Budget Blog

Apr 14 2015

New Bill to Curb Tax Dodging Corporations

Legislation from Sanders will prevent corporations from sheltering profits in tax havens like Bermuda and the Cayman Islands and would stop rewarding companies that ship jobs and factories overseas with tax breaks

THE CORPORATE TAX DODGING PREVENTION ACT OF 2015

The Corporate Tax Dodging Prevention Act would prevent corporations from sheltering profits in tax havens like Bermuda and the Cayman Islands and would stop rewarding companies that ship jobs and factories overseas with tax breaks. The Joint Committee on Taxation (JCT) has estimated in the past that similar provisions would raise more than $590 billion in revenue over a decade. The Corporate Tax Dodging Prevention Act will reform the tax code by:

1. Ending the rule allowing American corporations to defer paying federal income taxes on profits of their offshore subsidiaries. (Section 2 of the bill.)

Current law allows American corporations to defer paying U.S. income taxes on profits of their offshore subsidiaries until those profits are “repatriated” (officially brought to the U.S.) which may not happen for years, if ever. As a result, American corporations would rather report foreign profits than domestic profits to the I.R.S. Deferral therefore creates an incentive to either move operations and jobs to a lower-tax country, or to use accounting gimmicks to make U.S. profits appear to be earned in a lower-tax country.

The Congressional Research Service has indicated that the cost of this tax avoidance to the U.S. Treasury approaches or exceeds $100 billion annually. The Corporate Tax Dodging Prevention Act would end this tax avoidance by ending the rule allowing deferral of U.S. income taxes on offshore profits.

Under this legislation, American corporations would still be allowed a credit that reduces their federal income tax liability by an amount equal to income taxes paid to foreign governments on these profits. This foreign tax credit exists under current law and already prevents double-taxation of profits.

2. Closing loopholes allowing American corporations to artificially inflate or accelerate their foreign tax credits. (Section 4 of the bill.)

When U.S. corporations earn profits overseas, taxes paid to the foreign country are credited against U.S. tax liabilities, in order to avoid double-taxation. Under current rules and tax planning strategies, corporations are allowed to claim foreign tax credits for taxes paid on foreign income that is not subject to current U.S. tax (meaning foreign tax credits in excess of what is needed to avoid double-taxation). As a result, companies are able to use such credits to pay less tax on their U.S. taxable income than they would if it was all from U.S. sources – providing them with a competitive advantage over companies that invest in the United States. Under the Corporate Tax Dodging Prevention Act, foreign tax credits generated by profits earned in one country could not be used against U.S. income taxes on profits earned in another country.

3. Preventing American corporations from claiming to be foreign by using a tax haven post office box as their address. (Section 5 of the bill.)

Some companies claim to be based in a tax haven like the Cayman Islands even though their presence in these locations consist of nothing more than a post office box and their actual staff is still located in the U.S. Today, a single five-floor office building in the Cayman Islands is claimed as the address for over 18,000 corporations, demonstrating how easy it is for companies to pretend to be based there. Under the Corporate Tax Dodging Prevention Act, a corporation could not claim to be foreign if their management and control operations are primarily located in the U.S.

4. Preventing American corporations from avoiding U.S. taxes by inverting. (Section 7 of the bill.)

Another way American corporations avoid U.S. taxes is by inverting. In an inversion, an American corporation acquires or merges with a (usually much smaller) foreign company and then claims that the newly merged company is a foreign one for tax purposes — even though the majority of the ownership is unchanged and little or no personnel or operations have actually moved offshore.

Under the Corporate Tax Dodging Prevention Act, the U.S. would continue to tax such a company as an American corporation so long as it is still majority owned by the owners of the American party to the merger or acquisition.

5. Prevent foreign-owned corporations from stripping earnings out of the U.S. by manipulating debt expenses. (Section 6 of the bill.)

Foreign controlled multinational corporations sometimes load up their U.S. affiliates with excessive debt as a way to shift profits out of the U.S. The foreign-owned U.S. affiliates then make interest payments to foreign companies that result in deductions that reduce or wipe out their U.S. income for tax purposes. Often the loans are made between commonly owned companies, which means they are really an accounting fiction and the only real consequence is a lower U.S. income tax bill.

Under the Corporate Tax Dodging Prevention Act, a U.S. affiliate of a foreign-owned multinational corporation would not be allowed to deduct interest expenses that are disproportionate to its share of income of the entire corporate group (entire group of corporations owned by the same parent company). The U.S. affiliate could choose instead to be subject to a different rule limiting deductions for interest payments to ten percent of its income.

6. Preventing large oil companies from disguising royalty payments to foreign governments as foreign taxes. (Section 3 of the bill.)

U.S. taxpayers are taxed on their income worldwide, but are entitled to a dollar-for-dollar tax credit for any income taxes paid to a foreign government. U.S. oil and gas companies have been disguising royalty payments to foreign governments as foreign taxes in order to claim foreign tax credits. The Corporate Tax Dodging Prevention Act would close this loophole which amounts to a U.S. subsidy for foreign oil production for the five largest oil companies.

FACTS ON SENATE BUDGET RESOLUTION

Healthcare

The Republican budget would repeal the Affordable Care Act which would:

• Eliminate health insurance coverage to 16 million Americans;

• Deny over 2.3 million young adults the right to stay on their parents’ health insurance plan until the age of 26;

• Deprive up to 130 million Americans with pre-existing conditions with the right to purchase affordable health insurance if they lose their jobs or otherwise lose their health insurance; and

• Deprive every woman in this country with equal protection that prevents insurance companies from charging extra simply because they are women.

Medicaid

• The Republican Budget Resolution would cut Medicaid by $400 billion over the next decade denying health insurance to an additional 11 million Americans, including millions of children from low-income families.

• These cuts would also threaten the nursing home care of millions of Americans of senior citizens.

Medicare Part D Prescription Drugs

• The Republican Budget Resolution would increase prescription drug prices for 4 million seniors and persons with disabilities who are on Medicare Part D by re-opening the donut hole.

$5 trillion in cuts over the next decade

• The Republican budget would cut over $5 trillion in spending over the next decade from healthcare, education, nutrition assistance, affordable housing, and many other programs.

• The Budget Resolution is not an appropriations bill. It is not an authorization bill.

• The assumptions it makes will not become law. These decisions will be made at a later date.

• Further, the Budget Resolution is filled with magic asterisks to hide the true cost of many of the policies that the Republicans would like to enact.

• But, if the cuts the Republicans are talking about are applied proportionately here is what will happen:

Education

• At a time when the cost of a college education is becoming out of reach for millions of Americans, the Republican budget would eliminate mandatory Pell Grants, cutting this program by nearly $90 billion over ten years, which would increase the costs of a college education of more than 8 million Americans.

• At a time when the cost of pre-school and childcare has skyrocketed, the Republican budget would mean that 110,000 fewer young children would be able to enroll in Head Start over the next 10 years.

• Under the Republican budget, 1.9 million fewer students would receive the academic help they need to succeed in school by cutting about $12 billion in cuts to the Title I education program.

• The Individuals with Disabilities Education Act would be cut by $10 billion over the next decade which would shift costs to states and local school districts to pay for special education and could lead to increased property taxes for millions of Americans.

Nutrition Assistance

• At a time when there are more than 40 million hungry Americans throughout the country, some 1.2 million women, infants, and young children would be denied the nutrition they need to live healthy lives by $10 billion in cuts to the WIC program over the next decade.

• Further, the Republican budget would cut $660 billion over 10 years to programs that support low-income individuals and families, including massive unspecified cuts to Food Stamps.

• In 2011, according to the USDA, 83 percent of households receiving food stamps lived in poverty; and over 80 percent of benefits went to households that included a child, an elderly person, or a disabled person.

• The average food stamp benefit is $1.42 for a meal.

Affordable Housing

• Under the Republican budget, nearly half a million families would be kicked off of the Section 8 affordable housing program – and out of their homes by cutting the Section 8 program by $46 billion over ten years.

Job Training

• At a time when real unemployment is 10.9 percent, the Republican budget cuts job training and employment services for more than 2 million Americans.

Taxes

• At a time when the richest 400 Americans paid a tax rate of just 16.7 percent in 2012, the second lowest on record, the Republican budget does nothing to ask the wealthiest Americans to pay their fair share of taxes to create jobs or reduce the deficit.

• While the effective tax rate of large, profitable corporations was just 12.6 percent in 2010, and corporate profits are at an all-time high, the Republican budget does nothing to end the outrageous loopholes that allow major corporations to avoid $100 billion a year in taxes by shifting their profits to the Cayman Islands and other offshore tax havens.

• At a time when billionaire hedge fund managers on Wall Street pay a lower effective tax rate than a truck driver or a nurse, the Republican budget does not eliminate the carried interest loophole that costs the federal government $16 billion in lost revenue over the next 10 years.

• The Republican budget protects over $40 billion in unnecessary and expensive tax breaks and subsidies for oil and gas companies, even as the five biggest oil companies alone made more than $1 trillion in profits over the last decade.

• At a time when millions of Americans are working longer hours for lower wages, the Republican budget paves the way for a tax hike averaging over $900 apiece for more than 13 million families with 25 million children by allowing the expansions of the Earned Income Tax Credit and the Child Tax Credit to expire.

• Further, the Republican budget paves the way for a tax hike of $1,100 for 12 million families and students paying for college by allowing the American Opportunity Tax Credit to expire.

Defense Spending

• Despite the fact that the U.S. is spending more on military spending than the next nine countries combined, the Republican budget increases funding for the Pentagon by $38 billion next year alone by using an accounting gimmick that could pave the way for another unpaid for war.

Job Loss

• The Economic Policy Institute has estimated that the Republican budget would lead to the loss of 2.3 million jobs and a 1.9 percent reduction in GDP.

Whitehouse Amendment 867

Purpose: To establish a deficit-neutral reserve fund to make it more difficult for corporations to secretly influence elections.

Failed 47-52

Bennet Amendment 1014

Purpose: To establish a deficit-neutral reserve fund relating to addressing climate change.

Passed 53-47

Wyden, Brown, Casey, Stabenow, Cantwell, Whitehouse Amendment 1012

Purpose: To strike more than $1.2 trillion in cuts to Medicaid.

FAiled 47-53

Franken, Brown, Durbin, Reed Amendment 828

Purpose: To provide additional resources to save student financial aid and keep college affordable by restoring Federal Pell Grant cuts.

Failed 46-54