Mavens of Havens Beware

Ireland, the Netherlands, the Bahamas… No, I’m not planning my next vacation but instead listing some of the better known tax “havens,” or countries that specifically seek to lure companies to “locate” within their borders because of their non-existent or very low corporate tax rates.

The problem is most corporations just create a “letterbox” foreign subsidiary that resides in name only at such locales.  Of course, with bank accounts set to receive transfers via accounting wizardry that books U.S.-made money as generated by the foreign subsidiary.  Under a component of American tax law called deferral, multinational corporations are not required to pay taxes on such income until it is repatriated, or brought back to the United States.  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.

And, because some countries, like Ireland, require management and control of a corporation to be located within its borders in order for it to be taxed, companies like Apple have been allowed to exploit the dueling tax systems and paid no corporate tax while raking in billions in profits.  Smaller businesses and domestic companies are far less competitive than the huge multinational corporations that are able to game the system in this, unfortunately, legal way.

Cuts right to the heart of the American spirit of equity and fairness in business competition.

Speaking of cuts…

Like slapping a bandage on an arterial wound, Senate Finance Committee’s Staff Discussion Draft on International Business Tax Reform proposes to stem the annual loss of approximately $90 billion of revenue from international tax loopholes by beginning to address some of the worst offenders like “check-the-box” rules that allow for disregarding of foreign subsidiaries.

On the issue of deferral and sheltering profits in tax havens, the discussion draft lays out two different options for immediately taxing foreign income of U.S. companies: Option Y and Option Z. While good in theory, regrettably neither of the two options outlined in the draft reform proposal completely fix the huge problem of deferral since both options include a lower tax rate for some or all foreign profits made by U.S. companies.

That’s why Public Citizen today echoed the critiques of our partner groups in the Financial Accountability and Corporate Transparency (FACT) coalition and called on U.S. Sen. Max Baucus (D-Mont.) and his colleagues on the Senate Finance Committee to strengthen the reform proposal to address the shortcomings identified by the coalition.

In addition to its treatment of deferral, the proposal misses a real opportunity to create much-needed revenue for the nation and does no favors for tax enforcement officials since it doesn’t require complete recordkeeping on foreign profits made and taxes paid, known as country-by-country reporting.

Yet, even with its limitations, the reform proposal is definitely movement in the right direction.  Of course it’s yet to be decided whether we’ll see comprehensive tax reform make it through a Congress counting down the days until the November election, especially without the leadership of Sen. Baucus, who will soon be leaving office to become Ambassador of China.

But I say this now, large multinational corporations beware: The American public will make sure that you are no longer allowed to avoid paying your fair share of the cost of government.  The same government, by the way, that works to keep the stock market stable, the roads in good shape for the shipping of goods, and provides a myriad of other services on which businesses rely.

Yes the tax code is complicated, yes it needs an overhaul.  However, settling for a partial fix when it comes to closing loopholes and ending the incentive to book profits overseas just won’t cut it.

Susan Harley is the deputy director of Public Citizen’s Congress Watch division.