Closing tax haven loopholes

Close tax haven loopholes!

 Background:

• This is a simple fix.  Corporations fill out one new line on their tax forms that shows how much of their Maine income goes to tax havens.  This “combined reporting” used in LD 1120 is no different than how Maine and twenty-two other states prevent tax evasion within the U.S. If we don’t let corporations hide their money in Delaware, Nevada, and other low-tax states, why would we let them hide their money in the Cayman Islands?
• LD 1120 from the 126^th legislature almost passed.  This simple bill passed the House and Senate easily, but was vetoed by the Governor.  Only one Republican had the courage to break ranks and vote to over-ride the Governor’s veto.  LD 341, sponsored this session by Rep. Tipping-Spitz, was similarly modeled.
• Fairness.  When huge multinational corporations hide their income in off shore tax havens, it creates an uneven playing field.  Small businesses in Maine that don’t use these tricks are stuck at a competitive disadvantage.
• Maine loses $10 million each budget.  This $10 million could be used for any number of priorities in the budget—from Head Start to health care to clean elections to revenue sharing to the property tax fairness credit.  This $10 million figure comes from the fiscal note from Maine Revenue Services.  In 2010, the most recent year for which data is available, Montana received an additional $7.2 ml in corporate income tax, a 6.9% increase.  Oregon projects it will receive 3.1% more in 2014.

Common questions:

• What states have policies like this?
  • Many states go after income hidden off-shore in many different ways, most of them much broader than tax-haven specific combined reporting.^[1]

▪      Three states (Massachusetts, Utah, and West Virginia) allow corporations to report their worldwide income for combined reporting (not just “water’s edge,” ie within the U.S.).

▪      Four states (California, Idaho, Montana, North Dakota) have mandatory worldwide combined reporting, unless the firm elects “water’s edge” treatment.

▪      Alaska requires worldwide combined reporting for oil, gas, and pipeline companies.

▪      Montana (also mentioned above) allows worldwide combined reporting, and mandates tax haven combined reporting for states electing “water’s edge” treatment.

▪      Oregon, like the approach outlined in LD 1120, does not have worldwide combined reporting, but mandates combined reporting for tax havens.

• Neither Montana nor Oregon had any lawsuits brought against them when they adopted tax haven combined reporting.
• How did Maine Revenue Services estimate it would raise $5 million?
  • Maine revenue services looked at how much new revenue came in to Montana (and is projected to come into Oregon) since they passed their versions of this reform. 
  • They came up with a conservative estimate for how much it would bring in to Maine based on what has happened in other states.  They included costs of hiring more staff to administer the program.
• Do Maine businesses hide taxes off-shore?  What is the evidence this is a problem?
  • Likely, the vast majority of what we consider to be real Maine businesses do not hide their income.  They should not be forced to compete against the huge multinational corporations that operate in Maine that take advantage of these schemes.
  • For example, Apple is a corporation that has physical presence in Maine and therefore pays Maine corporate income taxes.  In 2012, the New York Times got Apple executives and accountants to disclose the tricks that they and their competitors use to avoid paying taxes.  This led to a 2013 congressional investigation of these abuses.  Former Treasury Department economist Martin A. Sullivan found that without complex tax avoidance tactics Apple would have paid $2.4 billion more in U.S. taxes.^[2]  Congressional investigators discovered Apple dodged at least $74 billion of taxes between 2009 and 2012 from the IRS.^[3]
  • Other examples besides Apple:

▪      Seventeen Fortune 500 companies disclose information in their Form 10-K (filed with the SEC) that strongly suggest they have paid little or no tax on their off-shore holdings.

▪      Another 20 corporations hold an estimate of $720 billion in unrepatriated off-shore income that have subsidiaries in known tax haven corporations.  These include companies like Amgen, Nike, General Electric, Proctor and Gamble, and Wal Mart.^[4] 

• The public interest research group estimates that in 2011, states lost $20.7 billion in corporate tax revenue to off shore tax havens.
• Is this constitutional?
  • The Supreme Court has ruled twice on the constitutionality of international combined reporting:

▪      Container Corp v California, 1983 (US parents)

▪      Barclays Bank v California , 1994 (foreign parents)

•  Will this hurt legitimate business activities in those countries?
  • No.  In the same way that combined reporting within the U.S. does not harm businesses with legitimate activity in other states, this does not harm legitimate activity occurring within even these tax havens. 
  • Corporations just add the income of the tax haven sub affiliate to the domestic income of the unitary combined group, and they get to include the apportionment factors of that sub when they apportion the combined income.  This is no different than how combined reporting works.
• Who came up with the list of tax haven countries?
  • The mulit-state tax commission is an inter-governmental, non-partisan organization that comes up with model tax policy for states.  Maine is a member of the Multi-State Tax Commission.
  • The countries listed in LD 1120 are all consistent with the definitions promulgated by the MTC, as well as the lists that Oregon and Montana developed. 
  • These definitions for tax havens consistent with those created by non-partisan entities like the National Bureau of Economic Research, the Organization for Economic Cooperation and Development (OECD), and the Internal Revenue Service. 
  • The non-partisan Government Accountability Office and the Congressional Research Service cite these countries as tax havens regularly in their research.
  • The Montana Department of Revenue reviews this list every two years, and this list is consistent with their most recent findings.
  • It is true that Ireland and other European countries have been exploited in tax-dodging schemes.  If Maine adopted full worldwide combined reporting, we would be able to eliminate those tricks.  Because the committee wanted to utilize a more moderate, gradual approach to these issues, it made sense to go after only the countries that, beyond a shadow of a doubt, met tax haven criteria developed by all these non-partisan organizations.
• Doesn’t this need a federal fix?
  • The federal government cannot force states to close loopholes in our own tax codes.
  • Each state must make sure on its own that it collects the corporate income tax that it is due.