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International Tax Reform Proposal Takes First Step Toward Stemming Tide of Lost Revenue from Overseas Tax Sheltering

Jan. 16, 2014

International Tax Reform Proposal Takes First Step Toward Stemming Tide of Lost Revenue from Overseas Tax Sheltering

Statement of Lisa Gilbert, Director, Public Citizen’s Congress Watch Division

Today, Public Citizen proudly joined with our partner groups of the Financial Accountability and Corporate Transparency (FACT) coalition to call on U.S. Sen. Max Baucus (D-Mont.) to eliminate tax provisions that currently give corporations incentives to shelter profits in offshore tax havens.

Submitted in response to Sen. Baucus’ request for comments on the Senate Finance Committee’s Staff Discussion Draft on International Business Tax Reform, the FACT letter highlights three main deficiencies of the reform proposal: It does not level the playing field between domestic and multinational corporations, it is not intended to create long-term revenue and it does not require consistent country-by-country tax reporting by corporations.

Domestic and small companies are at a blatant disadvantage when it comes to the concept of tax deferral due to the outrageous way multinational corporations legally game the system by using accounting schemes to report profits in countries with little to no corporate tax. Though the Senate Finance Committee proposal makes some headway on closing some of the worst loopholes like “check-the-box” rules that allow for disregarding of foreign subsidiaries, neither of the two options outlined in the international tax reform discussion draft completely fix the problem of deferral.

Even though the first option proposes to immediately tax all international income, it proposes to do so at a lesser rate than profits earned domestically. This reinforces the incentive to shift profits offshore. The second option has the additional problem of distinguishing between “active” and “passive” income—like patent royalties and dividends—an unhelpful characterization that will not cut down on the use of tax shelters. Not only is the active/passive distinction difficult to administer, it would give further incentive for corporations to manipulate their books in order to avoid the passive income designation. The simpler solution is to end all deferral but keep full credit for foreign taxes paid.

International tax deferral has led to some corporations having an average effective tax rate of 12.6 percent, which is much lower than the statutory rate. Worse, some large corporations have paid no federal income taxes in recent years, despite making billions of dollars in profit. It’s far past time for all corporations to pay their fair share to support important government services that help businesses like market oversight and infrastructure improvements, and thus any tax reform proposal that moves forward must not be revenue-neutral.

There must also be accurate country-by-country reporting of basic information like profits earned and taxes paid so that shareholders, regulators and the public can have a clear picture of U.S. corporate dealings, including those that occur abroad.

As the appetite for tax reform ebbs and flows in the halls of Congress, the American public shows a clear desire for tax equity. Public Citizen and our members and supporters will continue to push for comprehensive tax reform, including closing international loopholes, which would recapture lost revenue to the tune of around $90 billion per year.