

Addressing Tax Avoidance by Companies Like Apple

The declaration issued from the G-8 meeting in Northern Ireland also addressed other tax issues. While mysterious shell corporations are the tool of individuals seeking to illegally hide their income from governments, well-known, publicly traded corporations are involved in offshore tax practices that are probably not illegal, but ought to be. (Think of Apple’s recently uncovered tax avoidance practices using Ireland as a tax haven.)

The G-8’s declaration addresses this type of corporate tax avoidance, for example by stating, “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Unimpressed, Global Financial Integrity says in its statement, “While we’re happy that the G8 acknowledges aggressive tax avoidance and profit shifting is a problem, they failed to agree to curtail it in any meaningful way. This is one area where coordination of changes to legal systems is essential to combat the problem, and public reporting by companies of revenues, profits, losses, taxes paid and number of employees in each country in which they operate is necessary in order to see whether those measures are having the desired effect.”

Ultimately, the White House must promote concrete legislative proposals rather than just vague principles. As we saw with the Incorporation Transparency and Law Enforcement Assistance Act, even a bill cracking down on money laundering and terrorist funding (the sort of bill the public would likely support) can be defeated by vested interests without advocacy from the President.


CTJ Report: Apple Is Not Alone


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Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple Corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But a new report from Citizens for Tax Justice (CTJ) documents seventeen other Fortune 500 corporations which disclose information, in their financial reports, that strongly suggests they, too, have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are doing the same, taking advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.

Read the report, Apple is Not Alone.

Apple is one of eighteen Fortune 500 companies that disclose that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. These 18 corporations have $283 billion in cash and cash equivalents parked offshore.
The report also identifies an additional 235 companies that choose not to disclose the U.S. tax rate they would pay on an almost $1.3 trillion in combined unrepatriated offshore profits.

Taken together, if all of these companies’ offshore holdings were repatriated, it could amount to $491 billion in added corporate tax revenue according to CTJ's calculations.

CTJ concludes that the most sensible way to end offshore tax avoidance of the kind documented in this report would be to end “deferral,” the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States – with, of course, a “foreign tax credit” against any taxes they pay to foreign governments to ensure that these profits are not double-taxed.


Yes, What Apple's Doing in Ireland May Well Be Legal -- and That's the Problem


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 What Rand Paul Fails to Understand about Apple’s Tax Dodging

During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.

As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal. 

Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes

Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.

Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.

An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.

On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.

Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)

Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”

As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.

Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.

This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.

The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.

On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.

The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)

A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.

Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.

The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.

Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”

Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.

It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.

Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.

So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.

Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules

The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.

All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.

Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.

The Bottom Line

So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.

Policy Solutions

Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.

Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.

One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying). 

PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.


New CTJ Report: Apple Holds Billions of Dollars in Foreign Tax Havens


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Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.

That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.

As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

Read the report.


Tax Rules for the Rich are Different, Just Ask Commerce Nominee Pritzker and Senate Candidate Gomez


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First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.


Senator Rand Paul's Fight for Offshore Tax Havens


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Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.

In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:

“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.

“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.

“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.

“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”

###

The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. More at www.itep.org.

 


New Corporate Tax Lobby: Don't Call It LIFT, Call It LIE


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A group of so far undisclosed corporations are forming a lobbying coalition called Let’s Invest for Tomorrow (LIFT) to press Congress to enact a “territorial” tax system. The coalition should be named Let’s Invest Elsewhere (LIE), because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.

A “territorial” tax system is a euphemism to describe a tax system that exempts offshore corporate profits from the U.S. corporate tax.

U.S. corporations are already allowed to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are brought back to the U.S. This creates an incentive for U.S. corporations to shift operations (and jobs) offshore or just disguise their U.S. profits as offshore profits so that U.S. taxes can be deferred. Completely exempting those offshore profits from U.S. taxes would obviously increase the incentives to shift jobs and profits offshore.

A CTJ report from 2011 explains these problems in detail and concludes that Congress should move in the opposite direction by ending “deferral” rather than adopting a territorial tax system. The stakes are getting higher each year as U.S. corporations hold larger and larger stashes of profits offshore. (A recent CTJ paper finds that 290 of the Fortune 500 have reported their profits held offshore, which collectively reached $1.6 trillion at the end of 2011.)

The Public Opposes Territorial Tax Proposals – But Will Congress Listen?

In a world where politicians actually did what voters wanted, we would not have to worry that this coalition might actually succeed in its goal of bringing about a territorial tax system, which the public would clearly oppose.

For example, a survey taken in January of 2013 asked respondents, “Do you approve or disapprove of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries?” 73 percent of respondents said they “disapprove” and 57 percent said they “strongly disapprove.” The same survey found that 83 percent of respondents approved (including 59 percent who strongly approved) of a proposal to “Increase tax on U.S. corporations’ overseas profits to ensure it is as much as tax on their U.S. profits.”

And yet, it’s unclear that lawmakers are paying attention to the interests or opinions of ordinary Americans.

It is true that Vice President Biden went out of his way at the Democratic National Convention to criticize the territorial system proposed by Mitt Romney. And it’s also true that the “framework” for corporate tax reform released by the White House in February of 2012 refused to endorse a territorial system.

But the framework only rejected a “pure territorial system.” CTJ pointed out that the time that probably no country has a “pure territorial system,” so this does not provide much assurance or guidance.

Meanwhile, it has long been rumored that many of the Democratic members of the Senate Finance Committee (the Senate’s tax-writing committee) favor a territorial system.

Republican lawmakers, for their part, have long fully endorsed a territorial system. House Ways and Means Committee Chairman Dave Camp made public his proposals for a territorial system in October 2011. That very day, CTJ released a letter signed by several national labor unions, small business associations and good government groups opposing Camp’s move, but the response from lawmakers was relatively muted.

Perhaps more disturbing, at his recent confirmation hearings, the new Treasury Secretary, Jack Lew, appeared open to the idea of a territorial system.

Similar Corporate Lobbying Coalition Failed to Get a Temporary Exemption for Offshore Profits (Repatriation Holiday)

Some readers will remember that during 2011 and 2012 a group of corporations calling itself WIN America pushed for an tax amnesty for offshore profits (which they preferred to call a “repatriation holiday.”) The coalition was made up of companies who believed that Congress might not be naïve enough to give them the much bigger prize, a territorial system. As explained in a CTJ fact sheet, a repatriation holiday would temporarily exempt offshore profits from U.S. taxes, while a territorial system would permanently exempt those offshore profits from U.S. taxes, and would therefore cause even greater problems.

WIN America did give up and disband. But that could be largely because influential lawmakers like Ways and Means Chairman Dave Camp are indicating that the bigger prize, a territorial system, is within reach.

Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On

It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.

The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.

The reality is very different and much more complicated. While the U.S. has a relatively high statutory tax rate for corporations, the U.S. corporate tax has so many loopholes that most major multinational corporations seem to be paying a lower effective tax rate in the U.S. than they pay in the other countries where they have operations. CTJ’s major 2011 report on corporate taxes studied most of the profitable Fortune 500 companies and found (on pages 10-11) that among those with significant offshore profits (making up a tenth or more of their overall profits) two-thirds actually paid a lower effective tax rate in the U.S. than in the other countries where they operated.

On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.

This is confirmed by a recent report from the Congressional Research Service finding that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five very small tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries. In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.

These statistics are outrageous and demonstrate that U.S. corporations are engaging in various accounting tricks in order to make it appear (for tax purposes) that their profits are generated in countries where they won’t be taxed. The LIFT coalition will count on the fact that this is simply too difficult for ordinary people to understand – which makes educating the public about this more important than ever.


Why We Hope Obama's Nominee for Treasury Secretary Is a Quick Learner


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If confirmed, Jack Lew, the President’s nominee for Treasury Secretary, will oversee IRS enforcement of tax laws and will oversee the development and analysis of tax proposals, among other things. It would therefore be reassuring if Lew did not seem unaware of what is going on in tax havens, and unaware of the problems with proposals to exempt corporations’ offshore profits from U.S. taxes.

Much has been made of the fact that Lew, who worked at Citigroup before serving as chief of staff to the President, had an investment in a fund registered in the Cayman Islands, a notorious offshore tax haven.

Lew told the Senate Finance Committee on Wednesday that the fund was set up by Citigroup, that he didn’t know where it was based, and that he lost money on it in any event.

Lew “Unaware of Ugland House” in the Cayman Islands

What’s actually alarming about Lew’s comments before the committee is that he didn’t even seem to understand the crisis in our tax system that the Cayman Islands and other tax havens are taking advantage of.

For example, Republicans on the committee told of how the fund in question was registered in Ugland House, a small five-story building in the Cayman Islands where over 18,000 companies are officially headquartered. Obviously, most of these “companies” consist of little more than a post office box. Profits are shifted from real business activities in countries like the U.S. into these “companies” in Ugland House. The profits can then be designated as Cayman Island profits, because the Cayman Islands has no corporate income tax.

Those of us who follow tax issues know that Ugland House has been discussed for years at Congressional hearings — although Wednesday’s hearing may be the first time that it was brought up by Republicans.

The Washington Post describes the back-and-forth during the hearing on this topic:

Lew argued that “the tax code should be constructed to encourage investment in the United States.”

“Ugland House ought to be shut down?” Grassley asked.

“Senator, I am actually not familiar with Ugland House,” the witness pleaded. “I understand there are a lot of things that happen there.”

Lew Unaware that Offshore Tax Avoidance, Not Just Tax Evasion, Is a Problem

Equally troublesome is Lew’s defense. “I reported all income that I earned. I paid all taxes due.”

This completely misses the point and misses the point of the debate over tax reform. No one has suggested that Lew committed tax evasion — the criminal act of hiding income from the IRS. The Cayman Islands and other tax havens are certainly used for tax evasion, but that’s not the issue here.

The much larger problem is that our tax system allows massive tax avoidance — practices that reduce taxes that are mostly legal, but in many cases should not be legal — and that tax havens like the Cayman Islands are exploiting this weakness.

Lew probably did pay all the taxes that were due under the tax laws as they’re currently written. The same is true of General Electric, Boeing, Pepco, Verizon, Wells Fargo and the dozens of corporations that paid nothing over several years because the tax laws allowed it. The scandal is not that laws were broken, but that the laws actually allowed this.

Is Lew Unaware that the Administration Has Rejected a “Territorial” Tax System — Or Does He Know Something We Don’t?

One Senator at the hearing asked Lew about the possibility of the U.S. shifting to a “territorial” tax system — which is a euphemism for a tax system that exempts the offshore profits of corporations.

Lew said “there is room to work together.” He said [subscription required] “We actually have a debate between whether we go one way or the other [towards a territorial system or a worldwide system], and we have a hybrid system now. It’s a question of where we set the dial.”

This is alarming for those who thought that the administration had already wisely rejected moving to a territorial system. As CTJ has explained in a report and fact sheet, U.S. companies now can “defer” (delay indefinitely) paying U.S. taxes on their offshore profits, which creates an incentive to use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in a tax haven like the Cayman Islands. Under a territorial system, they would never have to pay U.S. taxes on offshore profits, which would logically increase the incentive to engage in such tax dodges.

A year ago, the Obama administration stated that it opposes a “pure territorial system.” CTJ pointed out at the time that a little more clarity is needed because probably no country has a “pure” territorial system, and the “impure” ones are facilitating widely reported tax avoidance in Europe and across the world.

That clarification seemed to arrive when Vice President Joe Biden went out of his way to criticize the idea of a territorial tax system at the 2012 Democratic convention, referring to a study concluding that it could cost the U.S. hundreds of thousands of jobs.

We hope that this is simply another case of Lew being uninformed, and not an indication that the administration may shift towards favoring a territorial system.


New Google Documents Show Another Year of Offshore Tax Dodging


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In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.

To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented.  And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.

So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.

 

A two-page report from Citizens for Tax Justice explains new evidence of offshore tax avoidance by corporations unearthed by the non-partisan Congress Research Service (CRS).

In a nutshell, CRS finds that U.S. corporations report a huge share of their profits as officially earned in small, low-tax countries where they have very little investment and workforce while reporting a much smaller percentage of their profits in larger, industrial countries where they actually have massive investments and workforces.

This essentially confirms that corporations are artificially inflating the share of their profits that they claim to earn tax havens where they don’t really do much real business. Remember that offshore tax avoidance by corporations often takes the form of convoluted transactions that allow U.S. corporations to claim that most of the profits from their business are earned in offshore subsidiaries in a tax haven like Bermuda, and that the offshore subsidiary my be nothing more than a post office box.

And Bermuda is a great example. CRS finds that the amount of profits that U.S. corporations report to earn in Bermuda is 1,000 percent of Bermuda’s GDP! That’s ten times Bermuda’s gross national product — ten times the tiny country’s actual economic output. This is obviously impossible and confirms that much of the profits that U.S. corporations claim are earned there represent no actual economic activity but rather represent profits shifted from the U.S. or from other countries to take advantage of that fact that Bermuda has no corporate income tax.

Sadly, most of the tax dodges practiced by U.S. corporations to shift their profits to tax havens are actually legal. CTJ’s report explains what type of tax reform is needed to address this.


Small Business Owners Push Back Against Anti-Tax Agenda


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For years, groups like the US Chamber of Commerce and the National Federation of Independent Business (NFIB) succeeded in portraying the consensus position of the “small business community” as staunchly favoring lower tax rates on top income earners and corporations. The tax debate surrounding the so-called “fiscal cliff” has exposed the myth that these groups actually represent small businesses and shows that many of these large national groups have very different interests at stake.

The biggest pushback in recent days against the anti-tax agenda represented by the Chamber and NFIB has come from groups of small business owners who are fed up with having the position of “small business owners” misrepresented. In recent days, thousands of business owners and executives have signed on to a letter calling for the expiration of the Bush tax cuts for those making over $250,000 and arguing that only a small fraction of the wealthiest small business owners would even be affected by allowing this to occur. In addition, many small business leaders have signed on to a letter calling for corporations to contribute more to reduce the deficit as part of the fiscal cliff deal. The letter also calls for an end to the offshore tax loopholes that give larger multinational corporations a tax advantage over small businesses.

The reason so many small business owners are raising their voices is because they believe that raising revenue is critical to stopping spending cuts in education, health care, and infrastructure that are crucial to building a strong economy. Backing this up, a poll of small business owners by the Small Business Majority found that, by a 2 to 1 margin, small business owners believed that spending cuts would do more harm to the economy than higher taxes on the wealthy. As Brian McGregor, owner of the Silver Dollar Saloon in Montana and a supporter of allowing the tax cuts for the wealthiest to expire, put it, “What my business needs is customers – not more tax cuts for the rich.”

The growing opposition of small business owners has not done much to change the position of NFIB and the Chamber, which continue to push for more tax cuts for the wealthy and corporations. This is not all that surprising, since both groups have historically been more interested in promoting the Republican Party than the real preferences of the small business community. In fact, during 2012 the Chamber spent over $32 million (98% of its total spending on electioneering communications) supporting Republican candidates, while the NFIB spent $4 million (100% of its total spending on electioneering communications) supporting Republican candidates. This is especially striking considering that less than half of small business owners identify as Republican.

The intransigence of the NFIB and Chamber has become even more clear as other big business backed groups like the Business Roundtable and Fix the Debt have begun calling for a fiscal cliff deal that includes revenue increases. To be fair, however, many critics suspect that the Business Roundtable and Fix the Debt groups messaging may have more to do with cutting a backroom deal to lower corporate taxes, than in protecting small businesses. In fact, one recent study using data from Citizens for Tax Justice found that the companies backing the Fix the Debt campaign could directly benefit to the tune of $134 billion if such a deal included a move to a territorial tax system, while at the same time further disadvantaging small businesses that do not have offshore earnings.

The more small business owners speak out for themselves, rather than allowing corporate-backed national organizations to speak for them, the more lawmakers will realize that small businesses demand robust government investments and are hurt when multinational corporations are allowed to escape paying their fair share in taxes.


New Report Shows Why Corporate Lobbyists' Proposals Should Not Be Part of Budget Deal


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New CTJ Report: Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore

More Evidence that the Corporate Lobbyists’ Version of Tax “Reform” Should NOT Be a Part of Any Budget Deal 

A new report from Citizens for Tax Justice explains that among the Fortune 500 corporations, 290 have revealed that they, collectively, held nearly $1.6 trillion in profits outside the United States at the end of 2011. This is one indication of how much they might benefit from a so-called “territorial” tax system, which would permanently exempt these offshore profits from U.S. taxes.

Just 20 of the corporations — including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs — held $794 billion offshore, half of the total. The data are compiled from figures buried deep in the footnotes of the “10-K” financial reports filed by the companies annually with the Securities and Exchange Commission. 

Read the report.

The appendix of the report includes the full list of 290 corporations and the size of their offshore profits in each of the last three years, as well as the state in which their headquarters is located.

Corporate lobbyists and their allies in Congress are pushing for two changes that would benefit their investors but leave America worse off. Neither one of these should be included in any deal coming out of the so-called “fiscal cliff” negotiations.

Congress Should Reject a Revenue-Neutral Corporate Tax Overhaul

The first goal of the corporate lobbyists is an overhaul of the corporate tax that does not raise any revenue. Some corporations have stated that they would support closing corporate tax loopholes, but only if all the revenue savings is used to reduce the corporate tax rate. This would be a terrible waste of revenue at a time when lawmakers are considering cutting public investments that middle-income people rely on in order to reduce the deficit.

In May of 2011, a letter circulated by Citizens for Tax Justice was signed by 250 organizations, including organizations from every state, calling on Congress to close corporate tax loopholes and use the revenue saved for public investments and deficit reduction rather than lowering the corporate tax rate.

CTJ also has published a fact sheet and a detailed report explaining why corporate tax reform should be revenue-positive rather than revenue-neutral.

Unfortunately, the Obama administration endorsed a revenue-neutral corporate tax overhaul in the vague “framework” it released in February of this year. As lawmakers face real choices about whether to cut programs like Medicare, Medicaid, and education, we believe many will realize that demanding corporations contribute more to the society that makes their profits possible is more sensible.

Congress Should Reject a Territorial Tax System

The second goal of the corporate lobbyists is a transition to a “territorial” tax system, which would call off U.S. taxes on the offshore profits of U.S. corporations. As the new CTJ report explains, many of those profits are truly U.S. profits that have been made to look like “foreign” profits generated in tax havens through convoluted accounting schemes.

Citizens for Tax Justice has published a fact sheet and a detailed report explaining why Congress should reject a territorial tax system.

Thankfully, the administration has not endorsed a territorial tax system and Vice President Biden even criticized it during his speech at the Democratic National Convention. We hope that the President and his allies in Congress hold firm to this position. 


CEOs and Fix-the-Debt Gang Lobby for Terribletorial Corporate Tax System


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While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.

Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.

Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.

Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K.  Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K.  Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.

The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?


The International Relations Issue the Candidates Probably Won't Debate: Territorial Taxes


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As President Obama and Governor Romney discuss foreign policy in their final debate, there’s a major issue that they will, unfortunately, probably ignore: the tangle of international tax rules that allow offshore tax dodging.

The U.S. tax system is already in a mess when it comes to the rules we use to determine how profits of multinational companies are taxed. President Obama has proposed some steps to rein in the worst abuses, but most of these are relatively timid or vague. Meanwhile, Romney proposes that the U.S. follow the example of other countries that have a “territorial” system, which has facilitated high-profile tax avoidance schemes by major multinational corporations. On this issue, the U.S. needs to show leadership that has been lacking so far.

Here are the basics: The U.S. could either have a “worldwide” tax system, in which we tax the offshore profits of our corporations (but provide a credit for foreign taxes paid, to prevent double-taxation) or the U.S. could have a “territorial” tax system, which exempts the offshore profits of our corporations from U.S. taxes. What we have now is a hybrid of the two systems. The U.S. does tax the offshore profits of U.S. corporations and provides a credit for foreign taxes paid, but also allows the corporations to “defer” (delay indefinitely) those U.S. taxes, until the profits are brought to the U.S.

Under the current rules, U.S. corporations have a reason to prefer offshore profits over U.S. profits, because they benefit from the rule allowing them to “defer” U.S. taxes on offshore profits indefinitely. So they may shift operations (and jobs) to a country with lower taxes, or engage in convoluted transactions that make their U.S. profits appear to be earned by subsidiaries in countries with no (or almost no) corporate tax (i.e., offshore tax havens).

The offshore subsidiary may be nothing more than a post office box in the Cayman Islands. CTJ recently explained that Nike, Microsoft, Apple and several other companies essentially admit in their public documents that they engage in these tricks.

If allowing corporations to “defer” U.S. taxes on offshore profits causes them to prefer offshore profits over U.S. profits, then eliminating U.S. taxes on offshore profits would logically increase that preference, and increase these abuses. And that’s exactly what a territorial system, which Romney supports, would do.

CTJ has explained in a fact sheet and a more detailed report that we should move in the opposite direction by simply repealing “deferral” so that we have a true “worldwide” tax system. A CTJ report on options to raise revenue explains that repealing deferral would raise $583 billion over a decade.

President Obama has proposed far more limited steps. His most recent budget blueprint proposes to raise $148 billion over ten years with a package of provisions to crack down on the worst abuses of deferral. (The official revenue estimators for Congress projected that the provisions would raise a little more, $168 billion over a decade.)

These proposals would do some good. For example, one would end the practice of companies taking immediate deductions against their U.S. taxes for interest expenses associated with their offshore operations while they defer (not pay) the U.S. taxes on the resulting offshore profits indefinitely. Another would help ensure that the foreign tax credit, which is supposed to prevent double-taxation of foreign profits, does not exceed the amount necessary to achieve that goal. Still another would reduce abuses involving intangible property like patents and trademarks, which are particularly easy to shift to tax haven-based subsidiaries that are really no more than a post office box.

But none of these reforms proposed as part the President’s budget really addresses the underlying problem with a deferral system or a territorial system: The IRS cannot figure out which portion of a multinational corporation’s profits are truly generated in the U.S. and which portion is truly generated overseas. If a U.S. corporation tells the IRS that a transaction with an offshore subsidiary wiped out its profits, the IRS cannot challenge the company unless it can prove that the transaction was unreasonable. And that’s difficult to do, especially when the transaction involves some product or service that is not comparable to anything else in the market (like a new invention, pharmaceutical, or software program).

President Obama has also proposed, as part of his “framework” for corporate tax reform, a minimum tax on offshore corporate profits. Because he has not yet specified any rate for this minimum tax, it’s impossible to say whether it would be effective. If the rate is set extremely low, then it would change very little. In theory, if the rate was set high enough, it would almost have the same effect as ending deferral — but no one in the administration is talking about anything that dramatic. (Read CTJ’s response to the President’s “framework” for corporate tax reform.)

There are some members of Congress looking very seriously at offshore tax dodging by corporations (like Senator Carl Levin). But serious leadership is unlikely to come from the presidential candidates anytime soon.

Photo of Barack Obama, Mitt Romney, and Cayman Islands Flag via Austen Hufford, Justin Sloan, and J. Stephen Con Creative Commons Attribution License 2.0 


Nike, Microsoft and Apple Admit to Offshore Tax Shenanigans; Other Companies Plead the Fifth


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While the presidential candidates debate whether the tax code rewards companies that move operations overseas, a new CTJ report shows that ten companies, including Apple and Microsoft, indicate in their own financial statements that most of their foreign earnings have never been taxed – anywhere. The statements the companies file with the SEC reveal that if they brought their foreign profits back to the U.S., they would pay the full 35 percent U.S. tax rate, which is how we can surmise that no foreign taxes were paid that would offset any of the 35 percent U.S. tax rate.

The most likely explanation of this is that these profits, instead of being earned by real, economically productive operations in developed countries, are actually U.S. profits that have been shifted overseas to offshore tax havens such as Bermuda and the Cayman Islands. This same type of offshore profit shifting was the focus of a recent Senate hearing where Microsoft and Hewlett-Packard found themselves in the hot seat.

In the tax footnote to their financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested,” that is, parked offshore. Calling it "indefinitely reinvested" allows them to embellish their bottom lines, on paper anyway, because they don't have to account for the cost of U.S. taxes they'd pay on that offshore income. But, they must disclose the total amount of their unrepatriated profits, and also estimate the U.S. tax that would be due if those earnings were repatriated.

A new CTJ analysis of the Fortune 500 found that, although 285 companies reported unrepatriated foreign earnings, only 47 companies disclosed in their financial statements an estimate of the U.S. income tax liability they would face upon repatriation, although that disclosure is required by accounting standards. The remaining companies hid behind a common dodge that estimating the U.S. tax would be “not practicable.” Legions of lawyers and accountants help these companies avoid taxes but can’t calculate the costs to the U.S. treasury?

Which Fortune 500 Companies are Shifting Profits to Offshore Tax Havens? ranks the 47 companies that do disclose this figure by the tax rate they’d pay if they repatriated their foreign earnings. Seven of the top ten are members, either directly or through a trade association, of the WIN America campaign that is lobbying for a repatriation tax holiday (aka corporate tax amnesty) that would let them bring the foreign earnings home at a super-low rate.

It’s not as though the rest of the Fortune 500 is innocent. CTJ’s report notably says nothing about the 238 Fortune 500 companies that have admitted having offshore hoards but refuse to calculate how much tax they’d pay. These companies include suspected tax dodgers like Google and HP, each of which has subsidiaries in known tax haven countries. In all likelihood, many of these other companies have been as successful in avoiding tax as the ten companies ranked highest in CTJ’s report.  

The new CTJ report is another reminder of what U.S.-based multinationals will do to avoid paying tax and why changing the U.S. international tax system to a territorial system is such a bad idea. Moving to a territorial tax system, which is supported by Gov. Romney and Congressman Ryan, would give companies a permanent tax holiday and encourage even more aggressive offshore profit shifting. President Obama has proposed corporate tax reform that would include a “minimum tax” on foreign earnings, although the rate has not been specified. And Congress, it seems, will be taking up overhaul of the corporate tax code next year, so watch this space for the facts about corporate America’s campaign to make dodging taxes even easier.

 


About that Cayman Islands Trust....


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In last night’s presidential debate, Governor Romney pointed out that President Obama’s pension holds investments in Chinese companies and even in a Cayman Islands trust. Unlike Romney’s self-directed Individual Retirement Account, the President’s pension is in a system over which the President has absolutely no control; it’s an account with the Illinois General Assembly Defined Benefit Pension Plan. To somehow compare that with the vast wealth that Romney has personally placed offshore is ludicrous.

While Romney was at the helm of Bain Capital, the private equity firm began forming all of its new funds in the Cayman Islands through labyrinthine structures that allow investors to legally avoid – and illegally evade – tax. In addition, Gov. Romney has a Bermuda corporation which has never been explained and, of course, there is that famous Swiss bank account. Over 250 of the 379 pages of Romney’s 2011 tax return are devoted to disclosing transactions with offshore corporations and partnerships.

If Romney was trying to make the point that most investors have some holdings in companies outside of the U.S., we buy that. But if Romney’s point was that facilitating tax avoidance and evasion through complicated offshore structures is both normal and acceptable or in any way ordinary, we could not disagree more.


Microsoft and HP in the Hot Seat as Senate Investigates Offshore Profit Shifting


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A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.

On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.

The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.

Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income.  Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.

In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.

The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).

Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.

It's outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.


Swiss Bank Tipster Gets Record $104 Million Reward from IRS


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Bradley Birkenfeld, a former banker at the Swiss banking giant UBS, received a record-setting reward of $104 million from the Internal Revenue Service (IRS) for blowing the whistle on the bank’s systematic efforts to woo wealthy Americans investors and then help them evade taxes. Birkenfeld’s revelations resulted in UBS paying a $780 million fine to the US government, and the recovery of more than $5 billion from American taxpayers took part in the IRS’s amnesty program to avoid criminal charges for their own offshore tax evasion.

Birkenfeld participated in the UBS scheme (he served jail time and is now under house arrest). His insider disclosures led the IRS to other UBS bankers who had persuaded wealthy Americans to place $20 billion of assets in UBS in order to facilitate tax evasion that -- obviously -- boosted those clients’ returns. The IRS has charged two dozen offshore bankers and 50 American taxpayers with crimes, and at least 11 banks are still under criminal investigation.

The record payout to Birkenfeld is part of the IRS Whistleblower program that provides a substantial financial incentive, up to 30 percent of the taxes recovered, to encourage tipsters to come forward with information about tax evasion. This program is a smart piece of the IRS’s larger strategy to combat the estimated $40 to $70 billion in individual offshore tax evasion each year.

While the effort to combat offshore tax evasion has revved up over the past couple years, the IRS still lacks the tools it needs to fully confront evasion. To help fix this, Senator Carl Levin has proposed the Stop Tax Haven Abuse Act, which, among other things, would allow the Treasury to put more pressure on financial institutions that don’t cooperate with US tax enforcement. In addition, the Senate still needs to override Senator Rand Paul’s block and ratify the US-Swiss tax treaty so that the IRS can begin collecting critical information from Swiss banks about US tax evaders.

Even with the many hurdles the IRS faces, Stephen Kohn, the Executive Director of the National Whistleblowers Center, said that it had been a good day in the fight against tax evasion because the IRS sent “104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”



Are Bain's Tax Practices Actually Illegal?


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More and more people are asking if Bain Capital’s tax avoidance strategies are more than merely aggressive. On August 23, Gawker.com released a staggering 950 pages of documents related to Bain, the private equity firm that Mitt Romney founded, that confirm a lot of what we had previously surmised, including the fact that the Bain private equity funds set up “blocker” corporations to help tax-exempt investors avoid the unrelated business income tax and help foreign investors avoid tax in the U.S. and in their home countries.

CTJ senior counsel Rebecca Wilkins summarized it for Huffington Post: “The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax. Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions.”

The management fee conversions, detailed in several of the fund documents, do what they sound like they do: they convert some of the private equity firms’ annual management fees from clients, which would be taxed as ordinary income, into increased shares of partnership profits known as “carried interest”.  Carried interest is how these firms have structured their performance-based compensation from managing their clients’ investments, and carried interest is taxed at the special low rate at which capital gains are taxed. The management fee conversion is an effort to get yet another form of client compensation taxed at the capital gains rate, which is less than half the rate at which it would be taxed if it were ordinary income. These conversions save private equity firms’ partners millions of dollars in income taxes (the Bain partners alone have saved an estimated $220 million).

Colorado Law Professor Vic Fleischer, an expert on the taxation of private equity, quickly branded the management fee conversions as improper. “Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.”

It looks as though the New York Attorney General agrees. In July, weeks before the Gawker document dump, AG Eric Schneiderman served subpoenas on more than a dozen private equity firms, including Bain Capital.  The AG’s office is seeking documents related to whether the firms improperly converted management fees into additional carried interest, and running the investigation through its Taxpayer Protection Bureau

As controversial as private equity firm tax practices have become (thanks to Mitt Romney’s candidacy), we are likely to be hearing more about this investigation soon. Stay tuned.

 


Mitt Romney: I "Learned Leadership" From Tax Dodging Marriott CEO


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Presidential candidate Mitt Romney has been doing a lot of media interviews lately, and when the editors at Politico wrote up their sit-down with the GOP nominee, they characterized Romney’s answers to their questions as “the clearest window yet into how the lessons he gained in the corporate world would be applied to the presidency.

So what did he say? Romney told Politico “I learned leadership by watching people,” and named J.W. “Bill” Marriott, a fellow Mormon and the CEO of the hotel chain of the same name, as one of the people from whom he’s learned a lot about leadership. He put Marriott right up there with his mentor, Bill Bain.

While we can’t speak to Bill Marriott’s management style, we can tell you that during his 40-year tenure as CEO of Marriott International, the company engaged in aggressive tax avoiding – so aggressive that it later got them into trouble with the IRS.

The company used a tax shelter known as “Son of BOSS,” generating capital losses that a federal court deemed “fictitious,” “artificial” and a “scheme.” The government criminally prosecuted the promoters of this particular tax shelter and people are now serving federal prison sentences for it. In fact Romney himself, as a member of Marriott’s audit board, most likely signed off on this tax evasion strategy. The company has used other aggressive tax planning vehicles, too, even claiming a questionable tax credit for synthetic fuels.

Marriott also shows an ever-increasing ability to shift and shelter its profits offshore. While 3,122 of its 3,718 hotel properties are in the United States, the company pays more income tax in foreign jurisdictions than in the US, even though the majority of its profits must surely be generated here.

Marriott has over a hundred subsidiaries in known tax haven countries. For example, while it has only one hotel in the Cayman Islands, Marriott has 15 subsidiary companies there.  And in Luxembourg, where it has nine subsidiaries but zero hotels, Marriott uses one of its subsidiaries to collect royalties on its various brand names which the US cannot tax.

Does Romney admire and endorse these kinds of shenanigans? Hard to say for sure. But given his widely recognized use of some pretty aggressive (though legal, far as we know) strategies to avoid paying his personal taxes, we now have a glimpse into the values that inform his views on corporate tax policy.  We are beginning to sense a pattern in this presidential candidate, and it looks a little like disdain for our nation’s tax laws.

 

Today, the Senate Finance Committee approved a package of provisions often called the "tax extenders" because they extend several tax cuts, mostly benefiting businesses. A new report from Citizens for Tax Justice identifies two of the "tax extenders" as particular problems, despite having arcane names that are unknown outside of the corporate tax world: the “active financing exception” and the “CFC look-thru rules.”

Read the report: Don't Renew the Offshore Tax Loopholes: Congress Should Kill the “Extenders” that Let G.E., Apple, and Google Send Their Profits Offshore

These two temporary rules in the tax code — which allow U.S. multinational corporations to park their earnings offshore and avoid paying tax on them — expired at the end of 2011. If Congress refuses to extend these expired provisions, many U.S. companies will have much less incentive to send their profits (and possibly jobs) offshore.

►  The active financing exception and the CFC look-thru rules make it easy for U.S. multinational companies to move income to offshore tax havens and avoid paying U.S. tax.

►  Income shifting by multinational corporations using offshore tax havens, including transactions facilitated by these two rules, cost the U.S. Treasury an estimated $90 billion per year in lost tax revenue.

Read the report for more details.

At a hearing before the House Ways and Mean Committee today, witnesses from Corning, Inc. and 3M called for a “territorial” tax system, which would exempt offshore corporate profits from U.S. taxes, and which is part of Mitt Romney’s tax plan. Both companies said that their ability to compete internationally is harmed by the current system, in which U.S. corporations pay U.S. taxes on foreign profits when they bring them back to the U.S. (U.S. taxes minus a credit for whatever they already paid in foreign taxes).

As we explain in another post, our 2011 corporate tax study found that both of these companies actually pay higher effective tax rates in the other countries where they do business than they pay in the U.S., raising the question of how our tax system could be making them less able to compete.

Our 2011 study examined most of the Fortune 500 corporations that had been profitable for three years straight and found that two thirds of those corporations with significant foreign profits paid higher taxes to the foreign governments than they paid to the U.S. on their domestic profits.

Despite the U.S. having a relatively high statutory corporate tax rate, the effective U.S. corporate tax rate (the percentage of profits that U.S. corporations actually pay in income taxes) is clearly lower than that of most other countries (not counting tax havens, where companies don’t do any real business).

A refreshing dose of honesty was provided by the witness from Ford Motor Company, who said Ford’s offshore operations are, in fact, in “high-tax” countries and that Ford has no position on whether or not we should adopt a territorial system.

As we explain in a fact sheet and in a more detailed report, adopting a territorial system would mainly increase the incentives to shift operations (and jobs) to a handful of countries that really do have low corporate tax rates, or to simply disguise their U.S. profits as “foreign” profits generated in countries with low (or no) corporate taxes.

As we also explain in our report, the expansion of U.S. corporations’ operations in foreign countries may not be in the interest of U.S. workers.

In some situations those offshore operations may be substitutes for U.S. operations, meaning U.S. jobs are shipped offshore. In other situations those offshore operations may compliment U.S. operations, meaning U.S. jobs are created, particularly in corporate headquarters and research facilities, to support the offshore operations. Data from recent years shows that the former effect is more pronounced than the latter.

But either way, America does not need a tax system that favors offshore operations over U.S. operations — which is exactly what a territorial system would do. 

We’re not alone in this view. Last year, several small business associations, labor unions, and good government groups joined a letter opposing a territorial system. And today, the New York Times editorialized that the “corporate tax system needs reform, to raise more revenue, more fairly. The territorial tax system does not meet those criteria.”


Corning Pays Zero Federal Taxes, Tells Congress That's Too Much


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Earlier today, the U.S. House of Representatives’ Ways and Means Committee held a hearing on “tax reform and the U.S. manufacturing sector.”  With no apparent irony, the Committee invited Susan Ford, a senior official from champion corporate tax-avoider Corning, Inc., to testify on how Congress ought to make the U.S. tax code more friendly for manufacturing.

Ford raised eyebrows with her claim that in 2011, Corning paid a U.S. tax rate of 36 percent and a foreign tax rate of 17 percent.

It’s unclear how Ms. Ford comes up with a 36 percent rate, but clearly one thing she’s doing is counting Corning’s “deferred” U.S. taxes (taxes not yet paid) as well as “current” taxes (U.S. taxes actually paid in 2011). Of course, those “deferred” taxes may eventually be paid. If and when they are paid, they will be included in Corning’s “current” taxes in the year(s) they are paid.

But current taxes are what Corning actually pays each year, and Corning has amassed an impressive record of paying nothing, or less than nothing, in current U.S. taxes. CTJ and ITEP’s November 2011 corporate tax avoidance report found that between 2008 and 2010, Corning didn’t pay a dime in federal corporate income taxes, actually receiving a $4 million refund to add to its $1.9 billion in U.S. profits during this period. And a more recent CTJ report found that in 2011, Corning earned almost $1 billion in U.S. pretax income, and once again didn’t pay a dime in federal income tax. These data paint a dramatically different picture from the “36 percent” claim made by Corning before Congress today.

Ford’s testimony also includes a common but false claim about how U.S. taxes compare to foreign taxes:

“American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturers…”

In fact, over the 2008-2010 period, Corning paid a higher effective corporate income tax rate to foreign governments than it paid to the US government. (Which wasn’t hard to do, since it paid nothing to the U.S. government.) CTJ’s November 2011 report shows that over the 2008-2010 period, Corning paid  -0.2 percent (negative 0.2 percent) of its US profits in US corporate income taxes, but paid 8.6 percent (positive 8.6 percent) of its foreign profits in foreign corporate income taxes.

During the Congressional hearing, 3M executive Henry W. Gjersdal made a similar, and equally misleading, claim, in his testimony before the Committee, arguing that “[i]n an increasingly global marketplace, 3M’s high effective tax rate is a competitive disadvantage.”

But if 3M has a high worldwide effective tax rate, it’s not because the U.S. corporate income tax is high. In fact, like Corning, 3M paid a higher effective corporate income tax rate to foreign governments than it paid to the U.S. government between 2008 and 2010. Specifically, it paid an effective 23.8 percent rate on its US profits in US corporate income taxes and 27.1 percent on its foreign profits in foreign corporate income taxes, according to CTJ’s report.

Let’s remember that Corning also spent $2.8 million on lobbying during the 2008-10 period they spent enjoying a tax-free ride from the federal government. There are companies across the country paying their fair share in taxes and still making enough to grow their business and please their shareholders. Those are the kinds of companies Congress should be hearing from.

 


The IRS 35,000: How the Richest Americans Pay the Lowest Taxes


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A new study from the Internal Revenue Service confirms your worst fears about the tax code: it’s riddled with loopholes and Congress isn’t doing anything about it.  Year after year since 1977, the IRS has dutifully issued its “data on individual income tax returns reporting income of $200,000 or more, including the number of such returns reporting no income tax liability and the importance of various tax provisions in making these returns nontaxable” because Congress mandates it. And year after year, it shows that some of the very richest Americans are finding entirely legal ways to avoid federal income taxes altogether.

The new (and most recent) IRS data show that in 2009, more than 35,000 Americans* with incomes over $200,000 paid not a dime in federal income tax. For this group—less than one percent of all the Americans with incomes over $200,000, according to the study— itemized deductions and tax-exempt bond interest are among the main tax breaks that make this tax-avoiding feat possible. 

And, as if to illustrate how loopholes never die, these two tax breaks are among the oldest on the books; the exemption of bond interest dates to the century old statute establishing the income tax itself!

Sensible tax reforms could close (or at least shrink) these holes in the tax code.  The president, for example, has proposed a limit on the value of itemized deductions for the wealthiest Americans, and to extend the “Build America Bonds” program which keeps revenues flowing to cities but phases out the tax shelter the current system provides for the bond holders.

Of course, these wealthy taxpayers avoiding all their federal income tax responsibilities don’t even include the ones paying zero or low federal taxes because of the low rates at which investment income is taxed.

There is no excuse for hundred-year-old loopholes in a tax code: it’s time for Washington to clean up the tax code and take a brave stand against unwarranted exemptions that drain revenues and reward the rich.


* Others have focused on a smaller number of taxpayers, 21,000, who have an adjusted gross income (AGI) of over $200,000. But simple AGI excludes many types of income, such as tax exempt bond interest which is key to the low tax liabilities.


Tax Treason and a Facebook Billionaire


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Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.


Close the Newt Gingrich/John Edwards Loophole!


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Republican leaders in the Senate claim that they agree with the Democrats’ goal of extending a temporary reduction in interest rates on student loans, but oppose the Democrats’ proposal to offset the costs. But this proposal, which would close the “Newt Gingrich/John Edwards Loophole” used by owners of “S corporations” to avoid payroll taxes, is a reason to support the Senate Democrats’ bill, which was filibustered by Senate Republicans on Tuesday.

CTJ’s recent report on revenue-raising options explains the loophole (on pages 17-18) and explains a proposal from Congressman Pete Stark to close it. The Senate Democrats’ proposal to close the loophole is a little weaker (as explained below) but still certainly deserves support.

Income from work, including wages and salaries, is subject to federal payroll taxes (Social Security taxes and Medicare taxes). Some wealthy individuals, including (at one time) former presidential candidates John Edwards and Newt Gingrich, have used a loophole to make their earned income appear to be unearned income, in order to avoid payroll taxes. (This is particularly true of the Medicare tax because there is no cap on the amount of earnings subject to the Medicare tax.)

The scheme involves a type of business called an “S corporation,” which is distinguished from other corporations in that its profits are not subject to the corporate income tax but are simply included in the taxable income of the owners and therefore subject to the personal income tax. These profits should also be subject to payroll taxes when they are income from work, but an odd feature of S corporations allows some “active income” (income a business owner receives as a result of being involved in the operations of the business) to be characterized as income that is not earned and thus not subject to payroll taxes.

This is an invitation for abuse, and John Edwards accepted the invitation when he was a trial lawyer. He claimed that his name was an asset and that this asset (rather than his labor) was generating the income for his firm (which was an S corporation). Newt Gingrich’s recently released tax returns demonstrated that he, too, took advantage of this loophole.

To be sure, the Senate Democrats’ proposal doesn’t go as far as it should. It would apply the Medicare tax to this income only when the S corporation is “a professional service business in which more than 75% of its gross revenues come from the service of 3 or fewer shareholders.” The proposal is more restrictive than Congressman Stark’s bill in that it would apply to S corporation owners only if their adjusted gross income exceeds $250,000. It’s hard to see why anyone at any income level should be allowed to get away with this.

Nonetheless, the Senate Democrats’ proposal certainly sounds like it would, if in effect, have prevented John Edwards and Newt Gingrich from using this loophole to avoid payroll taxes. And that’s a reason to support the legislation, which may come up for a vote again according to Democratic leaders.

Photo of Newt Gingrich and John Edwards via Gage Skidmore and SS Kennel Creative Commons Attribution License 2.0


Senator Rand Paul: Champion of Secret Swiss Bank Accounts


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Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0


No Amnesty for Corporate Tax Dodgers!


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Representing a remarkable defeat for corporate tax dodgers, a spokesman for the so-called "Win America Campaign" confirmed this week that it has “temporarily suspended” its lobbying for a tax repatriation amnesty. The coalition of mostly high-tech companies pushed for months for a tax amnesty for repatriated offshore corporate profits. The campaign once seemed unstoppable because so many huge corporations, and veteran lobbyists with ties to lawmakers, were behind it. 

What supporters call a tax "repatriation holiday," or more accurately, a tax amnesty, allows US corporations a window during which they can bring back (repatriate) foreign profits to the US at a hugely discounted tax rate. The holiday’s proponents argue this would encourage multi-national corporations to bring offshore profits back to the US.

CTJ has often pointed out that the only real solution is to end the tax break that encourages U.S. corporations to shift their profits offshore in the first place — the rule allowing corporations to defer (delay indefinitely) U.S. taxes on foreign profits. Deferral encourages corporations to shift their profits to offshore tax havens, and a repatriation amnesty would only encourage more of the same abuse.

The Win America Campaign and its long list of deep pocketed corporate backers (including Apple and Cisco) spared no expense in pushing the repatriation amnesty, spending some $760,000 over the last year. This sum allowed the coalition to hire a breathtaking 160 lobbyists (including at least 60 former staffers for current members of Congress) to promote their favored policy in Washington.

So what prevented Win America from winning its tax amnesty? It was the steady march of objective economic studies put out by groups from across the political spectrum demonstrating how the holiday would send more jobs and profits offshore and result in huge revenue losses.

One of the toughest blows the repatriation amnesty took came from the well-respected Congressional Research Service’s (CRS) report showing what happened last time: the benefits from the repatriation holiday in 2004 went primarily to dividend payments for corporate shareholders rather than to job creation as promised. In fact, the CRS found that many of the biggest corporate beneficiaries of the 2004 holiday had since actually reduced their US workforce.

On top of this, the bipartisan and official scorekeeper in Congress, the Joint Committee on Taxation (JCT), found that a new repatriation holiday would cost $80 billion, which is a lot of money for a policy that would not create any jobs. Advocates for the tax holiday responded with studies of their own claiming the measure would actually raise revenue, but Citizens for Tax Justice (CTJ) immediately debunked the bogus assumptions underlying these reports. 

On top of the solid research there was the incredible and rare consensus among policy think tanks across the political spectrum to oppose the measure. The groups opposing a repatriation holiday included CTJ, Tax Policy Center, Tax Foundation, the Center on Budget and Policy Priorities and Heritage Foundation, to name a few.

The suspension of lobbying for the repatriation amnesty is a victory for ordinary taxpayers. And while the Win America Campaign isn’t dead – one lobbyist promised that "if there was an opportunity to move it, the band would get back together and it would rev up again" – its setback validates our work here at CTJ on corporate tax avoidance in all its forms. 


Obama Administration Scores a Victory for Honest Taxpayers Everywhere


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On Tuesday, advocates for transparency scored a victory while tax evaders suffered a loss. The Treasury Department issued final regulations requiring banks to report to the IRS any interest payments made to foreign account holders in the same way they must report interest payments made to U.S. resident account holders. You’d think this sort of regulatory issue would be a pretty dull affair, but sparks flew over the last several months as opponents of the new rule accused Citizens for Tax Justice and the Obama administration of supporting dictators, kidnappers and terrorists.

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so before now it never bothered to require banks to report those interest payments made to foreigners. But the IRS proposed to change that rule in order to reduce tax evasion by Americans, both directly (by helping to identify Americans who evade U.S. taxes by posing as foreign account holders) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

CTJ and the Financial Accountability and Corporate Transparency (FACT) Coalition continually expressed support for the regulations as they worked their way through the process, and CTJ’s Rebecca Wilkins testified before the Internal Revenue Service and the House Financial Services Committee in support of the rule. Sen. Carl Levin, a long-time crusader against tax haven abuse and chair of the Senate Permanent Subcommittee on Investigations also submitted comments. Levin’s committee has done ground-breaking investigative work on offshore tax evasion issues and chief counsel Elise Bean also testified in support of the proposed regulations.

At the House Financial Services Committee hearing in October, Republican Chairman Spencer Bachus read a letter from the Florida House delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

Wilkins explained that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement. Even more important, Wilkins explained, is that the rule in effect until now actually helped criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.

The hearings made clear that supporters of the regulations were greatly outnumbered by the tax cheaters’ lobby, the politicians, and the bankers who benefit from facilitating tax evasion. We’re really glad that the IRS didn’t rewrite the regulations to please them.

Today we’re celebrating this rare win in our long fight for good tax policy and robust enforcement. But the real winners today are honest taxpaying citizens all over the world.


New CTJ Report: Tax Tips with Mitt


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Millions of Americans will spend part of this upcoming weekend trying to navigate tax preparation software or filling out the actual paper forms to file their income tax returns before the Tuesday deadline. For those wishing they could pay less tax, outlined below are some tax planning ideas taken from a review of presidential candidate Mitt Romney’s tax returns.

Read the report.


New Rule: If Taxpayers Pay Your Salary, Come Clean on Your Finances


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Presidential candidate Mitt Romney took some heat this winter for delaying release of his tax returns and then, in January, released only one year’s worth (and an estimate for 2011). Now the calls for more disclosure are heating up again since the Washington Post reported that Romney is using an obscure ethics rule loophole to limit the disclosure of his Bain Capital holdings. An earlier Los Angeles Times article reported that Romney’s financial disclosure did not list many of the funds and partnerships that showed up in his 2010 tax returns, eleven of which are based in low-tax foreign countries such as Bermuda, the Cayman Islands and Luxembourg.

While it’s Romney’s offshore holdings that are making news, the fact is any government official using offshore tax havens right now is allowed to keep that a secret.

But that’s about to change. On March 29, Senators Dick Durbin (D-IL) and Al Franken (D-MN) introduced a bill that would require members of Congress, candidates for federal office, and high-ranking federal government officials to identify which of their assets are located in tax havens when they file their required financial disclosures. The Financial Disclosure to Reduce Tax Haven Abuse Act of 2012 (S. 2253) would amend the Ethics in Government Act of 1978.

Although there’s nothing illegal about having an offshore account, estimates are that abuses facilitated by these accounts cost the U.S. Treasury over $100 Billion per year in lost tax revenue. And while the Durbin-Franken bill won’t make it illegal, it would have the effect of limiting that sort of tax dodging among public officials – or weed out candidates unwilling to tolerate a little sunshine.

In his floor statement introducing the bill, Sen. Durbin stated “it might seem ridiculous that we don’t already know whether candidates and Members of Congress are using offshore tax havens.” Sen. Franken, in the press release, said “Americans deserve transparency from public officials.” We could not agree more.

Photo of Mitt Romney via Gage Skidmore Creative Commons Attribution License 2.0

 


New from CTJ: How Corporate Tax Dodgers are Buying Tax Loopholes


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Large majorities of Americans, including small business owners, want profitable corporations to pay their fair share in taxes, but none of the major proposals in Washington would make that happen.  They will close some loopholes while creating others and, meantime, leave the amount of revenues U.S. companies contribute just about where it is now – at an historic low.

Why the disconnect between public opinion and political action? Could it be because 98 percent of the sitting members of Congress have accepted campaign donations from the country’s most aggressive, successful tax avoiding corporations?

Citizens for Tax Justice and U.S. PIRG’s new report Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.

Loopholes for Sale details how thirty major, profitable corporations (a.k.a. the Dirty Thirty) with a collective federal income tax bill of negative $10.6 billion have made Congressional campaign contributions totaling $41 million over four election cycles. This includes PAC contributions to 524 current members of Congress.

These 30 tax dodging companies specifically targeted the leadership of both political parties, and members of the tax writing committees in the House and Senate. Top recipients of their largesse since the 2006 campaign have been:

1- House Minority Whip Steny Hoyer (D-MD) - $379,850.00
2- Speaker of the House John Boehner (R-OH) - $336,5000.00
3- House Majority Leader Eric Cantor (R-VA) – $320,900.00
4- Senator Roy Blunt (R-MO)Former House Minority Whip 2003-08) – $220,500.00
5- Senate Minority Leader Mitch McConnell (R-KY) - $177,001.00

These companies – including GE, Boeing, Honeywell and FedEx—also gave disproportionately to members of the tax writing committees, including $3.1 million to current members of the House Ways and Means Committee and $1.9 million to members of the Senate Finance Committee.

The “pervasiveness of that money across party lines speaks volumes about why major proposals to close corporate loopholes have not even come up for a vote,” says US PIRG’s Dan Smith.

So if the public is so clearly supportive of closing corporate tax loopholes and making corporations pay more than they currently are, why aren’t our elected officials moving forward on corporate tax reform? This report, along with our earlier Representation with Taxation on corporate lobbying expenditures, exposes how part of the answer may be found by taking a hard look at the way some of America’s largest companies translate wealth into influence.


iTax Dodger


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apple store.png

On Monday, Apple™ announced that it will distribute tens of billions of its cash holdings as dividends to shareholders, ending speculation over how the company will use the large pile of cash it has been sitting on. CFO Peter Oppenheimer went out of his way to point out that the dividends would be paid entirely from Apple’s U.S. cash, which means the $54 billion Apple has stashed in foreign countries will stay there. Oppenheimer explained that “repatriating cash from overseas would result in significant tax consequences under U.S. law.”

He’s not kidding! CTJ has estimated that Apple has paid a tax rate of just over three percent on this stash of “foreign” earnings, a clear indicator that much of this cash is likely parked in offshore tax havens and has never been taxed by any government. If Apple brought this cash back to the U.S., they’d likely pay something close to the 35 percent corporate tax rate that the law prescribes. The resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits – over the last 11 years.

Apple is part of the Win America Coalition that’s been lobbying hard for a repatriation holiday (a.k.a. tax amnesty) which would allow them to bring back those unrepatriated profits at a super-low tax rate. But that would only encourage U.S. multinational corporations to shift even more profits offshore in anticipation of the next holiday.

Apple’s CFO was astonishingly blunt: “we do not want to incur the tax cost.”  Rather than shirking its basic obligation to help pay for the public goods that contribute to its extraordinary success, Apple’s executives might want to “think different” about its tax dodging ways before its devoted consumers start thinking differently about their favorite high-tech brand.

Photo of Apple Logo via Marko Pako Creative Commons Attribution License 2.0


Press Release: General Electric's Ten Year Tax Rate Only Two Percent


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For Immediate Release: February 27, 2012 (rev. 4/12)

Contact: Anne Singer, 202-299-1066, ext. 27

General Electric Paid Only Two Percent Federal Income Tax Rate Over the Past Decade, Citizens for Tax Justice Analysis Finds; Actual Payments Were Probably Lower

Washington, DC – General Electric’s (GE) annual SEC 10-K filing for 2011 (filed February 24, 2012) reveals that the company paid at most two percent of its $80.2 billion in U.S. pretax profits in federal income taxes over the last 10 years.

Following revelations in March 2011 that GE paid no federal income taxes in 2010 and in fact enjoyed $3.3 billion in net tax benefits, GE told AFP (3/29/2011), “GE did not pay US federal taxes last year because we did not owe any.” But don’t worry, GE told Dow Jones Newswires (3/28/2011), “our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.”

As it turns out, however, in 2011 GE’s effective federal income tax rate was only 11.3 percent, less than a third the official 35 percent corporate tax rate.

“I don’t think most Americans would consider 11.3 percent, not to mention GE’s long-term effective rate of 1.8 percent, to be ‘normal,’ ” said Bob McIntyre, director of Citizens for Tax Justice.  “But for GE, taxes are something to be avoided rather than paid.”

Citizens for Tax Justice’s summary of GE’s federal income taxes over the past decade shows that:

O From 2006 to 2011, GE’s net federal income taxes were negative $3.1 billion, despite $38.2 billion in pretax U.S. profits over the six years.

O Over the past decade, GE’s effective federal income tax rate on its $81.2 billion in pretax U.S. profits has been at most 1.8 percent.

McIntyre noted that GE has yet to pay even that paltry 1.8 percent. In fact, at the end of 2011, GE reports that it has claimed $3.9 billion in cumulative income tax reductions on its tax returns over the years that it has not reported in its shareholder reports — because it expects the IRS will not approve these “uncertain” tax breaks, and GE will have to give the money back.

GE is one of 280 profitable Fortune 500 companies profiled in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.”  The report shows GE is one of 30 major U.S. corporations that paid zero – or less – in federal income taxes in the last three years.  The full report, a joint project of Citizens for Tax Justice and the Institute on Taxation and Economic Policy, is at http://ctj.org/corporatetaxdodgers/. Page 24 of the report explains “uncertain” tax breaks.

###

Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).

 

Note: GE’s profits and taxes for 2009 and 2010 have been slightly revised from an earlier version of this release. The earlier version inadvertently used GE’s restated 2009 and 2010 figures from GE’s 2011 annual report. Those restated figures excluded the half of NBC that GE sold to Comcast in 2011, and did not reflect GE’s actual results for those two years.


Facebook's First Public Filing Reveals Its Plan to be a Champion Tax Dodger


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(See CTJ director's full explanation of Facebook's use of the stock option deduction here.)

Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.

The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing?  If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.

In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.

The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.

See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0


The Huge Corporate Tax Issue that Obama's Jobs Council Can't Agree On


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A new report from President Obama’s jobs council reflects a major dispute between corporate and labor leaders over tax reform. According to Reuters, the report “notes disagreement among council members over whether to shift to a ‘territorial’ system that exempts most or all foreign income from corporate taxes when it is repatriated.”

The report is from the President’s Council on Jobs and Competitiveness, which includes labor and business leaders and is chaired by Jeffrey Immelt, CEO of the notorious tax dodger, General Electric.

A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from our corporate income tax. The bottom line is that our current system already provides a tax break that encourages U.S. corporations to shift investments offshore, and a “territorial” system would expand that tax break.

The existing tax break is the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (until they are “repatriated”). Often these profits remain offshore for years and the U.S. corporation may have no plans to repatriate them ever.

This “deferral” of U.S. taxes on offshore profits provides an incentive for U.S. corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.

These incentives for corporations to shift jobs and profits offshore would only increase if their offshore profits were entirely exempt from U.S. taxes, as would be the case under a territorial tax system.

Labor leaders know this, and labor unions have joined other organizations in opposing a territorial system. In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, the big unions joined a letter to the committee members urging them to reject any proposal for a territorial tax system.

Corporate leaders, on the other hand, have been calling for a territorial system because of the benefits it would provide for corporations trying to lower their tax bills. The likely “disagreement” cited in the White House report probably was between the labor leaders and corporate leaders on the President’s jobs council.

As we explain in this fact sheet, the real answer is not to adopt a territorial tax system but to end “deferral.” Here’s a report making the same case in much more detail.

Ending Tax Breaks for Companies Moving Jobs Offshore

President Obama hosted an “Insourcing American Jobs Forum” last week with business leaders who are bringing jobs back to the United States. During the event, the President announced he’d soon “put forward new tax proposals that reward companies that choose to bring jobs home and invest in America.  And we’re going to eliminate tax breaks for companies that are moving jobs overseas.”

As already explained, the most straightforward way to do this would be to end deferral.

Another possibility is that the President could push some of the modest, but still helpful, proposals made early in his administration to limit the worst abuses of deferral. (Here’s a CTJ report explaining these proposals.) Unfortunately, the President immediately started backing away from these and dropped the most significant of these reforms (a change to the arcane-sounding “check-the-box” rules) by the time he made his second budget proposal.

Real tax reform depends on the administration being far more willing to stand up to the corporate CEOs — including those who sit on his jobs council.

Photo of Council on Jobs and Competitiveness via The White House Creative Commons Attribution License 2.0


Tax Cheaters Cost Law Abiding Taxpayers $385 Billion in a Single Year


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A new report from the IRS estimates that individuals and businesses failed to pay $385 billion of the taxes they owed in a single year — a figure that many experts believe is an understatement. This comes just months after Congress cut funding for IRS enforcement activities that could recoup those dollars.

The IRS report estimates that taxpayers paid $450 billion less than was owed in 2006 and that the IRS eventually recovered $65 billion of that, leaving a net "tax gap" of $385 billion — which is roughly 14.5 percent of all taxes due.

As CTJ director Bob McIntyre explained in his testimony before the Senate Budget Committee a few years ago, he and other tax experts have long thought that the tax gap is actually larger than what the IRS estimates, particularly the portion that results from income hidden in offshore tax havens.

The IRS is less able to counter this type of tax evasion than it was in the past. Congress drastically slashed the IRS budget in the 1990s with the rationale that the agency was a bother to taxpayers. But another report released today by the National Taxpayer Advocate (a Bush appointee) concludes that the paltry budget for the IRS is itself the source of irritation for taxpayers who are affected by the various short-cuts the IRS must take in administering the tax system with fewer staff.

The more fundamental problem with the tax gap is that it means the vast majority of Americans, who pay the taxes they owe, are effectively subsidizing those who do not.

Most middle-income working people don't have many opportunities to evade taxes because their employers report their wages to the IRS and withhold a portion of them for taxes. On the other hand, corporations and business owners are responsible for a majority of the tax gap.

For example, underreporting of business income, corporate income, and compensation by self-employed individuals together make up a majority of the tax gap, according to the IRS report.

Congress's cuts to IRS funding are bizarre because this is one type of government spending that pays for itself several times over. In some cases a dollar of additional IRS funding can generate $200 of revenue. In other words, lawmakers have forced cuts to the IRS budget knowing full well that this is one type of spending cut that actually increases the budget deficit.

In addition to restoring IRS funding, there are other measures that Congress can take to increase income reporting and crack down on institutions that facilitate offshore tax evasion, as McIntyre called for in his testimony. Most of those proposals have still not been enacted, partly because they're opposed by the Tax Cheaters Lobby.

Photo of Tax Preparation via Money Blog Creative Commons Attribution License 2.0

On Thursday, a subcommittee hearing on a proposed IRS rule veered towards the absurd when Citizens for Tax Justice and the Obama administration were accused of supporting dictators, kidnappers and terrorists.

CTJ’s Rebecca Wilkins testified before a House Financial Services subcommittee in favor of a proposed rule that would require U.S. banks to report to the IRS any interest payments made to foreign account holders in the same way they report interest payments made to U.S. resident account holders.

Read Rebecca Wilkins’s Written Testimony

Watch Rebecca Wilkins’s Testimony

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so it never bothered to require banks to report those made to foreigners. But the IRS has proposed to change that rule in order to reduce tax evasion by Americans directly (to help identify Americans who evade U.S. taxes by posing as foreigners) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

Wilkins faced off against three witnesses opposed to the proposed rule and a panel of lawmakers controlled by bank supporters. Chairman Spencer Bachus read a letter from the Florida delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

In other words, Bachus and the Florida delegation believe we should help all foreign individuals break their home countries’ tax laws because some of those countries have corrupt governments.

Never mind that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement, as Wilkins calmly explained. Even more important, Wilkins explained, is that the rule in effect now actually helps criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.!

“America should not be a tax haven,” Wilkins told the panel.

Towards the end of her opening statement, Wilkins addressed her opponents directly:

"Chairman Bachus said, ‘Do we want to have blood on our hands, as a result of these rules?’ I want to tell you, the U.S. already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands."

Perhaps the most remarkable comment came at the end of the hearing from Bill Posey of Florida, who said to Wilkins, “Your advocacy for the government of Venezuela and, um, ultimately someday maybe Iran, North Korea and Cuba and the like, startles me, quite frankly. Most of us here try to put America first.” Posey then went on, not about putting Americans first, but about the plight of the people living under these dictatorships who hide their money in American banks. 

Wilkins had already explained that the IRS would not be required to provide foreign governments with the information it collects, but would be able to respond to a limited request under a tax information exchange agreement. Perhaps if Wilkins had been allowed to respond to Posey’s comments, she might have addressed some of his confusion, starting with his apparent belief that the United States has tax information exchange agreements with North Korea, Iran and Cuba.

 

Labor unions, small business associations and good government groups have lined up to oppose proposals to exempt corporations' offshore profits from U.S. taxes on a permanent basis (by enacting a "territorial" tax system) or temporary basis (by enacting a "repatriation" amnesty). These organizations also oppose any overhaul of the corporate income tax that fails to raise significant revenue.

The organizations spell out their positions on corporate tax reform in a letter sent to members of the Joint Select Committee on Deficit Reduction (commonly called the "Super Committee") today.

Read the letter.

These positions put the organizations at odds with House Ways and Means Chairman Dave Camp, who today proposed a corporate tax overhaul that includes a territorial system and that would be "revenue-neutral."

The letter asks the Super Committee to do four things:


1. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes permanently (by enacting a “territorial” tax system).

2. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes temporarily (by enacting a “repatriation” amnesty).

3. Require any overhaul of the corporate income tax to raise significant revenue.

4. Require that the revenue-positive result be estimated using traditional revenue scoring procedures as opposed to controversial alternative procedures (often called “dynamic” scoring).

To learn more, see CTJ's fact sheet about raising revenue through corporate tax reform and CTJ's fact sheet about territorial/repatriation proposals.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

New CTJ Fact Sheet Explains Why Congress Should Reject “Territorial” System

House Ways and Means Chairman Dave Camp is planning to release a “working draft” of a plan to adopt a “territorial” tax system, which is another way of saying a permanent tax exemption for corporations’ offshore profits.

On Tuesday, BNA’s Daily Tax Report (subscription required) informed us that

Lobbyists representing U.S. multinationals said they have not heard anything specific related to the timing of the proposal but they have heard that it will not be formal legislation, just a working draft. The idea behind this is that it would allow business interests to weigh in on a proposal before lawmakers turned it into actual legislation, multiple lobbyists said.

That’s about the closest thing we ever see to an admission that corporate lobbyists will decide what the Republican-controlled House tax-writing committee should enact.

Those lobbyists will be in an awfully good mood from the start because the “territorial” tax system that Chairman Camp is offering them will increase opportunities for their companies to lower their taxes by shifting jobs and profits offshore. To understand why, see CTJ’s new fact sheet on the international corporate tax rules.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0


Rare Consensus among Organizations Opposing Massive Campaign to Enact Repatriation Amnesty


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CTJ, Heritage Foundation, Tax Foundation and Others AGREE that the 60 Former Hill Staffers Lobbying for Repatriation Amnesty Are Wrong

Bloomberg reports that the corporate coalition promoting a tax amnesty for offshore profits that U.S. corporations repatriate to the U.S. has hired 160 lobbyists, including an astounding 60 people who formerly served as staff to current members of Congress.

This breathtaking chart illustrates how everyone from President Obama’s former communications director to the Democratic Finance Committee chairman’s former chief of staff is now being paid by corporations to promote the repatriation amnesty.

Even more remarkable is that the organizations that study tax policy and agree on nothing have come to a consensus that this proposal should be rejected. Groups like Citizens for Tax Justice and the Center on Budget and Policy Priorities have been joined by the anti-tax Tax Foundation and the extremely conservative Heritage Foundation in opposing the proposal.

Naturally, the consensus ends there. For example, CTJ explains that the way to really fix our international tax rules is to remove the tax break that causes U.S. corporations to shift profits and operations overseas in the first place (“deferral”) while the Tax Foundation argues instead for permanently exempting offshore corporate profits from U.S. taxes. “However,” the Tax Foundation explains, “experience shows that the [repatriation] holiday has been ineffective policy.”  

The Heritage Foundation is similarly unimpressed with the proposal, saying:

“The issue here is not whether tax cuts are good or bad per se, but whether this particular tax cut would increase domestic employment and domestic jobs. Again, the answer is that it would not. . . Are these repatriating companies capital-constrained today? No, they are not. These large multinational companies have enormous sums of accumulated earnings parked in the financial markets already.”

Other organizations that have published analyses extremely critical of the proposal include the Economic Policy Institute, the Tax Policy Center, the Center on Budget and Policy Priorities, and the Center for Economic and Policy Research.

The proposed repatriation amnesty, which proponents call a “repatriation holiday,” would temporarily remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.

Here’s what we have said about this debate:

Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network

“The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits ‘permanently reinvested’ (i.e., parked) overseas as they did at the end of 2005.”

Call on Congress to Oppose the Amnesty for Corporate Tax Dodgers

1. Another repatriation amnesty will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.

2. Another repatriation amnesty will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.

3. The proposal is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.

4. Congress enacted a repatriation amnesty in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.


Here’s more from CTJ on the right way to fix our international tax rules:
Congress Should End “Deferral” Rather than Adopt a “Territorial” Tax System

 

The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report


Verizon Pushes for $1 Billion in Concessions from Workers, While Receiving Nearly $1 Billion in Subsidies from Uncle Sam


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On Sunday, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions. What makes these demands particularly galling is that Verizon is both highly profitable and already a model of poor corporate citizenship.

Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.

If Verizon thinks its employees should pay $1 billion more for their benefits, we think Verizon should pay A LOT more for the benefits it receives from the federal government.

In fact, if Verizon paid its corporate income tax at the official rate of 35 percent, it would have owed more than $11 billion (rather than negative $1 billion). This alone is enough to  avoid the recent cuts in the debt deal to student loan programs..

For its part, Verizon has disputed the claim that it does not pay enough in taxes. Their math however is misleading because it includes taxes that they will owe in the future, not those they actually pay in a given year.

Verizon’s tax dodging is now so infamous that it has become one of the primary targets of US Uncut, a grassroots organization dedicated to getting corporations to pay their fair share.

The Communication Workers of America (CWA), who is leading the strike along with the International Brotherhood of Electrical Workers (IBEW), also notes that while calling for a benefit cut from workers, the top 5 executives at Verizon received more than a quarter of a billion dollars in compensation over the last 4 years.

Given their record on taxes and compensation, it’s hard to believe Verizon will come around to being a good corporate citizen anytime soon, yet unions and the public alike need to keep up the pressure by asking Verizon: Can you hear us now?

A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.

The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.

Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.

A coalition of companies that would benefit is promoting the bill.

Neither of the tax breaks offered under the bill would create jobs.

The R&E Credit Rewards Companies for Research They Would Do Anyway

The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.

The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”

The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.

A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.

The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.

The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs

Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).

For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.

Photo via Wellstone.Action Creative Commons Attribution License 2.0

 


Anonymous Owners of U.S. Shell Companies Now Funding Politics


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Levin-Grassley Incorporation Transparency Bill Would Help Identify Mysterious $1 Million Contribution to Romney Campaign

Today, NBC News reports that a Delaware company made a $1 million contribution to a PAC supporting Mitt Romney about six weeks after it was formed, and then dissolved two months later. This ripped-from-the-headlines story of a corporation that was created for the sole purpose of laundering massive political contributions highlights the need for a bill that was just introduced this week in the U.S. Senate.

The company, called W Spann LLC, filed a certificate of formation on March 15 with no information about the owners or the business purpose of the entity. On April 28, the LLC made a $1 million contribution to a political action committee supporting Mitt Romney.

The company then dissolved on July 11, leaving no trail of the real people behind the political mega-donation. Lawrence Noble, former general counsel of the Federal Election Commission, called it a "roadmap for how people can hide their identities" and disguise their political contributions.

This technique would be blocked if Congress enacts a bipartisan bill introduced this week to require states to collect information about who really controls corporations and limited liability companies (LLCs) that are formed in their jurisdictions. Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483) on August 2.

The bill's provisions are vital to law enforcement who are trying to investigate crimes ranging from arms dealing to money laundering and tax evasion. But it will also help combat another problem - the clandestine funding of politics.

Last year, a Senator from a certain state known for its loose incorporation laws blocked this bill from moving forward. (See Criminals, Inc.: Delaware's Fight to Keep Opaque Incorporation Rules is Helping Tax Cheats and Terrorists, June 25, 2010.)

The reasons for supporting this law continue to multiply. Lawmakers on both sides of the aisle should be lining up to cosponsor the Incorporation Transparency Act.

Photo via Gage Skidmore Creative Commons Attribution License 2.0


New CTJ Report: The Stop Tax Haven Abuse Act


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On July 27, Congressman Lloyd Doggett (D-TX) introduced the Stop Tax Haven Abuse Act (H.R. 2669) in the House of Representatives with 53 cosponsors. The Senate version was introduced July 12 by Sen. Carl Levin.

The U.S. Treasury loses an estimated $100 Billion in tax revenues annually due to tax havens. Many believe the actual revenue loss could be much higher.

A key provision would tax corporations where they are located and do business instead of where they are incorporated, say, a post office box in the Cayman Islands. Another important provision would require companies that file with the SEC to report certain financial information on a country-by-country basis so that investors and tax authorities could see where operations are located and where profits are ending up.

Most of the Stop Act provisions are aimed at the foreign financial institutions and foreign jurisdictions that facilitate offshore tax evasion and avoidance. The bill also targets some other types of tax dodging, as well as the bankers, lawyers, and accountants who facilitate these abuses by their clients.

A new report by CTJ explains the bill's provisions.

 


Tax Dodgers in the Cross Hairs


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Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.

Congress

In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department's Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a "loan" to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0


Senator Levin Introduces Bill to Crack Down on Tax Havens


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On Tuesday, Senator Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act (S. 1346) to help stem the tide of the estimated $100 billion annual tax revenue loss connected to the use of offshore tax havens. In his press conference and floor statement Sen. Levin stated that offshore tax abuses undermine public confidence in the tax system, increase the tax burden on middle America, create and unfair disadvantage for small business, and encourage the movement of jobs offshore.

The bill would give the IRS new enforcement tools to detect and prosecute these abuses. The bill is being championed by a wide spectrum of supporters including small business and the Financial Accountabiltiy and Corporate Transparency (FACT) Coalition.


Caterpillar Inc. Accused of Dodging $2 Billion in U.S. Taxes


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Company Accused of Dodging $2 Billion in US Taxes After Calling for Exemption for Tax Haven Profits and Attacking Illinois Tax Hike

A former global tax strategy manager of Caterpillar is suing the company for demoting him after he complained that it was using “tax and financial statement fraud” to avoid $2 billion in U.S. taxes.

Daniel J. Schlicksup’s specific claim is that the company improperly attributed at least $5.6 billion of profits from the sale of spare parts from a plant in Illinois to another unit in Geneva. He alleges that after telling his superiors that he believed the tax avoidance was illegal, they retaliated by transferring him to the company’s information technology division, which is entirely out of his area of expertise.

For their part, Caterpillar representatives have said that the company complies with all laws and regulations, but have not as of yet addressed the specific charges in the lawsuit.

Based on the details released so far, it is unclear how this case against Caterpillar will ultimately pan out. The problem, according to Harvard Professor Stephen Shay, is that a company does not need “much substance” to be considered legal in these circumstances under U.S. law. In other words, even if Caterpillar is using a Swiss subsidiary primarily to avoid billions in taxes, it’s possible that the maneuver could actually be legal depending on the specific details of the subsidiary’s operation.

Caterpillar has long been an especially outspoken critic of corporate income taxes. In May, the company’s CEO called for the US to adopt a territorial tax system, which would be a boon to multinational corporations and a disaster for everyone else.

On the state level, Caterpillar was the first company to protest the recent corporate tax increases in Illinois, where the company is headquartered. They led the opposition to the state increase, despite the fact that their total (all states including Illinois) state and local tax liability represented only a tiny fraction of their costs; a mere 0.7 percent of their global earnings in 2010. In addition, if the accusations prove to have any truth, Caterpillar may have been fraudulently avoiding Illinois taxes as well.

Photo via Cyrillicus Creative Commons Attribution License 2.0

Jeffrey Immelt, CEO of the company famous for making profits of $26 billion from 2006 through 2010 and receiving tax benefits from the IRS of $4.1 billion over that period, has endorsed the recently proposed amnesty for corporate tax dodgers, called a "repatriation holiday" by its proponents.

Immelt was selected by President Barack Obama in February of 2009 to chair his Council on Jobs and Competitiveness, which is to advise the White House on economic policy. He has been CEO of General Electric since 2000.

In March, the New York Times reported GE's federal corporate income tax bill of negative $4.1 billion over the five-year period in which it earned $26 billion in profits, which is an effective tax rate of negative 15.8 percent. A recent report from CTJ focuses on the three-year period 2008-2010 and finds that GE earned $7.7 billion in profits during this period and had a federal corporate income tax bill of negative $4.7 billion over this period.

Following the New York Times revelations, progressive activists spearheaded a call for Immelt's resignation from the President's Council on Jobs and Competitiveness.

His call for an amnesty for offshore tax dodgers will surely give more ammunition to those demanding that he step down from the Council.

What Does an Infrastructure Bank Have to Do with an Amnesty for Corporate Tax Dodgers? Nothing.

A repatriation holiday is essentially a break from U.S. corporate income taxes on offshore profits that U.S. corporations bring back (repatriate) from foreign countries, particularly from tax havens.

The non-partisan Joint Committee on Taxation (JCT), the official revenue-estimator for Congress, has concluded that a repeat of the repatriation holiday that was enacted in 2004 would reduce revenue by $79 billion over ten years.

Yet Immelt, confusingly, says that a repatriation holiday could be used to fund an infrastructure bank. How can a measure that reduces revenue be used to fund anything?

It's true that JCT finds that the holiday would raise some revenue initially because corporations would repatriate more profits to the U.S. than they normally would, and they would be taxed, albeit at a very low rate, on those profits. (The 2004 measure taxed repatriated offshore profits of U.S. corporations at a super-low rate of 5.25 percent.)

But in subsequent years the measure would cause much larger reductions in revenue, partly because corporations would be encouraged to shift even more profits and investments offshore.

Anything that costs $79 billion and encourages companies to shift even more profits and investments out of the U.S. has nothing to do with the goals of an infrastructure bank and should not be attached to any bill creating an infrastructure bank.

The infrastructure bank is supposed to create jobs, but the non-partisan Congressional Research Service (CRS) found that the repatriation holiday enacted in 2004 failed to create jobs and that the benefits went instead to corporate shareholders.

Read about how you can call your Senators and Representatives toll-free and urge them to oppose the amnesty for corporate tax dodgers. 

Photo via Steve Wilhelm Creative Commons Attribution License 2.0


How to Increase Tax Evasion and the Deficit in 1 Easy Step


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Despite the fact that the move would actually increase the deficit by an estimated $3.4 billion, House Republicans voted to slash the IRS’s budget by $600 million.

Unlike most types of public spending, increased funding of the IRS actually reduces the deficit. In some cases a dollar of additional IRS funding can generate $10 of revenue. Because of this, the non-partisan National Taxpayer Advocate noted in her recent report to Congress that the IRS should be viewed as not part of the deficit problem, but rather “as part of the solution.”

Taking this perspective, the Obama Administration proposed earlier this year to increase the IRS’s budget from $12.1 billion to $13.3 billion, in a move that was expected to actually reduce the deficit.

A $1.1 billion increase in funding would help the IRS reduce the “tax gap,” the difference between the amount of taxes owed and the amount of taxes actually paid on time. The tax gap is estimated to be between $400 to $500 billion each year.

One recent article points out that “the biggest losers” in the failure to stop tax evasion “are America's wage earners and salaried workers, who pay an estimated 99 percent of their taxes on time because their taxes are automatically withheld from their pay and reported by a third party, their employers.” These working people — the vast majority of Americans — must pay even more in taxes when others evade theirs.

Other than tax evaders, it’s unclear who the decrease in funding is supposed to benefit. It’s certainly not law-abiding businesses or individuals, who according to a report by the law and lobbying firm K&L Gates would actually face higher compliance costs if the cut in funding is enacted.

CTJ’s director, Bob McIntyre, addressed IRS enforcement a few years ago before the Senate Budget Committee. Just returning the IRS to the staffing levels of a decade ago, he said, would require a 50 percent increase in the IRS enforcement budget. Taking this a step further, McIntyre noted that, given the increase in tax sheltering in recent years, it may be necessary to double the resources for tax enforcement in order to keep up with tax evasion.

If lawmakers are serious about reducing the deficit, then reforming and dramatically increasing (rather than decreasing) funding for the IRS is one place to start.


Photo via alykat Creative Commons Attribution License 2.0


Call Lawmakers to Oppose the Amnesty for Corporate Tax Dodgers


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Call both your Senators and your member of the House of Representatives at the toll-free number below and tell them:


“Oppose the amnesty for corporate tax dodgers, which corporate leaders call a ‘repatriation holiday.’ This giveaway to corporations should not be part of the deal on raising the debt ceiling or any other legislation.”

Call this number to be connected to your members of Congress.

1-888-907-8574


Here’s why this is important.

A “repatriation holiday,” which has been proposed by some Republicans and Democrats in Congress, would remove all or almost all U.S. taxes on the profits that U.S. corporations bring back to the U.S. from other countries, including profits that they shifted to offshore tax havens using accounting gimmicks and transactions that only exist on paper.

If you want to give your lawmakers’ staffs more information, you can also tell them that:

1. Another repatriation holiday will cost the U.S. $79 billion in tax revenue according to the non-partisan Joint Committee on Taxation.

2. Another repatriation holiday will cost the U.S. jobs because it will encourage corporations to shift even more investment offshore.

3. The repatriation holiday is an amnesty for corporate tax dodgers because those corporations that shift profits into tax havens benefit the most from it.

4. Congress enacted a repatriation holiday in 2004, and the benefits went to dividend payments for corporate shareholders rather than job creation, according to the non-partisan Congressional Research Service. Many of the corporations that benefited actually reduced their U.S. workforce.


For more information, see the recent post from Citizens for Tax Justice on one senator’s repeated flip-flops related to the repatriation holiday.


Thanks to AFSCME for providing the toll-free number to enable constituents to get in touch with their members of Congress regarding this critical issue.


As Tax Repatriation Gains Steam, Important Questions Need Answering


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On June 15, 2011, think tank Third Way held the event "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America" supporting a tax repatriation holiday. When the panel was opened up for questions, they faced tough questioning from critics of the repatriation holiday, not all of which they could answer adequately.

Listen to an excerpt of the questions and answers here:

Questioning on Repatriation Holiday by taxjustice

Question 1: Steve Wamhoff, Legislator Director, Citizens for Tax Justice (0:00)
I just want to clarify your views on some of the other research that has been done. I think what your saying is that the bipartisan Congressional Research Service was wrong in issuing it’s study that said the last time this was tried it did not create jobs. And that the non-partisan Joint Committee on Taxation was wrong recently when it put out it’s analysis saying that if we repeat this repatriation holiday it will cost $79 billion over 10 years partially because some of those profits would’ve been brought back anyway, partially because ultimately corporation will shift even more profits offshore. Meaning even if your only goal is to get more of these profits to the US, even in that limited goal you fail on that. So do I understand you correctly that you think that the Congressional Research Service and the non-partisan Joint Committee on Taxation are incorrect and that Congress should ignore these analyses?

For the Congressional Research Service Analysis click here.

For the Joint Committee on Taxation Analysis click here.

Question 2: Richard Phillips, Research Analyst, Institute on Taxation and Economic Policy (3:40)
I’d like to ask a question based on this point we’re just talking about. Wouldn’t a better alternative to a tax repatriation holiday be to end deferral of offshore profits and go to a system where all companies have to pay taxes on offshore profits?

For more information on moving to a full worldwide system and ending deferral check out Citizens for Tax Justice's report here.

Question 3: Nicole Tichon, Executive Director, Tax Justice Network USA (6:22)
I think Mr. Rogers you said that we didn’t have as much offshore [then] as we do today in your comments. Doesn’t that speak to the issue that this actually incentivizes companies to keep their money offshore if they think they can just have a holiday every 5 or 6 years?

For more information on Tax Justice Network USA's take on the repatriation holiday see their op-ed in the Huffington Post.

Question 4: Scott Klinger, Tax Policy Director, Business for Shared Prosperity (9:56)
I think one of you noted that some companies are devoting a lot of effort to accounting way of moving profits offshore, through things like regressive transfer pricing. Some of our small business members think that that’s a pretty big loophole that needs closing that’s caused this swelling of offshore assets. Would you be in favor of looking at closing some of the tax haven loopholes and tightening transfer pricing restrictions as part of this repatriation bill?

For more information on Business for Shared Prosperity's take on the repatriation holiday see their website.


Chuck Schumer's Amazing Double-Somersault on the Repatriation Holiday


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Senator Schumer Supported, then Opposed, and Now Supports, Amnesty for Corporate Tax Dodgers

In 2004, Senator Charles (Chuck) Schumer of New York voted in favor of the so-called American Jobs Creation Act, a bill full of so many tax breaks for special interests that one observer called it a “bacchanalia of Caligulan proportions.” The bill, which many Democrats and Republicans supported, prompted one business lobbyist to confess to a reporter that the policy process had “risen to a new level of sleaze.” One of the most outrageous breaks in the bill was an amnesty for corporate tax dodgers, a measure called a “repatriation holiday” by its supporters.

A second “repatriation holiday” was proposed as “economic stimulus” in 2009, but Senator Schumer, like most Senators, voted against it because of data summarized by the Congressional Research Service showing that the 2004 measure did not create jobs. In fact, the research showed that the benefits went to enrich shareholders rather than to job creation.

Now Senator Schumer has switched positions again and is supporting a second repatriation holiday.

How the Repatriation Holiday Would Help Corporations

In theory, U.S. corporations pay U.S. income taxes on their profits no matter where they are generated. But they are allowed to “defer” (not pay) U.S. taxes on their offshore profits until they bring those profits back to the U.S. (until they “repatriate” the profits), which may never happen. (A separate provision ensures that these profits are not double-taxed if taxes are paid to the foreign government.)

A tax holiday for repatriated profits would allow them to bring these profits to the U.S. and pay no taxes, or pay a very low rate. (The 2004 measure taxed offshore profits repatriated during the holiday at a nominal rate of just 5.25 percent instead of the normal 35 percent corporate income tax rate.)

Another Repatriation Holiday Will Cost the U.S. $79 Billion in Tax Revenue

According to the non-partisan Joint Committee on Taxation, a repeat of the 2004 repatriation holiday would raise some revenue during the first few years, but then reduce revenue by a larger amount over the rest of the decade, resulting in a net loss of about $79 billion over ten years.

The analysis also shows that a repatriation holiday that is slightly less generous to corporations (one taxing repatriated offshore profits at 10.5 percent) would cost about $42 billion over ten years. 

Another Repatriation Holiday Will Cost the U.S. Jobs

One factor causing the $79 billion revenue loss is the way U.S. corporations will respond when Congress shows itself willing to enact a repatriation holiday more than once. Corporations will likely shift even more profits offshore in the long-run, because corporate leaders will think they can simply wait for Congress to enact the next repatriation holiday allowing them to bring those profits back to the U.S. tax-free or almost tax-free. This means more investment will be made overseas rather than here in the U.S.

Incredibly, the coalition of companies promoting the holiday argue that it will create jobs, even though the non-partisan Congressional Research Service found that the 2004 measure failed to create jobs and that the benefits went instead to corporate shareholders.

The Repatriation Holiday Is an Amnesty for Corporate Tax Dodgers

Corporations would not just shift real investments (real operations and jobs) overseas. They would also respond by increasing the amount of profits they shift to offshore tax havens through sham transactions that exist only on paper. In fact, the proposal would give the greatest benefits to the worst corporate actors, those who shift profits offshore to avoid U.S. taxes.

A U.S. company that is doing real business in another country typically will reinvest those offshore profits in factories, oil wells or other assets, making it difficult to bring those profits back to the U.S. But a company that is engaging in profit-shifting (disguising U.S. profits as “foreign” profits through transactions that exist only on paper) has likely merely shifted profits to a tax haven subsidiary that consists of little more than a post office box. It’s much easier to repatriate these offshore profits than the offshore profits from real business activities. 

Also, a U.S. corporation that is doing business in a typical foreign country is already paying some tax to the foreign government, which means they can already repatriate those profits to the U.S. without paying the full 35 percent U.S. corporate income tax rate. But a U.S. corporation that has shifted its profits to a tax haven is typically paying no taxes to the tax haven government, which means they would pay the full 35 percent U.S. rate if they repatriated those profits under current law. U.S. corporations shifting their profits to tax havens therefore stand to gain the most from a repatriation holiday.

Corporate Leaders Are Divided on the Repatriation Holiday

Some corporate leaders have banded together in an extremely well-funded campaign to promote a second repatriation holiday. But other corporate leaders have decided to lobby instead for an even bigger tax giveaway. A repatriation holiday is essentially a temporary tax exemption for corporations’ offshore profits. Some corporate leaders think they can obtain a permanent tax exemption for offshore profits — a territorial tax system, in other words — and they think that enactment of a repatriation holiday would distract from that goal.

The Republican chairman of the House Ways and Means Committee, Dave Camp, agrees with the corporate leaders who prefer a territorial system (the bigger tax giveaway) to a repatriation holiday. But he has not ruled anything out.

Photo via Pro Publica Creative Commons Attribution License 2.0


Getting Taxes Wrong: Fact-Checking the Republican Primary Debate


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With the Iowa Caucuses almost 8 months away, the Republican primary was in full swing on Monday night as 7 of the Republican contenders battled it out during a debate on CNN. Tax policy took center stage as every single one of the Republican contenders promoted lower taxes as central to their economic platform.

Predictably however, the candidates stayed relatively vague about their specific tax plans.

Former Minnesota governor Tim Pawlenty is the only candidate so far to release an official tax plan, which, among other things, proposes to eliminate the capital gains tax, create only two income tax brackets, and reduce the corporate income tax rate from 35 to 15%. Citizens for Tax Justice estimates that the plan would result in a 73% income tax cut for the Top 400 Taxpayers and cut taxes 41% for millionaires generally.

Even without getting into too many specific plans, the Republican contenders made a few curious claims about tax policy that are in dire need of fact checking:

Representative Michele Bachmann, Minnesota: “What we need to do is today the United States has the second highest corporate tax rate in the world…We've got to bring that tax rate down substantially so that we're among the lowest in the industrialized world.”

While Bachmann would be correct in claiming the United States' statutory tax rate of 39% (the federal income tax rate is 35 percent and the average state corporate income tax rate is about 4 percent) is on paper the second highest in the industrialized world, she fails to take into account the effect of special tax breaks and loopholes which make the effective rate paid by companies relatively low. According to a 2007 study by the Bush Treasury Department, between 2000-2005 US corporations paid only 13.4% of their profits in corporate income taxes, well below the Organization of Economic Cooperation and Development (OECD) average of 16.1%. The OECD is what Bachmann means by "industrialized world."

Demonstrating how big the difference between statutory and effective rates can be, a recent CTJ study showed that 12 US corporations together paid an effective corporate income tax rate of (negative) -1.5%, while earning $171 billion in profits over 3 years.

Former House Speaker Newt Gingrich: “The Reagan recovery, which I participated in passing…raised federal revenue by $800 billion a year in terms of the current economy, and clearly it worked. It's a historic fact.”

Rather than telling a ‘historic fact’, Gingrich is weaving a complete fiction. In claiming that Reagan’s tax cut efforts raised federal revenue $800 billion, Gingrich is assuming that all economic growth was due to Reagan’s efforts, while simultaneously ignoring the effect of inflation and population growth.

Citizens for Tax Justice’s internal estimates put the real cost of lost revenue due to the Reagan tax cuts at 3.97% of GDP or the equivalent of $581.2 billion today. Even former Reagan White House Senior Policy Analyst Bruce Bartlett admits that the Reagan tax cuts DECREASED revenue, adjusting for inflation, by $473.7 billion. In addition, it’s odd that Gingrich would point to the Reagan era to establish his fiscal credentials considering that the national debt tripled during Reagan’s two terms.

This is not Gingrich’s first foray into rewriting historic fiscal realities and it probably will not be his last.

Herman Cain, Godfather Pizza CEO: “We need an engine called the private sector. That means lower taxes…suspend taxes on repatriated profits, then make them permanent.”

Herman Cain’s call for an end to taxing repatriated profits puts him in good company with Republican establishment figures like Republican Speaker of the House John Boehner, who believe that moving the United States toward a territorial system of taxation would stimulate the economy by bringing home offshore capital.

In reality however, such a move would be disastrous for the US economy. Rather than encouraging investment in the United States, US corporations would have a much greater incentive to shift actual operations and jobs offshore because they would not have to pay US taxes on these profits. A better approach would be to end deferral, which would stop these current tax incentives pushing jobs offshore while also encouraging companies to bring more than a trillion dollars in offshore capital back to the US.

On Saturday, the organization U.S. Uncut demonstrated at Apple Stores in several cities in protest against the company's lobbying for an amnesty for offshore tax dodging by corporations, also known as a "repatriation holiday."

This video shows what happened in the Apple Store in Washington, DC. U.S. Uncut has more information about the protests that took place in Boston, San Francisco, Chicago and other cities.

U.S. corporations, in theory, pay U.S. corporate income taxes on all of their profits, regardless of where they are earned. But they are allowed to "defer" (to indefinitely delay) those U.S. taxes on foreign profits until those profits are "repatriated" (brought back to the U.S.).

Some corporate leaders have called for a permanent exemption of U.S. taxes on offshore profits (a "territorial" tax system) while others have called for a temporary exemption, which is essentially what the "repatriation holiday" is.

As CTJ has explained before, the "repatriation holiday" is an amnesty for corporate tax dodgers rather than a break for companies doing real business abroad.

Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. Their offshore profits are tied up in offshore investments, making it much less likely that they would bring those profits home in response to a tax holiday. And when they do bring those profits back to the U.S., they can do so under current law without paying the full 35 percent tax rate, because they are likely paying taxes to the government of the foreign country in which they are operating. (The U.S. taxes are reduced for each dollar paid to the foreign government to avoid double-taxation.)

On the other hand, a U.S. corporation that shifts its profits to a post office box in the Cayman Islands or another tax haven is likely to benefit enormously from a repatriation holiday. These profits may not be taxed at all by the foreign government, meaning they would be subject to the full 35 percent rate under current law.

So it's entirely fair for U.S. Uncut and others to be outraged that Apple and other companies are lobbying for a repatriation holiday and claiming that it will help the U.S. economy. Congress tried this in 2004 and it failed to lead to any job creation. In fact, many companies that benefited actually reduced their U.S. workforce.

Congress's official revenue estimators recently concluded that a repeat of the repatriation holiday would cost $79 billion over ten years. That's partly because U.S. corporations are likely to respond to a second repatriation holiday by shifting even more of their profits to offshore tax havens since they will have concluded that Congress is willing to call off almost all U.S. taxes on those profits every few years.


Attorneys, Accountants, Brokers Convicted in $7 Billion Tax Shelter Case


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Last week, former partners in the law firm of Jenkens & Gilchrist, the former head of accounting firm BDO Seidman, and a former Deutsche Bank broker, were convicted on criminal charges related to a tax shelter scheme that reportedly generated fake tax losses of more than $7 billion. The case illustrates the sort of tax cheating that often goes undetected and which would become less common under a proposal supported by Citizens for Tax Justice.

In December, Deutsche Bank entered into a related non-prosecution agreement with the Department of Justice, admitting criminal wrongdoing and agreeing to pay a $554 million fine in connection to its involvement in tax shelter cases that generated $29.3 billion in bogus tax benefits for their clients.

Five other defendants, former partners at the law firm or the accounting firm, previously pled guilty to criminal charges in the case.

The charges of tax evasion and conspiracy carry possible prison terms of more than 20 years and multi-million dollar fines. DOJ Tax Division attorney John A. DiCicco said that the verdict "sends a loud and clear message that dishonest tax professionals will be held accountable for their crimes."

In the next few weeks, Senator Carl Levin is expected to introduce a new version of the Stop Tax Haven Abuse bill, which would increase civil penalties for promoting tax shelters. The maximum penalty for knowingly aiding or abetting a taxpayer in understating their tax liability would be 150 percent of the aider-abettor's gross income from the activity.

That kind of civil penalty, and the possibility of a criminal conviction, should give tax shelter promoters reason to think twice about helping the wealthy dodge their taxes.

The debate over corporate tax reform is not just about whether corporations overall should pay more, less, or the same as they do now. There is also a debate over how the offshore profits of U.S. corporations should be treated.

Corporate leaders want their offshore profits to be exempt from U.S. taxes. Some corporate leaders hope for a permanent exemption (which would turn our tax system into a "territorial" tax system).

Other corporate leaders, perhaps realizing that the American public would not be receptive to this idea, are hoping they can prod Congress to exempt their offshore profits on a temporary basis. This is basically the goal of a "repatriation holiday," a temporary tax break for offshore corporate profits that are brought back to the U.S.

I can sync my iPhone to my MacBook. Why can't I sync it to my Values?

One corporation lobbying in favor of a repatriation holiday is Apple, which is being targeted by protests in major cities around the U.S. on June 4. The demonstrations, organized by US Uncut, will ask Apple to leave the coalition lobbying for a repatriation holiday.

Find Apple protests in your city, or the information you need to organize your own protest against Apple, on US Uncut's Apple page.


CTJ Testifies: America Should Not Be a Tax Haven


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"I'm here to tell you that the sky is not falling," began CTJ Senior Counsel for Federal Tax Policy Rebecca Wilkins as she testified Wednesday before Treasury and IRS officials in favor of new bank regulations to prevent tax evasion by foreigners.

Ten of the twelve witnesses were opposed to the regulations and predicted far-fetched consequences if the regulations are finalized, including massive outflows of capital from the U.S., failing banks, lost jobs, and even murder, extortion, and kidnapping.

The hearing was on proposed regulations that would require banks to report the interest income earned on deposit accounts held by nonresident alien individuals to the IRS in the same way that they report on U.S. customers.

The purpose of the new rules is to allow the IRS to collect information that may be turned over to foreign governments if requested under a Tax Information Exchange Agreement.

Although Wilkins addressed all of the arguments of the opponents, she concluded by saying, "This is really about tax evasion. Those who are opposed to the proposed rules have a vested interest in facilitating tax cheating. The stakes in tax evasion are very high and the forces in favor of maintaining the status quo are well-financed and very politically connected. But it's the money of honest, tax-paying citizens of all countries that the tax cheats are stealing."

See the complete testimony and our earlier report.

Republican House Ways and Means Committee Chairman Dave Camp called the Chief Financial Officers of four different corporations to testify in favor of a “territorial” tax system on Thursday.

A territorial system exempts offshore profits of U.S. corporations from U.S. taxes. American corporations can already “defer” their U.S. taxes on offshore profits until those profits are repatriated (brought back to the U.S.). This creates incentives to move operations (and jobs) offshore and also creates incentives to shift profits offshore by disguising U.S. profits as “foreign” profits.

A territorial system would increase these incentives because U.S. taxes on offshore profits would be eliminated (not just deferred).

The hearing occurred just days after Republican House Speaker John Boehner spoke in favor of a territorial tax system. Boehner’s comment came at the same event where he announced that he would prefer the U.S. to default on its debt obligations unless trillions of dollars are cut from spending.

The Problems with a PERMANENT Exemption for Offshore Profits


Among the tax experts who testified before the Ways and Means Committee was Jane Gravelle with the Congressional Research Service. She explained that a territorial tax system is not efficient because it encourages investment to flow to any countries that have lower tax rates rather than creating an even playing field. Reduced investment in the U.S. would result in fewer jobs and lower wages.

A territorial system would also, she argued, worsen the problem of offshore profit-shifting by corporations.

Our tax system can either be “residence-based,” meaning U.S. taxes are paid by any taxpayer (including corporations) that resides in the U.S., or it can be “source-based,” meaning a taxpayer pays U.S. taxes only to the extent that the U.S. is the source of its income.

Gravelle argued that it’s much easier for a company to move its profits to another country (change the “source” of its income) than it is to move its headquarters to another country (change its “residence.”) That means a “source-based” system (a territorial tax system) makes it much easier for U.S. corporations to change their behavior in ways to avoid U.S. taxes than a “residence-based” system would.

The U.S.’s corporate tax system right now is a hybrid between a “residence-based” system and a “source-based” system. To adopt a true residence-based system, Congress would need to repeal the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. This is a reform that has been endorsed by Citizens for Tax Justice, and Gravelle said that it would be simpler to administer.

The Problems with a TEMPORARY Exemption for Offshore Profits

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004.

Several studies of the 2004 effort showed that the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) on Wednesday to provide another repatriation holiday. (See related story.)

Not all corporate leaders are willing to give up the fight for a territorial system and settle for a repatriation holiday. The CFO's testifying Thursday said that they did NOT support a repatriation holiday, because they feel that it would distract corporate America from a larger tax policy goal of enacting a territorial system.


Three Republicans and Three Democrats Introduce Amnesty for Corporate Tax Dodgers


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On Wednesday, Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) to provide a tax holiday for corporations that repatriate offshore profits, similar to the widely panned repatriation holiday enacted in 2004. The holiday is essentially a temporary tax exemption for corporate offshore profits, which some corporate leaders see as a second best alternative to a permanent exemption. (See related story.)

Brady’s bill, like the 2004 measure, would reduce the federal corporate income tax rate on repatriated offshore profits from 35 percent to a token 5.25 percent.

Most companies with offshore profits would not actually have to pay 35 percent even under current law if they repatriated them, because they receive a credit for any foreign taxes that they have already paid. The final section of CTJ’s recent report explains that the repatriation holiday therefore provides the greatest benefits to those corporations that shift their profits to countries with no corporate income tax (tax havens).

A recent report from the Center on Budget and Policy Priorities summarizes the various studies concluding that profits repatriated under the 2004 measure largely went to shareholders in the form of increased dividends or stock buybacks rather than job creation.

Rehashed Trickle-Down Economics

Some business leaders say that increased dividends is itself a positive result because it means increased income in the U.S.

The problem is that this tax cut comes at a huge cost and is funneled to wealthy shareholders. Congress’s Joint Committee on Taxation recently found that a repeat of the 2004 repatriation holiday would cost over $78 billion over the course of a decade.  In other words, the argument in favor of a repatriation holiday that boosts dividends is simply a rehash of trickle-down economics.

Encouraging Companies to Shift More Profits and Jobs Offshore

But even if Congress wanted to encourage corporations to repatriate their offshore profits (regardless of what those profits are used for) the repatriation holiday fails at that goal in the long-run.

Enacting a second repatriation holiday will send a signal that Congress is willing to call off almost the entire corporate income tax on offshore profits every few years. This would actually encourage companies to shift even more profits offshore to countries where they are not taxed very much (tax havens) and then simply wait for the next repatriation holiday.  

Democrats Supporting Repatriation Holiday Have Long History of Opposing Fair and Responsible Taxes

Brady’s bill has five co-sponsors, and the three Democrats among them are likely to receive the most attention.

One is Jared Polis (D-CO) who famously drafted and circulated a letter in 2009 that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

The letter, which included factual inaccuracies, argued that higher taxes on the rich hurt small businesses. The Democrats changed their surcharge so that it would only affect millionaires, as a result of this letter.

The other two Democratic co-sponsors are Jim Cooper (D-TN) and Jim Matheson (D-UT). Both signed a letter last year calling for the extension of the Bush tax cuts even for the richest taxpayers. Both also signed a letter calling specifically for the extension of the special low rate of 15 percent on capital gains and dividends, perhaps the most indefensible provision among the Bush tax cuts.


Microsoft-Skype Deal Shows Need for a True Worldwide Corporate Tax


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Microsoft’s purchase of Skype for $8.5 billion provides a perfect illustration of why adopting a true worldwide corporate income tax system is critical to our economic future.  

According to the Wall Street Journal, the cash for Microsoft’s purchase of Skype (a Luxembourg-based company) will come out of its $42 billion in liquid assets held in foreign subsidiaries.

Because it is purchasing a foreign company with its overseas assets, Microsoft can avoid paying any U.S. tax that would be due if it had repatriated foreign earnings in order to purchase a US company for the same amount. Based on the company's effective foreign income tax rate disclosed in their most recent SEC filings, a repatriation of $8.5 billion dollars would cost Microsoft somewhere in the neighborhood of $1.1 billion in U.S. tax.

As a Forbes commentator opines, the Microsoft-Skype deal demonstrates the harmful incentive created in our current system that encourages companies to invest in overseas companies rather than domestic ones. The fear is that this deal may just be “a harbinger of things to come.”

How can the US stop encouraging companies to invest abroad rather than at home?

By adopting a pure worldwide tax system.

Under a pure worldwide system, any US company's foreign profits would be immediately subject to the US tax rate with a credit for any foreign taxes paid. This is similar to the current system except that the company would not be allowed to "defer," or delay indefinitely, its U.S. taxes by keeping its foreign profits offshore.

A pure worldwide system would mean that Microsoft would face the same tax rate regardless of where it earned its profits. This would remove any incentive for shifting profits offshore and remove any obstacles to repatriating foreign profits.

Spinning the Truth

Never missing an opportunity to toe the line of corporate leaders and their shareholders, the business press tried to spin the news as proof that the US needs to enact corporate tax cuts and a repatriation holiday. They argue that high rates in the US are the cause of US companies like Microsoft holding billions in profits overseas rather than investing them domestically.

They could not be more mistaken in their solution.

First, tax repatriation holidays may actually worsen the situation by encouraging companies to hoard profits abroad in order to wait for the next holiday or even to use them as a hostage in demanding another repatriation holiday.

In fact, Microsoft is part of a coalition lobbying for a repatriation holiday so that it can bring some of its $42 billion in overseas liquid assets back to the U.S. and pay little or no tax.

Second, as CTJ’s Director Bob McIntyre explained in his testimony to the Senate Budget Committee, simply lowering corporate taxes is unlikely to be effective and would encourage a race to the bottom as other countries feel pressure to respond by further reducing their rates.

Finally, lower corporate income taxes would of course deprive us of revenue that we need to reduce our budget deficit.   

We hope that the Microsoft-Skype deal can be seen for what it is: another reason for the adoption of a pure worldwide corporate income tax system.


How You Can Take a Stand for Tax Fairness This Week


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In the days leading up through Tax Day (which is on Monday, April 18 this year) there are several things you can do to promote tax fairness. US Uncut plans direct actions targeting particular corporations that have dodged their taxes. U.S. PIRG and other organizations will have activities outside post offices in several states to create awareness about tax dodging by corporations and to press Congress to act.

US Uncut Demonstrations

US Uncut protests corporations like Verizon and FedEx which have dodged all or most of their U.S. income taxes at a time when lawmakers are cutting basic public services to address federal and state budget gaps.

Find US Uncut events near you.

In D.C., US Uncut will host a creative direct action on April 15 at the Verizon store at Union Station with best-selling author of Treasure Islands, Nick Shaxson, who will do a book-signing. On April 17. US Uncut DC and organizers from Power Shift will target a corporate tax dodger and relate tax avoidance to cuts to the EPA's budget. This event is said to have a beach party/tropical tax haven theme.

Events like these will take place all over the country. Find US Uncut events near you.

U.S. PIRG Events at Post Offices

The U.S. PIRG acitivities will take place April 15 and April 18 in at least a dozen states. These events will target people whose minds are very much on taxes as they mail off their federal income tax returns.

See the list below for events in your state and contact information.

April 15, 2011

Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding.

Locations:

Portland OR, April 15th. Contact Jen Lavelle at jlavelle@ospirg.org, 503.231.4181

AnnArbor MI, April 15th. Contact Megan Hess at mhess@pirgim.org, 734.662.6597

Chicago IL, date TBD. Contact Brian Imus at brian@illinoispirg.org, 312-544-4433 x 210 (federal plaza, outside of main post office)

Hartford CT, April 15th, Contact Jenn Hatch at jhatch@connpirg.org, 860.233.7554

Albuquerque NM, date TBD, Contact Erin Eckelson at erin@nmpirg.org, 505.254.1244

Philly area, date TBD. Contact Megan DeSmedt at mdesmedt@pennpirg.org, 215.732.3747

Phenoix AZ, April 15th. Contact Seren Unrein at sunrein@arizonapirg.org, 602.252.9227

Des Moines IA, Date TBD, Contact Sonia Ashe at sashe@iowapirg.org, 515.282.4193


April 18, 2011

Event: U.S. Public Interest Research Group will be holding events outside of Post Offices across the country to try to get Congress to address tax dodging corporations with report releases and post-carding. U.S. PIRG is partnering with Citizen Action in a number of states: NJ, OR, IL, MI, MO, CT.

Locations:

Trenton NJ, April 18th. Contact Jen Kim at jkim@njpirg.org, 609.394.8155

Seattle WA, April 18th, Contact Lindsay Jacobson at ljacobson@washpirg.org, 206.568.2854 (either at post office downtown, or in front of Microsoft).

Boston MA, April 19th, Contact Dee Cummings at dcummings@masspirg.org, 617.292.4805

Baltimore MD, April 18th, Contact Johanna Neumann at Johanna@marylandpirg.org, (410) 467-9389

St. Lois MO, TBD

 


Briefings in D.C. on Tax Havens on April 14


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The Open Society Foundation is hosting a briefing on tax havens Thursday morning, which will be followed by a Hill briefing that afternoon. The details are below.

April 14, 2011

10:00 a.m.

Event: Civil Society Organization Briefing/Panel.
Location: Open Society Foundation, 1730 Pennsylvania Ave. NW, Washington, D.C.
Summary: Panel discussion to brief civil society organizations on the impact of tax havens on the global economy and the developing world. The panelists will include Mr. Shaxson, author of Treasure Islands, and Rebecca Wilkins, Senior Counsel, Federal Tax Policy, at Citizens for Tax Justice
Refreshments will be served
Please come and invite your friends/colleagues
Contact: Sarah Pray at spray@osi-dc.org

2:30 pm

Event: Hill Briefing
Location: S-115 of the Capitol
Summary: Panel discussion to brief Hill staffers on the impact of tax havens on the American economy, businesses and budgets. The panelists will include Mr. Shaxson, Rebecca Wilkins and Frank Knapp, President and CEO of South Carolina Small Business Chamber of Commerce
Refreshments will be served
Contact: Bonnie Rubenstein at bonnie@ctj.org


CTJ Op-Ed in USA Today Calls for Revenue-Positive Corporate Tax Reform


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A USA Today op-ed written by CTJ's Steve Wamhoff argues that we should approach corporate tax reform the way President Reagan did in 1986. He closed enough tax loopholes to raise new revenue from corporations, even while lowering the corporate tax rate.

Read the op-ed


STOP THE AMNESTY FOR CORPORATE TAX DODGERS


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New Report from CTJ Explains the Right Way to Reform Corporate Tax – and Why the Amnesty Is the Worst Possible Change

Corporate leaders are conducting a massive campaign for what amounts to a tax amnesty for corporate profits shifted out of the United States, especially profits shifted to offshore tax havens.

In 2004, Congress approved this sort of holiday, which allowed U.S. corporations that brought offshore profits to the U.S. to pay U.S. taxes at a rate of just 5.25 percent instead of the normal 35 percent. Corporate leaders claimed they would use the money brought back to create jobs, but several empirical studies found that the holiday did not lead to job creation, and many of the companies that benefited actually reduced their U.S. employment. The money was largely put towards stock repurchases, effectively putting it in the hands of shareholders.

Washington Resists the Repatriation Holiday — But for How Long?

During the debate over the economic recovery act in early 2009, Senator Barbara Boxer offered an amendment to provide another repatriation holiday. Concluding that the 2004 holiday was a corporate giveaway that enriched shareholders without creating jobs, most Senators opposed the Boxer measure, which failed by a vote of 42-55.

The Obama administration reiterated that it opposes a repatriation holiday — unless it is part of a comprehensive corporate tax reform. In another blow to proponents of the holiday, the leading Republicans of the Congressional tax-writing committees said the same thing.

U.S. Chamber of Commerce Admits that Job-Creation Rules Attached to Tax Holiday Won't Work

Some lawmakers who support a repatriation holiday argue that the conditions attached to the 2004 measure could be strengthened in a second holiday so that companies cannot benefit without creating jobs or otherwise directly investing in their U.S. operations. 

But this argument is so weak that even the U.S. Chamber of Commerce openly rejects it. At a panel discussion organized by Tax Analysts, Martin Regalia, a senior vice president for the Chamber, said that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

Regalia said that the case for a repatriation holiday is that it's good for America when a company brings offshore profits back to the U.S., even if the profits go directly to shareholders.

Regalia did not use the more recognizable terms that describe this type of thinking, perhaps because it is so widely discredited: Trickle-down economics, or supply-side economics.

Democratic Insiders Hired to Promote the Amnesty for Corporate Tax Dodgers

With all this going against the repatriation holiday, why do the corporations think they can win? Because this time they are far more organized and are devoting far more resources to lobbying. They have effectively bought off some highly influential Democratic insiders, as well as Republican insiders. The coalition in favor of the holiday includes Adobe, Apple, Cisco, Google, Kodak, Microsoft, Pfizer, Oracle and others. A Business Week article explains:

The team's chief communications strategist is Anita Dunn, the Democratic media consultant who served as President Barack Obama's interim communications director during his first year in office... The lead lobbyists are former Representative Jim McCrery of Louisiana, who was the ranking Republican on the House Ways and Means committee, and Jeffrey A. Forbes, the former chief of staff to Senate Finance Chairman Max Baucus (D-Mont.).  

New Report from CTJ Explains What Congress Should Do Instead

A new report from Citizens for Tax Justice explains that Congress should adopt a system that taxes all profits of U.S. corporations, no matter where they are earned. U.S. corporations would continue to get a credit, as they do now, for any taxes they pay to a foreign government, to avoid double-taxation. (The comprehensive tax reform offered last year by Senators Ron Wyden and Judd Gregg would do this.)

In this system, U.S. corporations would never have a tax-related reason not to repatriate their offshore profits because those profits would already be subject to U.S. taxes anyway.

In theory, the U.S. does have a “worldwide” tax system in which all profits of a U.S. corporation are subject to U.S. taxes, but it undermines this rule by allowing U.S. corporations to “defer” their U.S. taxes on offshore profits until those profits are brought to the United States (until those profits are “repatriated”). Deferral provides an incentive for corporations to move jobs overseas and to shift profits to offshore tax havens.

Many corporate leaders want Congress to permanently exempt offshore profits (adopt a "territorial" system, in other words) but that would only increase the incentives to shift jobs and profits offshore. So would allowing corporate leaders to believe that Congress will call off almost all of the U.S. taxes on offshore profits every few years with a repatriation holiday.

Repatriation Holiday Provides Greatest Benefits to the Worst Corporate Tax Dodgers

The CTJ report also explains that a repatriation holiday provides the greatest benefits to corporations that engage in the very worst tax avoidance. Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. On the other hand, a company that has shifted profits to a Cayman Islands subsidiary that conducts no real business and pays no foreign taxes would benefit enormously.


U.S. Corporations Are Paying Even Less in Taxes than Recently Reported


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There's been a lot of talk lately about how much U.S. corporations actually pay in federal income taxes, and a lot of it has been wrong. This is not surprising, since corporations go to a lot of trouble to obscure what they pay in the financial reports that they must file with the Securities and Exchange Commission (SEC) each year.

For example, the New York Times recently reported that General Electric paid 14.3 percent of its profits in taxes over the 2005-2009 period. While this is surprisingly low (compared to the statutory corporate income tax rate of 35 percent) it is incorrect, and the real effective rate is much lower.

GE's effective tax rate for its U.S. profits was actually just 3.4 percent over that period. Our figure is based on what GE says that it paid in U.S. corporate income taxes (called "current" taxes) divided by what GE says its pretax U.S. profits were (all from GE's annual 10K reports to shareholders, filed with the SEC).

There are several reasons for confusion over the effective tax rates paid by corporations. First, the U.S. only taxes corporate profits generated in the U.S. (or repatriated to the U.S.) so that it is mostly up to foreign countries to tax the profits these corporations generate offshore, and yet some people are referring to worldwide taxes U.S. corporations pay on their worldwide profits when they discuss the U.S. corporate tax system. The worldwide effective tax rate includes taxes that a corporation pays to all governments in the world. But to understand how the U.S. corporate income tax is working, one must focus on U.S. taxes paid on U.S. profits. No one expects Congress to do much about taxes that U.S. corporations pay to the governments of France, Germany, or Japan!

Second, to get a sense of what a corporation pays each year, we should include the current U.S. taxes paid, but not the deferred U.S. taxes. "Deferred" is a euphemism for "not paid." Corporations can defer (delay) paying taxes if, for example, they enjoy tax breaks for accelerated depreciation, which allow them to take deductions for capital investments sooner than they would if the rules were simply based on the actual life of the investment. A company could eventually pay taxes that it has "deferred." But that doesn't happen very often.

A post on the New York Times Economix blog, which received a lot of recent attention, uses data that includes the worldwide taxes, both current and deferred, paid by U.S. corporations on their worldwide profits, and tries to use this to make a point about the U.S. corporate tax system.

(The NYU scholar who created this data set recently introduced another measure which rightly focuses only on profitable corporations, but the problems identified above still remain.)

The point the New York Times article was trying to make is that effective corporate tax rates vary widely among companies and industries, which is true (and is a bad thing). But the worldwide tax information cited doesn't shed much light on the U.S. corporate tax system's role in these disparities.
 
More important, as our lawmakers contemplate reforming the corporate income tax, the place to start is to have an accurate understanding of the effective tax rates that companies pay to the U.S. government. Mistakenly mixing in foreign data just muddies the waters.


New Report from CTJ: The Tax Cheaters' Lobby Is Wrong about New IRS Proposed Regulations


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The "Center for Freedom and Prosperity," an organization that CTJ long ago dubbed the "Tax Cheaters' Lobby," has come out against new regulations proposed by the IRS to require banks to report interest paid to foreign account-holders. The Tax Cheaters Lobby claims that cracking down on tax evasion by foreigners and Americans posing as foreigners would break U.S. laws, cause a collapse of the American financial system, and result in kidnapping and deaths of people all over the world. A new report from CTJ addresses and refutes these incredible arguments.

Read the report.


Will the Tax Cheaters' Lobby Stop the IRS from Catching Foreign Tax Evaders?


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If you have a lot of investments or savings, your mailbox is starting to fill up (or will soon fill up) with copies of all those forms that your bank, your employer, and your brokerage firm send to the Internal Revenue Service to report the income paid to you last year. Banks are required to report the amount of interest paid on deposit accounts. Right now, they are only required to file those reports on U.S. and Canadian account holders.

On January 6, the Internal Revenue Service (IRS) proposed new rules (REG-146097-09) requiring banks to report interest paid to nonresident foreign individuals just as they report interest on U.S. citizens and residents. The IRS will use this information to respond to foreign governments' requests for information about their citizens' U.S. income.

As the IRS stated in its notice, we have seen in the last few years "a growing global consensus" about how important it is for countries to cooperate in exchanging tax information to protect their tax revenues and catch tax cheats. Many significant agreements have been reached recently, including eliminating the use of bank secrecy laws as a reason for refusing to share information.

The new reporting rules will also help the IRS catch U.S. tax cheats that are currently avoiding the reporting rules by posing as foreigners.

On the same day the proposed regulations were announced, the Center for Freedom and Prosperity, which CTJ long ago dubbed the "Tax Cheaters' Lobby," came out against the new rules and promised to lead the fight to "derail or kill this misguided regulation." The Tax Cheaters' Lobby works hard to preserve tax havens and the ability of wealthy people to hide their assets and avoid paying their taxes.

CTJ, on the other hand, applauds the IRS for taking this important step against tax evasion by citizens of all countries.

BACKWARDS BOEHNER

House Minority Leader Says that Loophole-Closing Provisions in Jobs Bill Would Push Jobs Offshore — When the Exact Opposite Is True

Speaking before business leaders in Cleveland on Tuesday, House Republican Leader John Boehner proposed a five-point "plan" to help the economy that mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing the President Obama's economic advisers. He also claimed that deviating from the Bush tax policies would hurt small businesses, which has already been refuted by CTJ and other experts.

Near the beginning of his speech, Boehner said that the $26 billion jobs bill recently enacted, H.R. 1586, "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."

That is literally the opposite of what the tax provisions in H.R 1586 do. The provisions in this jobs bill close existing loopholes that, to use Mr. Boehner's words, "make it more expensive to create jobs in the United States and less expensive to create jobs overseas."

In fact, these loopholes can result in U.S. corporations enjoying a negative effective tax rate on their offshore investment income. This creates a strong incentive for U.S. corporations to shift profits offshore, either through accounting gimmicks or by moving actual operations and jobs offshore.

The Foreign Tax Credit

The loopholes that were shut down relate to the foreign tax credit, which U.S. taxpayers take against their U.S. taxes for any foreign taxes they pay. The idea is that if an American earns some income in, say, the U.K. and pays taxes to the U.K. on that income, he or she should not have to pay all of the applicable U.S. taxes on that income also. In other words, the foreign tax credit is meant to avoid double-taxation of Americans' foreign income. U.S. corporations use the foreign tax credit for income they generate abroad, but the problem is that many have found ways to take foreign tax credits in excess of what they need to avoid double-taxation.

For example, U.S. corporations don't even have to pay U.S. taxes on any of their foreign income until they bring that income back to the U.S. (until they "repatriate" that income), which in many cases they never will. But many have found ways to take foreign tax credits on this foreign income — even though it's not even taxed in the U.S. Obviously, this has nothing to do with avoiding double-taxation.

This means the foreign tax credits are being used to reduce the corporations' U.S. taxes on its U.S. income. The corporations are taking more foreign tax credits than they even need to wipe out their U.S. taxes on that foreign income. This also means the offshore profits are effectively subject to a negative rate of taxation in the U.S.

It's hard to imagine a stronger incentive to shift investments — and in some cases, actual jobs — offshore. This incentive to shift investments offshore has been greatly reduced by H.R. 1586, the law Boehner criticizes.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

The corporate community has been remarkably effective at confusing everyone about this issue, partly because so few people understand it. Even the Peter G. Peterson Institute, named after and funded by the man who has become famous for lecturing America on budget deficits, issued a report opposed to the provisions that close these loopholes in the foreign tax credit. (See CTJ's response to the Peterson Institute.)

The Jobs Bill, H.R. 1586

The law that Congressman Boehner is criticizing, H.R. 1586, the Education Jobs and Medicaid Assistance Act, provides $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. The non-partisan Congressional Budget Office (CBO) has found that aid to states is one of the most effective measures to create jobs. (The income tax cuts that Boehner endorses, particularly income tax cuts for the rich, are the least effective measures for creating jobs, according to CBO's findings.)

Since the bill included the most effective possible job creation measures and offset the costs by closing tax loopholes that encourage U.S. corporations to shift profits and jobs offshore, it's about as close as Congress ever comes to a win-win proposal. We're glad that President Obama has signed it into law.

On Thursday, the Senate approved, by a vote of 61-39, H.R 1586, providing $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. House Speaker Nancy Pelosi announced that she would bring her chamber back into session next week to approve the bill. 

The bill includes revenue-raising provisions to offset the $26 billion cost, including the set of provisions that would clamp down on abuses of the foreign tax credit and which were originally part of the ill-fated "tax extenders" bill (H.R. 4213). (Some other revenue-raising provisions included in the bill are not ideal.)

The foreign tax credit ensures that a U.S. individual or corporation with income generated in a foreign country is not double-taxed on that foreign income. These taxpayers are allowed a credit against their U.S. taxes for any foreign taxes they pay on the foreign income. The problem is that many corporations have found ways to receive foreign tax credits in excess of what would be necessary to avoid double-taxation.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

In June, the Peter G. Peterson Institute (funded by, and named after, the billionaire who is ostensibly concerned with the federal budget imbalance) released a remarkable report opposing the provisions to prevent abuses of the foreign tax credit. Another CTJ report responds to the Peterson Institute's arguments.


Congress Revives Legislation to Prevent Abuses of Foreign Tax Credits


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Democrats in the House of Representatives have introduced a bill that includes several provisions to crack down on abuses of foreign tax credits that had been included in H.R. 4213, the ill-fated jobs and "extenders" bill that Senate Republicans successfully blocked. The revenue would be used offset the cost of repealing a reporting requirement for businesses that was included in the health care reform law and which some business owners and lawmakers feel is too burdensome.

Meanwhile, the Senate is scheduled to take up a bill on Monday that would also use these provisions, mainly to help offset the costs of Medicaid funding for states and education funding to prevent teacher layoffs.

See the previous analyses from Citizens for Tax Justice that explain why these provisions to stop abuses of the foreign tax credit are good policy.

Key Provisions in H.R. 4213 Would Prevent Abuses of Foreign Tax Credits

Peter G. Peterson Institute's Misguided Defense of Offshore Tax Loopholes


Blogger Behind Sherrodgate Targets Citizens for Tax Justice


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After days of wall-to-wall media coverage of its grotesquely misleading, edited clip of USDA official Shirley Sherrod speaking about race, Andrew Breitbart’s blog Big Government is targeting Citizens for Tax Justice.

Breitbart’s bizarre and extraordinary claim is that CTJ, ACORN, The New York Times, the Center for American Progress and a group called Clean Energy Works (of which we were previously unaware) are colluding to deceive the public about tax policies affecting oil and gas companies.  

Breitbart’s argument goes something like this. On July 3, the New York Times published an article saying that oil and gas companies get a whole lot of tax breaks. Then on July 9, CTJ published a report saying that oil and gas companies get a whole lot of tax breaks. Also on July 9, Clean Energy Works sent someone a strategy memo saying that the public needs to know that oil and gas companies get a whole lot of tax breaks.

As Breitbart sees it, surely this can be no coincidence! It doesn’t seem to occur to him that the tax breaks available for fossil fuel production have grown so outrageous — at a time when the world is concerned about carbon emissions and climate change — that hardly a week goes by without somebody somewhere criticizing them. Heck, even President George W. Bush criticized them.

To fill out the conspiracy a little more, Breitbart assumes that any organization that is associated with any of CTJ’s 21 board members, and any progressive organization with an employee cited in the New York Times article, is also involved in this coordinated plan to deceive the public.

Finally, Breitbart is simply wrong about the tax loopholes in question. He writes:

“The same day that Di Martino [of Clean Energy Works] released his memo, Citizens for Tax Justice (CTJ) released their own defective and dishonest hit piece, titled “What Oil and Gas Companies Extract from the American Public.”   The tax breaks referred to by Di Martino and the CTJ memo, in reality, are the same credits that every American company receives for taxes paid overseas to foreign governments on income earned abroad.”

Wrong. The CTJ report titled What Oil and Gas Companies Extract—from the American Public discusses the top 5 tax loopholes enjoyed by oil and gas companies. These breaks are not “the same credits that every American company receives for taxes paid overseas to foreign governments,” which seems to refer to the foreign tax credit. One of the five loopholes our report criticizes allows oil and gas companies to take the foreign tax credit for what are really royalties (not taxes) paid to foreign governments.

The other four loopholes discussed in the report are not related to the foreign tax credit. They include the deduction for “intangible” costs of exploring and developing oil and gas sources, “percentage depletion” for oil and gas properties, Congress’s decision to redefine “manufacturing” so that oil and gas companies can receive a deduction for domestic manufacturing, and another break for writing off the costs of searching for oil.

Now it’s true that there are some huge problems with the international tax system generally and it’s true that we are more than happy to use the energy industry as an example of those problems, even though they are not confined to the energy industry. CTJ’s recent report on oil drilling and taxes uses the example of Transocean to illustrate the problems with corporate inversions, transfer pricing schemes, and payroll tax avoidance, since Transocean has exploited all three. But this report makes clear that Transocean is just one example of many types of companies that are abusing the rules in these ways.

And, to be fair (although it’s not clear why we should be fair to Andrew Breitbart) the New York Times article did discuss both problems — tax breaks that are specific to oil and gas companies and tax avoidance schemes that are not limited to any particular type of company. But that doesn’t change the fact that oil and gas companies are particularly adept at finding ways to get out of paying their fair share to maintain the society that makes their enormous profits possible.

Given Breitbart’s track record, we’re not particularly surprised that we're being attacked by the blog Big Government. As Franklin D. Roosevelt once said, "I ask you to judge me by the enemies I have made."


Small Businesses Launch Campaign Against Offshore Tax Havens


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A group of small business owners and investors released a report on offshore tax havens this week and launched a campaign to put an end to the tax avoidance that they facilitate.

The group, Business and Investors Against Tax Haven Abuse, explains that tax havens provide an unfair advantage to large chain retailers and financial companies over locally-owned retailers and community banks. Target, Best Buy, Citigroup, Goldman Sachs and other well-known corporations are able to shift profits to their subsidiaries in places like the Cayman Islands (where they do little or no actual business) to reduce or eliminate their U.S. taxes. Independent "mom and pop" retailers are at a huge disadvantage just because they don't have subsidiaries set up in foreign countries solely to reduce their taxes.

It's not just independent and locally-owned businesses that suffer. All honest taxpayers are being cheated, the report explains, because the huge U.S. multinational corporations that use tax havens are actually doing most or all of their actual business in the U.S., meaning they are benefiting from the American education system, legal system, highways and other types of infrastructure even though they are not doing their part to pay for these public goods and services.

A particularly interesting part of the report explains how tax havens also helped facilitate shady financial dealings that contributed to the financial collapse. It cites reports that Goldman Sachs was using subsidiaries in the Cayman Islands when it "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst."

For too long, lawmakers have responded to efforts to end offshore tax avoidance as some sort of wild attack on the free market. Now that business people themselves are sounding the alarm, lawmakers should listen.

This week, efforts to crack down on offshore tax evasion and illegal flows of money were stymied by the U.S.'s own tax haven, Delaware. The Financial Secrecy Index ranks Delaware as the world's number one secrecy jurisdiction and this week one of the state's Senators fought to maintain its ranking.

Last year, Senators Levin, Grassley, and McCaskill introduced a bill (S. 569) to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed. A summary of the bill's provisions can be found here. The Senate Homeland Security and Government Affairs Committee (HSGAC) had scheduled a markup of the bill this week, but that was postponed when an alternative bill was proposed by Sen. Carper (D-DE). In addition to other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being. This would defeat the whole purpose of the bill.

In hearings last year on S. 569, Senator Levin told of a single Utah company that had been engaged in suspicious wire transfers of $150 million. When Immigrations and Custom Enforcement (ICE) investigated, they discovered a web of over 800 companies formed in all 50 states, all controlled by the same Panamanian entities involved "in a massive shell game in which U.S. companies were being used to disguise the movement of funds and mask suspicious activity." The Utah company had been set up by a Delaware corporation, and the investigation hit a dead end when ICE was unable to discover who the beneficial owners of the corporations actually were.

Or, take the case of Viktor Bout, which Senator Levin described in another hearing last year. Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists.

As Senator Levin explained:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Shell companies — as they are called because they don't do any real business — are used for all kinds of illegal purposes, including laundering money from illegal activities and financing terrorists. They are also used extensively for tax evasion. S. 569 would help law enforcement authorities combat these illegal activities and many law enforcement agencies have voiced support for the bill.

Sen. Carper is obviously concerned about his state's ability to maintain its status as the incorporation capital. But that can hardly take priority over addressing criminal activities and threats to national security. Let's hope his colleagues on HSGAC are less myopic than he is.


Minority of Senators Block Jobs and "Tax Extenders" Bill -- No Resolution in Sight


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President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.

Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.

The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.

To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.

For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.

Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.

The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.


Defenders of Tax Loopholes Continue Battle Against Jobs and "Extenders" Bill


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As the Senate continues a seemingly endless debate over H.R. 4213, the jobs and "tax extenders" bill, business lobbyists, right-leaning economists and politicians have had more time to shape their arguments in defense of the tax loopholes that the bill would pare back.

To offset the costs of the tax breaks included in the bill, three types of loopholes would be restricted. They include the "carried interest" loophole that allows certain investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate, the "John Edwards" loophole allowing people with "S corporations" to avoid payroll taxes, and abuses of the foreign tax credit by U.S.-based multinational corporations.

The debate over the "carried interest" loophole has received the most attention, and CTJ has responded to some of the outlandish arguments made in its defense.

More recently, Senator Olympia Snowe (R-ME) has voiced her opposition to the provisions regarding "S corporations," and filed an amendment to strip them from the bill. A recent report from CTJ explains that this amendment should be rejected because the loophole in question allows people to underestimate the extent to which their income is wages, meaning they avoid payroll taxes.

The report also explains that the main effect of the provisions in H.R. 4213 regarding S corporations would probably be on Medicare taxes. The new health care reform law actually applies Medicare taxes to most non-retirement income, but there is a bizarre exception left for certain non-wage income from S corporations. H.R. 4213 would not even eliminate this exception entirely but would merely target those taxpayers who are most obviously manipulating the tax rules to avoid paying the Medicare tax. This seems like the least Congress could do.

The provisions in H.R. 4213 that prevent abuses of the foreign tax credit have also received more attention lately. A new report from CTJ responds to criticisms of these provisions made by the Peterson Institute's Gary Hufbauer and Theodore Moran.

The purpose of the foreign tax credit is to ensure that American individuals and corporations are not double-taxed on income that they earn in other countries. Hufbauer and Moran seem to acknowledge — and endorse — the common practice of corporations using credits in excess of what is necessary to avoid double-taxation. In these instances, corporations are really using the credit to lower their U.S. taxes on their U.S. income. Or, put another way, it means the credit is being used to subsidize foreign countries by helping U.S. corporations pay their foreign taxes.

Surely, everyone should agree that this is not the purpose of the foreign tax credit. But without the reforms included in H.R. 4213, these practices will continue, and we will have missed an important opportunity to make our tax system fairer and more rational.


Senate Continues Battle Over Bill on Jobs, "Extenders," and Loophole-Closers


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Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

 


CALL YOUR MEMBERS OF CONGRESS: Urge Them to Pass the Jobs and Extenders Bill (H.R. 4213)


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A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.

Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.

The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)

Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.


Congress May Close International Tax Treaty Loophole


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As discussed in the previous article, Congress may close the "carried interest" loophole to help pay for the "tax extenders," which are provisions extending several expiring tax breaks that mostly benefit business. Another measure that Congress may also use to help pay for the tax extenders is a provision that would stop corporations from manipulating tax treaties between the U.S. and other countries to avoid withholding taxes before shifting their income into a tax haven.

U.S. subsidiaries of foreign corporations don’t have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed.

Congress may adopt a provision (which was originally proposed by Rep. Lloyd Doggett of Texas) that would simply impose the withholding tax that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. This would prevent treaty shopping and raise $7.7 billion over ten years.

Read CTJ's 2007 report explaining the proposal when it was proposed by Rep. Doggett.


Be Informed and Take Action on Tax Day


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Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.

And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.

The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.

CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding. 

US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.

Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.

UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.

Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."

Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.

IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.

CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.

Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.

NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.

CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.

UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps."  The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.

CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.

 

 

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

 

"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.


House Approves Bill to Close "Carried Interest" Loophole, Crack Down on Offshore Tax Cheats


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On December 9, the U.S. House of Representatives approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again. Congress would receive these reports at the same time it is trying to decide which of the Bush tax cuts should be extended, what to do with the President's tax reform proposals, and how to balance the federal budget. In this context, it is hoped that the reports will prod some lawmakers to take a more critical look at corporate tax breaks before extending them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress. (See our previous article on H.R. 4213 for the points made in the letter.)

Prospects in the Senate are unclear. One problem is the full agenda the Senate has with health care reform.

Another problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. This is, frankly, an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes. They know full well that comprehensive tax reform might not happen for decades. (The last one was in 1986, after all).

The carried interest loophole allows managers of private equity funds (a euphemistic term for buyout funds) to pay taxes at a lower rate than their secretaries. It involves using the tax subsidy (the special top rate of 15% for capital gains) that was intended for people who invest their own money. Whether or not the capital gains tax subsidy is justified is another matter. (We believe it's not.) But private equity fund managers are not investing their own money anyway. They're being paid to manage other people's money, but by calling their compensation "carried interest" they're able to pay income taxes at the low, capital gains rate.

The notion that Congress can tackle tax schemes this blatantly unfair only in the context of comprehensive tax reform (which apparently only comes once every 25 years, if even that often) is ridiculous. Advocates of tax fairness need to call upon the Senate to approve H.R. 4213 as it was written and approved by the House of Representatives. 

Citizens for Tax Justice and several other national organizations have come together to support passage of (H.R. 4213), which fairly and responsibly offsets the cost of the "tax extenders." The House of Representatives plans to vote on this bill as early as December 9.

Read the letter in support of H.R. 4213.

To be sure, many of these organizations question the efficacy and fairness of some of the "tax extenders," which are provisions that Congress enacts periodically to extend, for a year or so, various temporary tax breaks. But we nonetheless agree that the core revenue-raising provisions included in this legislation are important reforms to our tax system. We  support this bill for the following reasons:

H.R. 4213 would reverse Congress's tradition of increasing the budget deficit every year by extending "temporary" tax breaks without paying for them.

Unlike many previous "tax extenders" bills, this legislation includes revenue-raising provisions that would offset the costs of extending these tax breaks. Enacting corporate tax breaks (which make up the bulk of the "tax extenders") without paying for them contributes to our federal budget deficits and our national debt, which is borne by all Americans. The revenue-raising provisions in this bill prevent an increase in the deficit while also making the tax code fairer and more efficient.

H.R. 4213 would finally close the loophole for what private equity fund managers call "carried interest." (See CTJ's previous analyses of the carried interest loophole.)

A middle-income person typically pays income taxes as high as 25 percent plus payroll taxes. Private equity fund managers can receive millions of dollars (or even billions of dollars, during boom times) in compensation for their work, but by calling this income "carried interest," they pay only income taxes at a 15 percent rate.

The "carried interest" label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent). This pretense clearly contradicts the will of Congress in creating the subsidy for capital gains, which was meant to reward those who invested their own money, not those who are simply being paid to manage other people's money.

H.R. 4213 also includes a proposal introduced by Finance Committee Chairman Max Baucus and Ways and Means Committee Chairman Charles Rangel to prevent wealthy Americans from cheating on their U.S. taxes by hiding their income in offshore tax havens. (See CTJ's analysis of tax haven legislation.)

While this proposal is not as strong as we would prefer, it would be an important step forward to ensure that all Americans pay their fair share in taxes. Middle-income Americans typically have few opportunities to hide their income from the IRS. But wealthy Americans have access to lawyers and accountants who help them hide their income in offshore tax havens. Tax havens are countries that have a very low income tax (or no income tax) and laws that prevent their banks from cooperating with IRS enforcement efforts.

While the vast majority of taxpayers at all income levels do the right thing and pay their fair share, a minority of wealthy Americans are engaging in these activities that are both illegal and unfair. The Baucus-Rangel proposal would create strong incentives for foreign banks to provide information that would help the IRS identify tax cheats without creating any significant burden on the banks or their honest customers.

H.R. 4213 requires that the Joint Committee on Taxation (JCT) conduct studies evaluating the "tax extenders" before the end of next year, when Congress is likely to act on them again. (See CTJ's report calling on Congress and the administration to conduct regular reviews of tax expenditures.)

Providing a special corporate tax break through the tax code has the exact same effect as providing a subsidy through direct spending. Unfortunately, lawmakers have made almost no attempt to evaluate or even think critically about the effectiveness of corporate tax breaks before extending them each year. This contrasts significantly with lawmakers' attitudes towards the discretionary spending that they grapple with annually.

JCT's reports of the effectiveness of tax breaks will at least provide Congress with a basis to judge whether or not these tax provisions are worth their costs. This is a common sense reform that is long overdue.


CTJ Submits Testimony on Proposed Tax Treaties


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On Tuesday, the Senate Committee on Foreign Relations considered proposed tax treaties with France, New Zealand, and Malta. CTJ director Robert McIntyre and Wayne State University law professor Michael McIntyre submitted written testimony to the Committee arguing that the treaties are based on standards that are widely recognized as obsolete and ineffective in catching offshore tax cheating. They point out that it makes no sense for the U.S. to wrap up major litigation over Switzerland's UBS and then enter into treaties with other countries that would not help us find the sort of cheating that took place in the UBS case.

Read the testimony.

Last year, Senator Carl Levin's Permanent Subcommittee on Investigations reviewed various studies on the fiscal impact of offshore tax evasion and concluded that the resulting loss of revenue annually is in the neighborhood of $100 billion. (Yes, that's $100 billion with a "b" -- every year.)

Senator Levin then introduced the Stop Tax Haven Abuse Act in the Senate, and Rep. Lloyd Doggett introduced the House version. This legislation makes several changes that would make it easier for the IRS to identify and prosecute Americans who illegally stash their income in countries commonly called tax havens, which essentially have no income taxes (or extremely low income taxes) and laws that prevent banks from revealing anything about their clients to the U.S. tax enforcement authorities. It also includes some steps that would prevent corporations from engaging in the most egregious offshore tax avoidance schemes using some of these same tax havens for their low or non-existent income taxes.

Many of us were disappointed when the Congressional Joint Committee on Taxation (JCT) made it's official estimate that the bill would raise less than $30 billion over an entire decade (since the ten-year cost of offshore tax evasion to law-abiding America is probably over a trillion dollars.)

But the low revenue "score" is not surprising. JCT has historically erred on the side of making very low revenue estimates for measures that enhance tax enforcement, since it's hard to predict how effective new enforcement measures will be. And for that matter, it's hard to know exactly how many people are engaging in offshore tax evasion and how much they're cheating. It could cost us less than $100 billion, it could cost more, but we don't know for sure. That's the nature of tax evasion -- the money is hidden from the government, so no one knows for sure how big the problem is.

But even the little bit of revenue that the Levin-Doggett bill would officially raise over a decade seems to be too much for some members of both parties in Congress. Yesterday, the chairmen of the two tax-writing committees, Rep. Charles Rangel and Senator Max Baucus, introduced their own bill to crack down on tax havens (officially called the Foreign Account Tax Compliance Act), which will only raise $8.5 billion over ten years according to JCT.

The Baucus-Rangel bill does include important measures to require more reporting of foreign bank accounts and foreign assets and closing loopholes, and most of these provisions are in the Levin-Doggett bill. But Baucus and Rangel unfortunately left out some key provisions that are in the Levin-Doggett bill, which accounts for a large part of the difference in the revenue "scores" for the two bills.

Presumptions Against Americans Who Use Tax Havens

For example, the Levin-Doggett bill includes a list of countries that meet its definition of an "offshore secrecy jurisdiction," which is generally what we would call a tax haven. The Treasury would be authorized to remove countries from or add countries to the list as circumstances change. In tax evasion cases concerning accounts or assets in one of the listed countries, the IRS would be allowed three presumptions. (This means there would be three things that the IRS would not have to prove in court when prosecuting these cases, so the burden of proof would shift to the defendant.)

The first presumption would be that a U.S. taxpayer who “formed, transferred assets to, was a beneficiary of, or received money or property” from an offshore entity is in control of that entity. For example, this rule would prevent U.S. taxpayers from claiming that the trustee (usually a foreign person or entity) of their offshore trust is not permitted by the trust document to send money back to the U.S. to pay creditors (including the IRS).

The second presumption is that funds or other property received from offshore are taxable income, and funds or other property transferred offshore have not yet been taxed. The taxpayer will have to prove that the funds aren’t taxable income, or else pay the tax. The third presumption is that a financial account in a foreign country controlled by a U.S. taxpayer has a large enough balance ($10,000) that it must be reported to the IRS.

Special Enforcement Measures

Another set of provisions that are in the Levin-Doggett bill but not in the Baucus-Rangel bill would add to existing Treasury authority to impose special requirements on U.S. financial institutions. Under the Patriot Act, Treasury can impose a range of requirements on U.S. financial institutions dealing with certain entities -- from requiring greater information reporting to prohibiting opening accounts. The Patriot Act’s provisions are aimed at combating money laundering. The Levin-Doggett bill would extend that authority to allow Treasury to use those tools against foreign jurisdictions or financial institutions that are “impeding U.S. tax enforcement.” It would also add an additional tool to the Treasury’s arsenal: it would allow Treasury to prohibit U.S. financial institutions from accepting credit card transactions involving a designated foreign jurisdiction or financial institution.

Treatment of Foreign Corporations Managed and Controlled in the U.S. as U.S. Corporations

Yet another provision that is in the Levin-Doggett bill but not the Baucus-Rangel bill would treat foreign corporations as U.S. domestic corporations for tax purposes if 1) the corporation is publicly traded or has aggregate gross assets of $50 million or more, AND 2) its management and control occurs primarily in the U.S.

This provision of the bill deals with a certain type of tax avoidance rather than tax evasion, meaning a practice that may be technically legal even though it's an abuse of the tax system. The provision is particularly aimed at hedge funds and investment management businesses that are structured as foreign entities, although their key decision-makers live and work in the U.S. As Sen. Levin put it in his statement, “It is unacceptable that such companies utilize U.S. offices, personnel, laws, and markets to make their money, but then stiff Uncle Sam and offload their tax burden onto competitors who play by the rules.”

Less Robust Crackdown on Tax Havens Means Less Revenue

These provisions, which are some of the most important in the Levin-Doggett bill but which are not in the Baucus-Rangel bill, would raise $9 billion over ten years according to JCT. There may be many things that make Congressional leaders uncomfortable with these provisions, but surely one major factor is that it would require them to take on financial institutions that have subsidiaries in tax havens.

Economic Substance

There are other provisions included in the Levin-Doggett bill, but not the Baucus-Rangel bill, such as a provision codifying the “economic substance doctrine” in the Internal Revenue Code. The doctrine has been developed over the years by courts to disallow losses or deductions that have no economic substance apart from their tax benefits. Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. The bill would put the economic substance doctrine into the tax law, thereby disallowing losses, deductions, or credits arising from “tax avoidance transactions,” for example, where the present value of the tax savings far exceeds the present value of the pre-tax profits.

This particular provision was probably left out of Baucus and Rangel's bill simply because they want to use this as a revenue-raiser for other purposes, since it has already been attached to several bills.

The Path Ahead

The introduction of Baucus and Rangel's bill, the Foreign Account Tax Compliance Act, is certainly a positive development because it means Congress might finally be ready to do something about those who cheat on their taxes at the expense of the rest of us. But Congress tends to take on a controversial issue only once every decade (or longer) so if the legislation that is finally enacted is too weak to make a difference, we're stuck with it for a while. That's why the Baucus-Rangel bill will need to be amended in committee or on the floor of the House and Senate to incorporate some of the best elements of the Levin-Doggett bill.


CTJ's Suggested Principles for Tax Reform


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President Obama’s Economic Recovery Advisory Board (PERAB) recently requested ideas from the public about how the federal tax system could be reformed. The comments submitted by Citizens for Tax Justice yesterday begin "We want a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. Our current tax system falls far short of achieving these goals."

The comments note that:

- On the revenue side, even after the current recession ends, we can expect to be funding about a quarter of all non-Social Security spending with borrowed money (including amounts borrowed from the Social Security trust fund).

- As for simplicity and fairness, well, both parties have been guilty of using the tax code to promote a vast array of favored activities. One result is that taxpayers with similar incomes can be treated wildly differently depending on how they make their money or how they spend it.

- In fact, our current tax system allows many of our biggest and most profitable corporations to pay little or no tax.

The rest of the comments lay out principles for solving these problems.

Read CTJ's Suggested Principles for Tax Reform (2 pages)


Measure to Crack Down on Offshore Tax Evasion Could Be Used to Help Pay for Health Care Reform


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Senator Levin to Offer Tax Haven Legislation to Help Pay for Health Care Reform

This week, Senator Carl Levin of Michigan indicated that he will offer a measure to crack down on offshore tax evasion as a revenue-raiser to help pay for health care reform.

The Stop Tax Haven Abuse Act

The measure Senator Levin plans to offer is one he introduced earlier this year, along with four co-sponsors, as a stand-alone bill called the Stop Tax Haven Abuse Act (S.506). It would enact important new rules to deter offshore transactions designed to evade U.S. income tax.  Rep. Doggett introduced the same measure in the House the next day, with 59 co-sponsors (H.R. 1265). A description of the bill’s provisions is available here.

When the bill was originally introduced, Sen. Levin said “our bill provides powerful tools to end offshore tax haven and tax shelter abuses [which] contribute nearly $100 billion to the…annual tax gap.” Sen. Levin said, “With the financial crisis facing our country today and the long list of expenses we’re incurring to try to end that crisis, it is past time for taxes owing to the people’s Treasury to be collected.  And it is long past time for Congress to stop tax cheats from shifting their taxes onto the shoulders of honest Americans.

Paying for Health Care Reform with the Tax Haven Bill

A preliminary projection by the Joint Committee on Taxation estimates that the legislation would raise $29.8 billion in revenue over ten years. The ultimate amount of revenue may be many times that. Because these assets and income are not reported to the IRS, the true magnitude of the revenue loss is a mystery.

Attaching the Stop Tax Haven Abuse Act would be a progressive way to help pay for health care reform because it is generally wealthy Americans that are able to take advantage of tax havens. (See CTJ's additional suggestions for progressive ways to pay for health care reform.)

The Tax Haven Problem

It is estimated that the international tax gap — the amount of taxes American companies and wealthy Americans evade through offshore tax activities — is as much as $100 billion per year.

U.S. citizens and residents are taxed on all their income, whether it is earned here or abroad. If a foreign government also taxes the income, that tax may be credited against their U.S. tax.

Wealthy taxpayers are able to avoid paying U.S. taxes that they legally owe by moving assets and income offshore to what are known as “tax havens.”  Tax havens are offshore jurisdictions that have low or non-existent income taxes as well as bank secrecy laws that they use to justify being uncooperative with investigations by tax authorities from other countries. Evading U.S. income tax by using tax havens is illegal and U.S. citizens that do it are subject to civil and criminal penalties, including possible prison terms.

The U.S. government’s investigation of banking giant United Bank of Switzerland (UBS) revealed that as many as 52,000 accounts there are owned by Americans. That’s just one bank in one of the dozens of offshore financial centers. Several UBS account owners have already pled guilty to tax evasion.

The latest plea came Tuesday when a Seattle area man, a former sales manager for Boeing, appeared before the court in connection with his plea agreement. Roberto Cittadini faces possible criminal penalties of three years in prison and a maximum fine of $250,000. He has already agreed to a civil penalty for failure to file a Foreign Bank Account Report (FBAR) of up to one-half of the maximum balance of his offshore accounts which at one time contained as much as $1.9 million dollars. The great irony of this particular case is that since Boeing is a multi-billion dollar contractor for the U.S. government, part of Cittadini’s salary was paid by the U.S. government. He moved that money outside of the country to invest it and avoid paying U.S. income tax on the investment earnings.


No Tax on the $845 Million Sale of the Cubs? Why We Need the Economic Substance Law


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Yesterday a federal bankruptcy judge approved Sam Zell's Tribune Co. sale of the Chicago Cubs and Wrigley Field to the Ricketts family, of TD Ameritrade, for $845 million. Everyone, including the bankruptcy judge, is calling it a "sale" except Sam Zell and his tax advisors. They're calling it a "leveraged partnership transaction," wherein Zell will retain a 5% interest and avoid paying the tax on the sale. Reporter Allan Sloan called Zell out on the tax dodge in Tuesday's Washington Post.

The Zell structuring of the Cubs sale is just another example of why we need the "economic substance" doctrine in the tax code. The economic substance doctrine has been developed over the years by the courts to disallow losses or deductions that have no economic substance apart from their tax benefits. In other words, if the only reason someone would do a deal a certain way is to avoid taxes, then the court ignores it and looks at the real underlying transaction. Clearly, a court looking at the Zell deal would find that it was, in substance, a sale of the Cubs to the Ricketts family. And Zell would owe millions of dollars of tax on the deal.

Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. That's why there have been repeated calls for strengthening the doctrine's basis in statute, including in President Obama's budget proposal. Tax avoidance transactions rely upon the interaction of highly technical provisions of the Internal Revenue Code to produce a tax result not contemplated by Congress. In developing the tax laws, Congress cannot possibly foresee all the ways the rules might be abused.

But tax lawyers figure it out for their wealthy clients -- at fees upwards of $500 per hour. If the economic substance doctrine is codified, taxpayers would be required to show that a transaction had a substantial non-tax purpose and had real economic consequences apart from the federal tax benefits. It would give the IRS a way to fight any tax avoidance scheme, whether or not the law specifically addressed it.

The American Society of CPAs recently wrote a letter to the Assistant Treasury Secretary for Tax Policy, Michael Mundaca, arguing against the rule's enactment (subscription required). To be fair, the letter raised a few good points that should be considered in crafting the final legislation. The letter is nonetheless a study in how self-interest can cloud one's perception. The big accounting firms might have a little more trouble selling their tax shelter deals if an economic substance rule is enacted into law. The IRS would be able to quickly challenge the next abusive tax shelters that tax professionals are surely already dreaming up.


Tax Cheats Get a Three-Week Reprieve


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As we have reported in recent weeks, the IRS is taking much-needed action to crack down on Americans who hide their income in offshore tax havens to illegally evade their U.S. taxes. One of the biggest developments is a settlement with the Swiss bank UBS, under which it will hand over to the U.S. information about 4,450 of its American clients who may be evading U.S. taxes.

But the IRS is giving these possible tax evaders plenty of opportunities to avoid punishment. The IRS implemented the six-month IRS Offshore Income Reporting Initiative, which is a voluntary disclosure program for foreign financial accounts that started on March 23, 2009 and was supposed to end on September 23.

This week, just two days before the voluntary disclosure program was scheduled to end, the Internal Revenue Service pushed back the deadline until October 15, 2009. The IRS said it had received numerous pleas from tax practitioners and attorneys around the country to extend the program so that they would be able to deal with the last-minute rush of taxpayers wanting to disclose.

Don't think these tax cheats suddenly got religion and want to become virtuous taxpayers. By using the streamlined procedures of the voluntary disclosure program, taxpayers are able to limit their penalties and avoid criminal prosecution. See the previous CTJ report with more details and the IRS guidance. The IRS stressed that no more extensions would be granted.


Tax Havens are Hot Topic at OECD Meeting as Fallout from UBS Case Continues


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This week, governments around the world continued to turn up the heat on taxpayers who hide their income in offshore tax havens, as fallout from the settlement between the U.S. government and the Swiss mega-bank UBS continued.

Tax haven issues were prominent at the Organization for Economic Cooperation and Development (OECD) meeting earlier this week in Mexico City. The OECD has a monitoring program tasked with addressing offshore tax abuses, and its president-elect suggested a "system of sanctions" may be implemented against countries not living up to certain accepted standards for the exchange of tax information to catch tax evaders.

At the meeting, the Mexican finance minister urged the 70 delegations at the OECD meeting to look at other methods of tax evasion besides bank secrecy. For example, he noted that corporate dividends often escape taxation. He urged the representatives to include money laundering and other opaque financial practices in their investigations, especially in developing countries.

Countries that want to at least put some effort into preventing offshore tax evasion continue to sign tax information exchange agreements (TIEAs) with each other. Several new agreements were signed on the first day of the conference. Also that day, Austria, a long-time defender of bank secrecy, passed legislation allowing it to implement the new global tax standards after the European Investment Bank threatened to withdraw loans to Austria if it did not reform its bank secrecy laws.

In Switzerland last week, the government formally approved six of the 13 TIEAs that have been drafted with other countries. The agreement initialed with the U.S. in June was not approved, possibly because of the ongoing U.S. investigation of Swiss banking giant UBS.

UBS, the Swiss government, and the U.S. government reached agreements in the UBS case last month which anticipate that UBS will turn over approximately 4,450 names of account holders to the U.S. government. The U.S. government made its first formal request under the agreements and the first 500 names are to be provided within 90 days. The Connecticut attorney general has written Treasury and the IRS requesting that the names be provided to the state when they are received from the Swiss government so that his office can investigate whether state income taxes have also been evaded.

Noting the US/UBS agreement, last week a European Commission official stated that European Union members would expect the same cooperation from the Swiss. This week, the French minister of budget announced that the French government had compiled a list of 3,000 French-held Swiss bank accounts from audits and information provided by French banks on money transfers to tax havens. "Some are certainly tax evaders," he said.


Swiss Bank to Give Up Some, But Not All, Americans It Helped Evade U.S. Taxes


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The details of last week's settlement of the U.S. government's case against Swiss mega-bank UBS, which is accused of helping wealthy Americans hide their incomes from the IRS, were released on Wednesday. Under the agreement, UBS will disclose information regarding approximately 4,450 American taxpayers with current or former accounts at UBS. In exchange, the U.S. government will withdraw its legal action to compel UBS to disclose all of its 52,000 American customers. A related agreement with the Swiss government will provide a new treaty process to facilitate the release of the information.

This is both good news and bad news for law-abiding Americans who pay their taxes and who are tired of subsidizing those who don't. The good news is that the 4,450 Americans' accounts at one point in time totaled $18 billion in assets, approximately 90% of the estimated $20 billion in American-owned accounts at UBS. So, the IRS is perhaps going to be able to catch most of the tax-cheating, at least in dollar terms.

The IRS will use this information to investigate the offshore accounts of those 4,450 taxpayers, with hopes of collecting back taxes, interest, civil and possibly criminal penalties if those accounts have not been previously reported to the IRS.

Of course the bad news is that the 4,450 names expected to be released to the IRS make up less than 10% of the estimated 52,000 American-owned accounts. Without 100% disclosure, American taxpayers may in the future be tempted to play the "audit lottery," assuming they have only a 10% chance of getting caught.

Another piece of bad news is that the criteria used to select the UBS account holders to be disclosed to the IRS will not be released. But there is a strong indication that the size of the account has some importance. Taxpayers might avoid this danger in the future by spreading their offshore funds among several accounts and numerous banks so that they can "fly under the radar."

What also seems like bad news is that under the settlement, UBS will pay no civil penalties. It has already paid $780 million in criminal penalties for the actions of certain bank employees facilitating illegal tax evasion.

What's even more alarming is that the IRS will withdraw its "Notice of Default" that was issued to UBS for violating the agreement it entered into with the U.S. government. This agreement, which made UBS a "Qualified Intermediary" or "QI," is one that foreign banks enter into with the U.S. in order to get favorable treatment in return for complying with certain reporting standards. Given that UBS bankers came into the U.S. to solicit illegal business from Americans with the express purpose of helping them evade taxes, it's hard to believe UBS is not in default of such an agreement. If this egregious behavior can't get a bank kicked out of the QI program, what in the world can?

So the settlement certainly does not mean that the offshore tax evasion problem is resolved. If anything, it shows how badly we need legislation to deal with the problem, since there are apparently limits to how far the U.S. government will go, using existing laws, to crack down.

Fortunately, members of Congress seem to understand this. Senator Carl Levin, sponsor of the Stop Tax Haven Abuse Act, said in a statement that, "The UBS settlement is at most a modest advance in the effort to end bank secrecy abuses, tax haven bank misconduct, and the tax haven drain on the U.S. treasury. It will take a long time before we know whether this settlement will produce meaningful gains due to treaty procedures which are complex, depend upon the Swiss government to carry out, and open the door to potentially lengthy appeals."


The "Clock is Ticking" on the IRS Voluntary Disclosure Program for Offshore Accounts


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In case you are starting to feel sorry for all those wealthy taxpayers who might go to prison because the Swiss bank where they hid their money (UBS) is about to turn them over to the IRS, rest assured that they will avoid prison if they have any common sense whatsoever. That's because the IRS is temporarily allowing Americans who've hidden their income in offshore accounts to come clean now and face almost no chance of prosecution.

In his statement on the UBS settlement (see related story), IRS Commissioner Doug Shulman reminded taxpayers that the six-month IRS Offshore Income Reporting Initiative, which started on March 23, 2009, will end on September 23. That gives taxpayers only five more weeks to come clean with the government about their offshore accounts.

As a Forbes columnist put it so well: "What's a wealthy tax cheat to do?" According to Commissioner Shulman, they'd better come in to the IRS and disclose their accounts voluntarily before the IRS gets their names some other way.

If taxpayers take advantage of the voluntary disclosure program, they must:
- pay six years of back taxes and interest on any unreported income;
- pay a 20%-25% penalty on those taxes;
- and pay a penalty of 20% of the highest balance of their offshore accounts during the past six years.

By doing so, offshore account owners will avoid much harsher penalties. For example, taxpayers would avoid the penalty for not filing a Foreign Bank Account Report (FBAR), which is 50% of the balance of the account every year, and the fraud penalty, which can be as much as 75% of the tax. In addition, voluntary disclosure will avoid criminal prosecution and possible prison terms.

Once a taxpayer's name is turned over by UBS, it is too late to take advantage of the voluntary disclosure program and "all bets are off." Also, the related agreement with the Swiss government would allow the IRS to get names of taxpayers using Swiss banks other than UBS when the pattern of facts and circumstances is similar to that of the UBS case.

Commissioner Shulman indicated that the IRS currently has no plans to extend the voluntary disclosure program beyond September 23. He urged anyone with undisclosed offshore accounts to contact their tax professional immediately. He noted that the agreement demonstrated that " the world of international taxes has dramatically changed, and people hiding assets and income offshore and from the IRS need to get right with the government now."


UBS Reaches Agreement with U.S. on Disclosure of American Customers


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On August 12, the U.S. government and Swiss banking giant UBS announced that they had reached an agreement settling the dispute over whether the Internal Revenue Service can enforce a "John Doe summons" against the bank. The summons would have required UBS to turn over information on its 52,000 U.S. customers.

In a statement issued the same day, IRS Commissioner Doug Shulman said that the details of the agreement would not be available until after the Swiss government has signed the agreement, possibly as early as next week. But rumors have it that the IRS will get only a fraction of the information sought, perhaps on just 8,000 to 10,000 accounts.

Anything less than full disclosure of all U.S. customers is unacceptable. A federal court agreed with the IRS that there was a reasonable basis for concluding that the 52,000 includes people evading their U.S. taxes. The case against UBS exposed especially egregious behavior by the bank's employees. They came to the U.S. soliciting illegal business from U.S. citizens, and helped Americans hide their income and assets from the IRS by setting up accounts in the name of foreign shell companies. These private bankers committed crimes on U.S. soil, with the full knowledge and support of the bank's management. UBS should not be allowed to hide behind arguments about Swiss sovereignty or the country's bank secrecy rules.

If the agreement does not provide for full disclosure, it sets a terrible precedent for future investigations. Some Americans will continue to evade taxes by using offshore financial institutions and hope that, when the bank gets prosecuted, their names will be among the 80% that aren't turned over to the IRS.

Foreign governments and financial institutions should not be able to facilitate the evasion of U.S. taxes by its citizens.


Rep. McDermott Introduces Bill to Stop Employee Misclassification


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On July 30, Rep. Jim McDermott (D-WA), along with six cosponsors, introduced the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408) which is aimed at stopping the misclassification of employees as independent contractors.

For each worker that a company "employs," it must withhold income and payroll taxes, pay benefits and unemployment insurance, and comply with labor laws. But companies do not have these expenses when they use "independent contractors" rather than "employees." Independent contractors are themselves responsible for paying the employer half of payroll taxes, as well as the employee half, and they generally don't receive other benefits like health insurance from companies that hire them.

As a result, some employers intentionally misclassify workers as "independent contractors" to avoid these costs.

It's unclear exactly how much misclassifying employees costs the U.S. Treasury. In theory, it would not matter to the Treasury whether payroll taxes are entirely paid by workers (as is the case for independent contractors) or half paid by employers (as is the case for employees) but the reality is that workers misclassified as independent contractors may be unable to shoulder the payroll taxes and are often unaware of this responsibility until the taxes are due. Or the income to independent contractors is simply not reported at all. 

A Government Accountability Office (GAO) report issued earlier this year found that only 8 percent of small businesses with assets under $10 million submitted 1099-MISC forms that are due whenever independent contractors are used. It seems pretty unlikely that only 8 percent of those companies are really hiring independent contractors. When income is not reported to the IRS by a third party, the income is correctly reported only 46 percent of the time.

Many employers use a loophole created by Sec. 530 of the Revenue Act of 1978 which is commonly referred to as "Sec. 530 relief." It allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet. The old "Sec. 530 relief" would continue to be available for one year after the new bill is enacted.


Organizations Brief Capitol Hill on Offshore Tax Abuses


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On July 24, three organizations, Global Financial Integrity, the Tax Justice Network, and Citizens for Tax Justice, briefed Congressional Hill staff on proposals to crack down on offshore tax abuses. The speakers from the three organizations explained the types of offshore tax abuses that are costing Americans billions in tax revenue: tax evasion (which is illegal) by individuals and tax avoidance (which is not necessarily illegal) by corporations.

Speakers from Global Financial Integrity and the Tax Justice Network discussed developments related to offshore tax evasion and the ways in which some financial institutions facilitate it.

The strongest legislation proposed so far to crack down on offshore tax evasion is the tax haven bill introduced by Senator Carl Levin and Congressman Lloyd Doggett (S.506/H.R.1265). (See the letter that CTJ and several other organizations signed in support of this bill.) Congressman Doggett himself made a surprise appearance at the briefing and expressed his determination to keep pushing for action on the bill.

Speakers also explained that as the U.S. prods other governments to comply with our tax enforcement efforts, some respond that the U.S. itself is a tax haven for foreigners trying to escape paying taxes to their own governments. The problem is that certain U.S. states allow people to set up shell entities that can be used to hide income from whatever government they're supposed to be paying taxes to. The Incorporation Transparency and Law Enforcement Assistance Act, introduced by Senator Levin (S.569) would address this problem. (See a letter that Citizens for Tax Justice and other organizations signed in support of this legislation).

CTJ director Bob McIntyre discussed offshore tax avoidance by corporations. (See a summary of his remarks.)

Read CTJ's summary of pending legislation to address offshore tax evasion.

Read the complete materials from the briefing: Tax Evasion and Incorporation Transparency.


Did Tax Avoidance Contribute to the D.C. Metro Accident?


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Did tax avoidance schemes contribute to the tragic subway crash in the nation's capitol on June 22? For us to know for sure, the District's transit agency should make public the details of leasing agreements it entered into purely to facilitate tax avoidance.

The Washington Metropolitan Area Transit Authority (WMATA or "Metro") has, like many other transit agencies, engaged in so-called sale-in, lease-out (SILO) deals with financial institutions that don't actually have any real substance and do not change anyone's behavior -- except perhaps that Metro was obligated to keep train cars in service longer than was advisable.

Here's how SILOs work. When a company buys assets like equipment, it takes depreciation deductions over a period of years to reduce its taxable income. Cities and transit agencies are not subject to federal income tax, so they can't use the deductions. A SILO basically allows transit agencies to sell the benefits of those deductions, which they cannot use anyway, to a private investor. A city or transit agency sells assets such as train cars to a private investor (usually a bank). The sale gives the city immediate cash for other investments. The bank, which now "owns" the train cars and can take depreciation deductions, "leases" the train cars back to the city. So the investor gets depreciation deductions on the equipment and deductions for interest, if it borrowed money to make the purchase. The city gets the cash it was paid for the train cars, which exceeds the lease payments it must make.

But notice that the deal has no economic substance whatsoever. The train cars obviously never are possessed by the bank, which is in no way involved in operating mass transit systems. Both the transit agency and the bank are in the exact same position as they were before the deal, except they've made some money by manipulating the tax code in a way that Congress obviously never intended, at a cost to U.S. taxpayers. In 2004 alone, SILO deals were estimated to cost the Treasury $4.4 billion.

Metro has $889.1 million of these deals in place. In a statement that the agency has recently backed away from, Metro told federal inspectors in 2006 that it could not retire its 1000 Series Rohr railcars (which are suspected of being a significant contributor to the deaths and injuries) because "tax-advantaged leases" required that the cars be kept in service "at least until the end of 2014. The National Transportation Safety Board had previously recommended that the 1000 series cars be retired or retrofitted, after its investigation of a 2004 crash.

Federal transit officials encouraged these deals as a way to provide much-needed funds to transit agencies. But the Treasury Department fought them and, beginning in 2004, denied depreciation deductions for SILO deals.

Sarah Lawsky, a law professor at George Washington University, posted one of the many SILO agreements the Metro has entered. This agreement is available to the public because of a court settlement, but the other agreements are not. What details are in the other agreements is unclear, but Metro has said that the agreements did not bar it from replacing the cars and were not a factor.

But there's only one way we can know for sure. Metro should make the rest of the agreements public.


Microsoft Leaving the United States if Obama's Proposals Become Law?


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A column by Kevin Hassett on Bloomberg.com this week suggested that if President Obama's international tax policy proposals are enacted, Microsoft will move out of the country.

Actually, quite the opposite is true. The President's proposals would reduce the perverse incentives in our tax code that currently reward companies for moving plants, profits, and people offshore. If they are enacted, Microsoft would have less, not more, reason to leave. The President's proposals would limit multinational companies' ability to reduce their U.S. tax by using deductions and tax credits attributable to their foreign income before the foreign income is taxed. The proposals would require matching of the income and deductions. (See the CTJ report explaining the President's international tax proposals.)

Hassett's assertions were based on Microsoft CEO Steve Ballmer's comments last week while in Washington, that "it makes U.S. jobs more expensive...we're better off taking lots of people and moving them out of the U.S." This strikes us as a lot of hot air designed to scare Americans and their lawmakers.

In support of his argument against changing the tax rules, Hassett also cites a study that shows for every 10 dollars U.S. companies invest offshore, their investment in the U.S. increases by about two dollars, and that foreign investment is therefore good for the U.S.

We might begin by pointing out that every ten dollars that U.S. companies invest in the U.S. result in at least, well, ten dollars of investment in the U.S. But this is largely beside the point. Many of the administration's proposals really address corporate tax avoidance practices that involve investments that only exist on paper anyway (think of Citigroup and its 90 subsidiaries in the Cayman Islands, which cannot possibly be conducting much real business). These are practices that serve only to reduce the U.S. taxes that corporations pay on the profits that are really generated in the U.S.

And as far as incentives to genuinely move real operations offshore, the current system of allowing tax deferral on foreign income encourages that. The President's proposals would begin to reduce that incentive (we wish they'd go farther).

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

  • raising revenues from upper-income households;
  • assessing a significant tax on large estates;
  • reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
  • closing financial industry, oil and gas, and other inefficient corporate loopholes; and
  • reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

Assistant U.S. Trade Representative Everett Eissenstat told the Senate Finance Committee yesterday that the administration has put the Panama Free Trade Agreement on hold while the administration develops a "new framework" for trade. Some Democratic members of Congress have been pressuring the administration and Speaker Pelosi to delay approval of the agreement until a Tax Information Exchange Agreement (TIEA) has been completed with Panama, a known tax haven. TIEAs enable two countries' governments to exchange information necessary to prosecute offshore tax evasion (although arguably many of the existing TIEAs are so weak as to be useless). Panama and the U.S. began negotiations on a TIEA back in 2002, but Panama has never finalized it. The administration and Congress should, at very least, refuse to reward countries that are uncooperative with U.S. tax enforcement efforts with enhanced trading relations.

The national advocacy group Public Citizen issued a report on April 29th explaining the issues. Lori Wallach, director of Public Citizen's Global Trade Watch division said, "Members of Congress wouldn't vote to let AIG not pay its taxes or to give Mexican drug lords a safe place to hide their proceeds from selling drugs to our kids, but that's in essence what the Panama FTA does." She argued that the trade agreement directly conflicts with the goals of regulating finance and closing tax havens. Thankfully, the Obama administration seems to be listening.


New CTJ Report on President Obama's Revenue Proposals


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On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.


Read the report.

On May 4, President Obama proposed several measures to address overseas tax avoidance and tax evasion. As explained in two new reports from Citizens for Tax Justice, these proposals are steps in the right direction but could be stronger.

For example, the President proposes to limit the rules allowing corporations to "defer" their U.S. taxes on foreign income, but he would largely exempt technology and pharmaceutical companies from even the weak limits he proposes, instead of simply repealing "deferral" altogether. He proposes sensible steps to reduce abuses of the foreign tax credit and the "check-the-box" rules that allow multinational corporations to cause their subsidiaries' income to "disappear." His proposals to crack down on the use of secret accounts in offshore tax havens are also positive steps but could be stronger.

Read the two new reports:

Obama's Proposals to Address Offshore Tax Abuses Are a Good Start, but More Is Needed

Myths and Facts about Offshore Tax Abuses


U.S. Continues to Turn Up the Heat on Offshore Tax Evaders


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Senate Votes to Include Offshore Transfers to Avoid Tax in Money Laundering Criminal Statute

On Tuesday the Senate passed the Fraud Enforcement and Recovery Act of 2009 (S. 386). The bill makes several amendments to the International Money Laudering Statute, including one which places steep criminal penalties on transfers of money offshore for the purpose of evading federal income tax or committing tax fraud.

Violators of the criminal statute would face a fine of up to $500,000 or twice the value of the funds transferred (whichever is greater), or imprisonment for up to twenty years, or both. The Internal Revenue Code already provides for criminal penalties for tax evasion but the penalties are much lower (a maximum fine of $100,000 and imprisonment for up to five years).

The House has its own version of the money laundering legislation, the Fight Fraud Act of 2009 (H.R. 1748), which has been approved by the House Judiciary Committee. It does not contain the tax provision.

DOJ and IRS Get First Conviction in UBS Investigation

On April 14, the Department of Justice and the Internal Revenue Service made a joint announcement that a Florida yacht broker has pled guilty to tax charges related to the UBS scandal. The Swiss banking giant agreed in February to provide the names of several hundred U.S. clients and pay $780 million in penalties as part of a deferred prosecution agreement with the federal government. The yacht broker, Robert Moran, used a Panamanian corporation to open secret UBS accounts and conceal more than $3 million in assets. Under the plea agreement, Moran pled guilty to one count of filing a false return and the court may impose a maximum three-year prision term and a fine of up to $250,000.


IRS Wins a Battle in the War on Tax Havens


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Court Grants DOJ/IRS "John Doe" Summons for First Data Customers

Tax Day marked a small victory for law-abiding taxpayers who are tired of subsidizing those who evade their taxes. On April 15, the U.S. District Court for the District of Colorado granted the government permission to serve a "John Doe" summons on First Data Corporation. The Department of Justice (DOJ) had requested the summons in connection with an Internal Revenue Service (IRS) investigation of offshore tax evasion.

First Data, formerly part of American Express, is a payment card processor. It processes credit and debit card transactions for merchants and deposits the funds in merchant bank accounts. The IRS is seeking information on any merchants who have their payments directly deposited in an offshore bank account. It suspects that Americans with business in the U.S. are using payment card processors to send their income out of the country to tax havens, where it can go undetected (and untaxed) by the IRS.

The amount of tax revenue lost each year due to offshore tax evasion is estimated to be around $100 billion. Because of the tax havens' bank secrecy laws, it is almost impossible to get information on these accounts. The IRS usually can't get any answers from the foreign government unless it can identify a particular tax evader. But without knowledge of the offshore accounts, the IRS doesn't know who those taxpayers are. The ability to use a "John Doe" summons is critical to the agency's search for tax cheaters.

The IRS would have an easier time getting these summonses approved by courts if Congress adopts the "John Doe" Summons provisions of the Stop Tax Haven Abuse Act which was introduced by Sen. Carl Levin (D-Mich.) and Rep. Lloyd Doggett (D-Texas) last month. As tax haven legislation moves through Congress, we encourage lawmakers to be sure this provision is included.


New Report Explores the Cost of Tax Havens


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The U.S. PIRG Education Fund released a report today that explores the impact of tax havens, the countries commonly used by unscrupulous individuals and corporations to hide their income from the IRS to evade taxes. The report discusses the estimated $100 billion annual cost to U.S. taxpayers and estimates the amount of additional taxes residents of each state must pay to make up the loss. Some specific examples of companies that seem to make ample use of tax havens are given, including Citigroup, Bank of America and Morgan Stanley and others.

Read the U.S. PIRG report.


Answers to Your Tax Day Questions


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A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:

Question: Does President Obama plan on raising our taxes?

Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?

Question: What are "tax havens" and why are some people in an uproar over them?

Question: What does it matter to me if someone else is hiding their income from the IRS?

Read the report.

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