Each year U.S. multinational corporations avoid an astounding $90 billion in corporate income taxes by booking their profits on paper through international tax havens. At a time of growing inequality and budget austerity, it is outrageous that we allow the world's richest companies to get away with not paying their fair share in taxes.
What can be done to combat this flagrant abuse of our tax system? One new approach would be the passage of Sen. Sheldon Whitehouse (D-RI) and Rep. Lloyd Doggett's (D-TX) Stop Tax Haven Abuse Act, recently reintroduced legislation that would significantly curb rampant tax avoidance by many multinational corporations. Tightening offshore tax rules and enforcement as the act proposes could generate an estimated $278 billion over the next decade in much-needed revenue.
While the Stop Haven Abuse Act would significantly improve our international tax system, it does not go quite as far as proposals that would "end deferral" of taxes on foreign profits, which would end international income shifting by corporations full stop by ensuring that U.S. companies pay the same tax rate at the same time on their foreign and domestic profits.
In previous Congresses, the Stop Haven Abuse Act has been very closely associated with tax fairness champion Sen. Carl Levin, who retired at the end of the last Congress. While the new legislation is largely the same as the previous bill of the same name, the latest version includes significant new provisions to curb corporate inversions (which have also been proposed separately as part of the Stop Corporation Inversions Act) and earnings stripping.
The key provisions of the Stop Tax Haven Abuse Act include:
- The act would take aim at corporate inversions by treating the corporation resulting from the merger of a U.S and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).
- The act would disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called "earnings stripping," a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation in order to wipeout U.S. income for tax purposes.
- The act would require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors generally.
- The act would deny companies the ability to deduct the expenses of earning foreign income from their U.S. taxable profits until those foreign profits are subject to U.S. tax.
- The act would limit the ability of corporations to apply excess foreign tax credits from high tax jurisdictions to offset taxes in tax haven jurisdictions.
- The act would repeal the "check-the-box" rule and the "CFC look-through rules" that allow companies to shift profits to tax havens by letting them 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.