CTJ Reports

In Spite of Treasury's New Regulations, Corporate Inversion Crisis Will Continue Without Congressional Action

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The recent surge in corporate inversions — American corporations using mergers to pretend that they are foreign companies for tax purposes — has been curbed but not stopped by the Obama Administration. The Illinois-based pharmaceutical company AbbVie called off its planned acquisition of Shire to invert to the United Kingdom. But another corporation, Ohio-based Steris, announced this week it plans to acquire U.K.-based Synergy Health for that very purpose.

The Treasury Department’s new regulations only address certain parts of the problem. Depending on a company’s tax planning (and avoidance) strategies, some companies have altogether halted their plans while other corporations are unfazed.

Treasury has the power to enforce the law more effectively but not the power to fundamentally change it. For example, under current law, the company that results from a U.S.-foreign merger is taxed as an American company if it is 80 percent or more owned by shareholders of the American partner to the merger. President Obama and some members of Congress propose to change the law to lower that threshold from 80 percent to 50 percent. The administration cannot do this on its own, but the new regulations will prevent corporations from making parties to the merger appear larger or smaller to create the appearance that the 80 percent threshold is met.

Another aim of Treasury’s regulations is blocking the tax avoidance opportunities that serve as a primary motivation for inversions. One relates to profits earned in the past (and booked offshore) while another relates to future profits that can be shifted offshore through earnings stripping. The Treasury announcement explains that the new regulations will address the former but only hints at future action to address the latter.

This means that some corporations may still invert if their goal is earnings stripping. A simple example of this is an American company that is foreign-owned (which an inverted company is, technically) borrowing large amounts from its offshore parent company and deducting the interest payments to wipe out its U.S. income for tax purposes. Given that these companies are really acting as one company, this is really an accounting gimmick that moves money on paper to minimize U.S. taxes.

The new regulations will address the avoidance of taxes on profits already booked offshore. Many U.S. corporations are holding huge profits in their offshore subsidiaries and want to avoid paying the U.S. tax that is normally due if those profits are brought to the United States. Corporations that invert can use loans to route the money through the foreign company that ostensibly becomes the parent company after an inversion. The Treasury regulations would treat such a payment as a dividend and therefore taxable.

But even this problem will not be totally resolved by the new regulations. The new rule will apply only if a U.S.-foreign merger results in a company that is 60 percent or more owned by the shareholders of the American partner to the merger. This seems to mean that a merger could result in a company that is 55 percent owned by the shareholders of the American partner to the merger (basically meaning the Americans have not given up control) and can claim to be foreign for tax purposes, and the new regulation would have no effect. This may be another reason why some inversions continue.

One unpredictable factor is court challenges to the new regulations. Tax experts such as Stephen E. Shay, Victor Fleischer and others agree that the plain language of our tax law gives the administration the power to issue regulations to solve these problems. But litigation could create enough uncertainty to alter some corporate decisions and is another reason why congressional action would be the optimal solution.

European Commission Action on Ireland and Apple Reinforces Need for Tax Reform in the United States

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CTJ: European Commission Action on Ireland and Apple Reinforces Need for Tax Reform in the United States

(Washington D.C.) Following is a statement by Robert S. McIntyre, director of Citizens for Tax Justice, regarding the European Commission’s decision to characterize Ireland’s tax deal with Apple as illegal “state aid”.

“The European Commission’s move to crack down on Ireland facilitating corporate tax avoidance by Apple, one of the most recognizable brands in the world, could strike a blow against tax dodging by large, profitable American corporations. But this problem will never be fully resolved until Congress reforms the U.S. tax code to prevent corporations from continually seeking haven in countries that entice them with special deals, massive loopholes or zero percent tax rates. Ireland and other tax haven countries have loose rules that allow U.S. corporations to stash profits they earned in the United States offshore, avoiding billions in U.S. taxes.

“The European Commission may cut down the Irish malarkey in the corporate tax world, but what about the Dutch Sandwich offered by the Netherlands, the Swiss cheese tax system offered by Switzerland, the P.O. box corporations offered by Bermuda and the Cayman Islands, and all the other tax dodges offered by various countries? American corporations will find ways to make their U.S. profits appear to be earned in these tax havens until Congress enacts a tax reform that finally puts an end to this nonsense.”

Treasury Department Action on Inversions an Important First Step, but Congress Still Needs to Act

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For Immediate Release: Tuesday, Sept. 23, 2014
Contact: Jenice R. Robinson, 202.299.1066 x 24, Jenice@ctj.org

CTJ: Treasury Department Action on Inversions an Important First Step, but Congress Still Needs to Act

Following is a statement by Citizens for Tax Justice Director Robert S. McIntyre regarding the Obama Administration’s regulatory action Monday to crack down on tax avoidance by U.S. corporations. The measure will discourage corporate inversions by reducing the tax benefits corporations can claim by simply pretending to be foreign.

“The Treasury Department’s new rules will make it harder for corporations to get away with claiming they are foreign to avoid taxes, but only congressional action can stop it in its tracks.

“Congress should immediately enact anti-inversion reforms. A decision to wait is a decision to allow more American corporations to pretend that they are foreign simply because loopholes in our tax laws allow it. The victims of inaction will be ordinary patriotic Americans, who pay their taxes every year.”

###

State-by-State Estate Tax Figures Show Why Congress Should Enact Senator Sanders' Responsible Estate Tax Act

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New data from the IRS show that only 0.1 percent — just one-tenth of one percent — of deaths in the U.S. in 2011 resulted in federal estate tax liability in 2012. (Estate taxes are usually filed the year after a person dies.) To restore some of the revenue lost when the estate tax was scaled back in recent years, Congress should enact a proposal from Senator Bernie Sanders that would restore exemption amounts in effect in 2009, but would subject the largest estates to higher rates. These figures show that only 0.3 percent of deaths in 2009 resulted in estate tax liability, which is an indication that under Sen. Sanders’ proposal the estate tax would still only affect the very largest estates.

Why the Estate Tax is Important
The estate tax is a way of acknowledging that the wealthiest families benefit the most from what the government provides: public investments like roads that make commerce possible, public schools that provide a productive workforce, the stability provided by our legal system and armed forces, the protection of private property. These public investments make America a place where huge fortunes can be made and sustained. None of this would be possible without taxes, so it’s reasonable that the wealthiest families contribute more to support these public services. At the same time, the estate tax has provisions to ensure that it only applies to the wealthy, encourages charitable giving and does not impact family farms and small businesses.

Just as important is the tax’s function as a mitigator of gross wealth inequality in the United States. Highly concentrated wealth threatens the essence of democracy, giving some groups greater political leverage and creating disparities in economic opportunity. Viewed this way, the estate tax is now more critical than ever: in 2010, the wealthiest 1 percent of Americans owned 35 to 37 percent of the wealth nationwide.

A Recent History of the Estate Tax
The estate tax makes use of a basic per-spouse exemption to ensure that only wealthy households are impacted. Only the portion of the estate that exceeds the exemption threshold is subject to tax. The tax also provides deductions for things like funeral expenses, mortgages and other debts, bequests to surviving spouses, and charitable donations, further reducing the amount of the estate that is actually taxable. Over the past decade, changes in the structure of the federal estate tax have drastically reduced the number of estates subject to the tax, effectively exempting even many wealthy households from taxation.

The first round of President George W. Bush’s tax cuts, enacted in 2001, included gradual repeal of the federal estate tax over several years. The amount of estate value exempt from the tax increased over time, and the tax rate decreased over time, until the federal estate tax disappeared in 2010.

In 2007 and 2008, the basic exemption was $2 million per spouse and the top estate tax rate was 45 percent. Of those who died in 2008, only 0.6 percent left estates large enough to be taxable in 2009. (Estate taxes are usually filed the year after the year of death.)

In 2009, the basic exemption rose to $3.5 million per spouse, and the top estate tax rate continued to be 45 percent. Of those who died in 2009, only 0.3 percent left estates large enough to be taxable in 2010. This is likely representative of the share of deaths that would be subject to the estate tax under Senator Sanders’ bill, which includes an exemption of $3.5 million per spouse.

In 2010, the estate tax was eliminated. (A small number of estates are not taxed the year after death but rather in the same year as death or several years later, which is why a small number of estates were taxed in 2011.)

Like all the Bush tax cuts, this break from the estate tax was scheduled to expire at the end of 2010, in which case the pre-Bush rules would come back into effect.

President Obama and Congress agreed to a compromise at the end of 2010 to (among other things) extend the Bush income tax cuts and partially extend Bush’s break from the estate tax. As part of this deal, lawmakers reinstated the estate tax but with a higher basic exemption of $5 million per spouse and a rate of just 35 percent in 2011 and 2012. A mere 0.1 percent of deaths in 2011 resulted in estate tax liability in 2012.

As part of the fiscal cliff deal reached at the end of 2012, the higher basic exemption level set during the 2010 compromise was permanently extended and indexed to inflation, and the rate was increased from 35 percent to 40 percent. When data for deaths in 2013 eventually becomes available, the extension of this exemption level should be reflected in a continuing historically low percentage of estates subject to tax.

The pie chart below shows that the 0.1 percent of estates taxed in 2012 (mostly estates of people who died in 2011) were taxed at an effective rate of about 14 percent by the federal government. More than 72 percent of the value of those estates was left to heirs while 11 percent was left to charity. The increase in the tax rate effective in 2013 should be reflected beginning with estates that file in 2014 in a slightly larger share of taxable estates going toward federal taxes.

Senator Bernie Sanders’ Responsible Estate Tax Act
Like President Obama in his recent budget plans, Sen. Sanders proposes to bring back the basic estate tax exemption of $3.5 million per spouse, which was in effect in 2009. Only 0.3 percent of deaths in 2009 resulted in estate tax liability, and therefore a similar percentage of deaths would result in estate tax liability under either of these proposals.

According to the Joint Committee on Taxation, President Obama’s estate tax proposal would raise $85 billion over a decade. Senator Sanders’ proposal would likely raise more because it includes a graduated rate structure.

Rather than simply reinstate the 45 percent rate that was in effect in 2009, Sen. Sanders’ Responsible Estate Tax Act would tax the value of an estate above $3.5 million and below $10 million at 40 percent. It would tax the value of estates above $10 million and below $50 million at 50 percent, and the value of estates above $50 million at 55 percent. It would also apply an additional surtax of ten percent on estates worth over $1 billion.

Both the President’s proposal and the Responsible Estate Tax Act would close certain loopholes in the estate tax. For example, one provision in both proposals would “require a minimum term for GRATs.”

A person owning an asset with a quickly rising value may want to find some way to “lock in” its current value for purposes of calculating estate and gift taxes before it rises any further. One way is to place the asset in a certain type of trust (a Grantor Retained Annuity Trust, or GRAT) that pays an annuity for a certain time and then leaves whatever assets remain to the trust’s beneficiaries.

The gift to the trust’s beneficiaries is valued when the trust is set up, rather than when it’s received by the beneficiaries. This benefit is particularly difficult to justify when the trust has a very short term (perhaps just a couple years) and wealthy people have used such short-term trusts to aggressively reduce or even eliminate any tax on gifts to their children. The proposals would require a GRAT to have a minimum term of 10 years, increasing the chance that the grantor will die during the GRAT’s term and the assets will be included in the grantor’s estate and thus subject to the estate tax.

More State-by-state Figures
The following pages provide figures on the number and percentage of estates in each state that are subject to the federal estate tax. (For easier reading, see the PDF version of this report, which also includes these tables.)

Impact of the EITC and Child Tax Credit in Addressing Poverty

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The federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are among the most important anti-poverty programs in America. The table below examines two types of families living below the official poverty line — those with one parent and two children and those with two parents and three children — and the impact that the EITC and CTC has on them.[1]

The table also demonstrates that a significant amount of this impact comes from an expansion in both credits, which was first enacted in 2009 and will expire at the end of 2017 if Congress does not act. The figures are estimates produced by the Institute on Taxation and Economic Policy (ITEP) microsimulation model.

The EITC is a refundable credit equal to a certain percentage of earnings (40 percent of earnings for a family with two children, for example) up to a maximum amount (a maximum credit of $5,460 for a family with two children in 2014). It is phased out at higher income levels. The CTC is a credit equal to a maximum of $1,000 per child. The refundable part of the CTC is equal to 15 percent of earnings (above a specific threshold) up to the maximum of $1,000 per child.

Both credits were expanded—temporarily—in the American Recovery and Reinvestment Act of 2009 (ARRA). The EITC was given a higher credit rate (45 percent) for families with three or more children, and the income level at which the credit begins to phase out was raised for families headed by married couples.

The CTC was adjusted so that the refundable part of the credit is equal to 15 percent of earnings above $3,000, rather than the higher threshold in permanent law (which would be $13,600 in 2014).

These expansions of the EITC and CTC have been extended several times and are now scheduled to expire at the end of 2017.

The table on the first page illustrates that the average one-parent, two-child family living below the poverty line this year will receive $4,550 from the EITC and CTC this year, which boosts those families’ incomes by a little over a third on average. Of that amount, $880 is the result of the 2009 expansions in the CTC, which boosts those families’ incomes by 7 percent on average. (The expansions of the EITC would not impact a family without married parents or three or more children.)

The table also illustrates that the average two-parent, three-child families living below the poverty line will receive $5,790 from the EITC and CTC, which boosts those families’ incomes by 30 percent on average. Of that amount, $1,580 is the result of the 2009 expansions of the credits, which boosts these families’ incomes by 8 percent.

Several empirical studies have found that the EITC increases hours worked by the poor. These studies have also found that the EITC has had a particularly strong effect in increasing the hours worked by low-income single parents, and there is evidence that it had a larger impact on hours worked than did the work requirements and benefit limits enacted as part of welfare reform.[2]

The refundable part of the CTC is likely to have similar impacts. The EITC and the refundable part of the CTC are credits equal to a certain percentage of earnings, meaning these refundable tax credits are only available to those who work.

 

 


[1] In 2014, the Census Bureau’s official poverty threshold, which is adjusted for inflation each year, will likely be roughly $19,000 for families with one parent and two children and $28,000 for families with two parents and three children.

[2] Chuck Marr, Jimmy Charite, and Chye-Ching Huang, “Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds,” Center on Budget and Policy Priorities, revised April 9, 2013, http://www.cbpp.org/cms/index.cfm?fa=view&id=3793.

Inverting Corporations Should Be Required to Pay Taxes Owed on Profits Held Offshore

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The pace of corporate inversions has increased in the last decade but only recently has this practice begun to make headlines with known American brands such as Burger King announcing plans to become foreign companies for tax purposes. A company inverts when, technically, it merges with and becomes a subsidiary of a foreign company. The practice is under fire because many American corporations undergo inversions to subsequently reduce their U.S. tax bill, either through earnings stripping to avoid U.S. taxes on future profits, or, by avoiding U.S. taxes on profits already earned and accumulated offshore.

This document focuses on the latter, tax avoidance on profits already accumulated offshore, and argues that this problem can be addressed by requiring payment of the U.S. tax that has been deferred on these offshore profits at the point when a corporation officially becomes controlled by a foreign company, whether through inversion or through other means. This reform would be akin to the requirement that individuals pay income taxes on unrealized capital gains when they renounce their U.S. citizenship.

Individuals and corporations are both allowed to defer paying U.S. taxes on key parts of their income. Under current law, wealthy individuals are required to give up this benefit when they renounce their American citizenship, while profitable corporations are not.

The tax code allows American individuals to defer paying income taxes on capital gains (appreciation of their assets) until they sell their assets. But wealthy individuals who renounce their U.S. citizenship lose this benefit and are required to pay tax on unrealized capital gains.[1]

American corporations are allowed to defer paying income taxes on profits earned by their offshore subsidiaries until those profits are brought to the U.S., but under current law are not required to give up that benefit even after being acquired by a foreign owner. This more generous treatment of corporations has no apparent rationale and seems to be an accident of history rather than the intent of Congress.

Legislative history (explained below) suggests that Congress preserved deferral to help American multinational corporations compete with foreign-based multinational corporations. There is no reason to continue this tax break for corporations once they declare that they are no longer American.

Ending deferral in this situation would also remove a significant incentive for corporations to undergo inversions and could complement other legislative proposals to prevent inversions.

This document uses the term “American corporation” or “U.S. corporation” to describe what the tax code calls a “domestic” corporation, one that is “organized in the United States or under the law of any State.”[2] A foreign corporation is one that is not domestic.[3] We use the term “offshore subsidiary” of an American corporation to describe what the tax code calls a “controlled foreign corporation,” or CFC.[4]

Deferral Facilitates Tax Avoidance

Income that is subject to the federal income tax includes dividends and other payments made from corporations.[5] That is true whether the dividend is income received by an individual or another corporation. Profits earned outside the United States by a foreign corporation are not subject to federal income tax except when those profits are paid (usually as a dividend) to a U.S. individual or domestic corporation that owns the foreign corporation.[6] This means, in effect, that a U.S. corporation is allowed to defer paying federal income tax on profits earned by foreign corporations that it owns (earned by its offshore subsidiaries) until those profits are repatriated (until they are paid to the U.S. corporation as a dividend or similar payment).  

This general approach has been in place since the enactment of the federal income tax. By the 1960s, American corporations widely recognized they could simply create a shell corporation in a country with very low or no corporate tax (an offshore tax haven) and use accounting tricks to make profits earned in the United States appear to be earned in the tax haven. For example, a domestic corporation might claim that it owns a foreign corporation in a tax haven and that this tax haven corporation holds the logos used by the domestic corporation. The domestic corporation claims that it must therefore pay (to the tax haven corporation) royalties that wipe out its U.S. income for tax purposes.

In reality, the domestic corporation and the foreign corporation are owned by the same people and operate as one company, so this arrangement is a gimmick that allows tax accountants to move money between different parts of the same company. But because the IRS recognizes the corporations as separate entities, the domestic corporation can defer paying taxes on these profits indefinitely.

To address this, President Kennedy proposed ending deferral of federal corporate income tax on most profits generated by American corporations’ offshore subsidiaries in most circumstances.[7] What Congress ultimately enacted was the part of the tax code commonly referred to as subpart F, which ended deferral only for certain kinds of “passive” income (such as royalties in the example above) paid from a “controlled foreign corporation,” (CFC) which is defined as a foreign corporation that is majority owned by U.S. shareholders, including domestic corporations.[8]

There are numerous loopholes in subpart F and today it is quite clear that much of the income that U.S. corporations report as earned by their CFCs (their offshore subsidiaries) is actually income earned in the United States or another country with a normal tax system but manipulated to appear as though it is earned in offshore tax havens.[9]

Today, American multinational corporations have an estimated $2 trillion in offshore subsidiary profits that have not been repatriated to the U.S., and $1 trillion of that amount is likely in cash or cash equivalents that could fairly easily be repatriated. Because American corporations only pay U.S. income tax on these profits when they are repatriated, they have an incentive to declare them offshore “permanently reinvested earnings” rather than repatriating them to the U.S.

As discussed below, after an inversion, the corporation can route its offshore “permanently reinvested earnings” through the ostensible foreign parent company or through its subsidiaries to indirectly get the money into the hands of the U.S. shareholders without triggering the tax that is normally due upon repatriation. The simplest way to end this tax dodge is to tax these profits accumulated by offshore subsidiaries as if they had been repatriated at the point when their U.S. parent corporation inverts. This would remove much of the benefit of inversion. 

Profits Held Offshore Have Not Been Taxed by the U.S. — and Will Never Be After Inversion

Domestic corporations have an incentive to not repatriate the profits of their offshore subsidiaries (profits of their CFCs). This is most true of those profits that are earned in the U.S. or another country with a normal tax system and then manipulated to appear to be earned in a tax haven. The U.S. federal income tax bill on repatriated profits is reduced by the amount of income taxes paid to foreign governments. So, profits earned in a country with a normal tax system are subject to much less than the full U.S. corporate income tax rate upon repatriation. But profits that are earned (at least officially) in a tax haven with a zero tax rate would be subject to the full U.S. statutory corporate income tax rate of 35 percent upon repatriation.

Several corporations, including Apple, Microsoft, Nike, Safeway, Wells Fargo, Citigroup and others have disclosed that if they repatriated their offshore subsidiary profits, the effective U.S. federal income tax due would be close to the full 35 percent statutory rate. This implies that they have paid little taxes to foreign governments because these profits are largely in tax havens.[10]

Some American corporations may never repatriate these offshore profits because they can access these profits indirectly. For example, to fund a share buyback last year, instead of repatriating any of its massive offshore cash holdings, Apple issued bonds at negligible interest rates made possible by its offshore cash.[11]

Nonetheless, many American multinational corporations seek ways to, in effect, move these offshore profits into the hands of shareholders without paying U.S. federal income tax that is due upon repatriation.

Subpart F includes a section designed to address this, section 956. Before section 956 was enacted in the 1960s, an American corporation could get around the tax by having an offshore subsidiary make an investment in its American operations that was not actually a dividend payment to the American parent company, and thus not considered a taxable repatriation. For example, the offshore subsidiary could lend money to, or guarantee a loan to, its American parent company in a way that has the same effect as paying a dividend to the American parent company. Section 956 was enacted to treat such investments as repatriations and to impose U.S. tax at that point.

Section 956 applies to investments made by the offshore subsidiaries in related American companies. A major problem is that 956 does not apply if the offshore subsidiaries “hopscotch” over their American parent company, investing or lending instead to a foreign company that has ostensibly acquired the American corporation after an inversion, or to other foreign companies that are subsidiaries of the foreign parent company, which can then funnel that money to the U.S. operations or shareholders of the U.S. company without triggering U.S. tax.

Proposals to Address Avoidance of Repatriation Tax After Inversion

One proposal, reported to be included in draft legislation by Rep. Sander Levin of Michigan, would amend section 956 to make it apply when the investment is done indirectly, routed through a foreign parent company after an inversion or through one of the other companies that is owned by the foreign parent company.[12] Another approach would be for the Treasury Department to issue regulations that would have the same effect, which seem to be authorized by section 956 and other parts of the tax code.[13] These approaches are described in detail in another report from Citizens for Tax Justice.[14]

One alternative that has not received much attention is the one described in this report. It would simply treat accumulated offshore profits as repatriated at the point when the American corporation is officially acquired by a foreign one. Whether this acquisition takes the form of an inversion, in which owners of the American corporation are not really giving up control, or a genuine takeover by a foreign buyer does not matter. Congress preserved deferral (despite President Kennedy’s proposal to largely end it) apparently as a way to help American multinational corporations compete with multinational corporations. There is no rationale for continuing to extend this tax break to corporations once they declare that they are no longer American.

This approach would dramatically reduce incentives for some corporations to invert. For example, the medical device maker Medtronic, which is merging with Covidien and plans to change its corporate address to Ireland, has $20.5 billion in permanently reinvested earnings offshore, and $13.9 billion of that is cash or cash equivalents (the profits the company is most likely to repatriate). Medtronic even acknowledges that if it repatriates these profits it would pay U.S. income taxes on them at an effective rate in the range of 25 to 30 percent, implying that much of the profits are in tax havens. [15] A major motivation for the inversion may be the desire to officially bring offshore cash to the United States without paying taxes.

Similarly, the pharmaceutical giant Pfizer, which attempted (and may attempt again) to obtain the U.K.-based drug maker AstraZeneca, has $69 billion in permanently reinvested earnings offshore. Given that Pfizer has 128 subsidiaries in countries characterized as tax havens by the Government Accountability Office, it would not be surprising if Pfizer has paid very little in foreign taxes on these profits.[16]

Under the reform described in this report, an inversion would cause these profits to be taxed as if they were repatriated. It is very unlikely that Pfizer and Medtronic and companies in similar situations would then pursue inversions.

 


[1] Section 877A of the tax code subjects individuals who expatriate to certain tax provisions if they have a net worth of over $2 million, had an average personal income tax liability over the previous five years above a certain amount ($157,000 for 2014) or failed to pay taxes during the previous five years. Even if one of these criteria is met, a large amount of capital gains income is excluded (the first $680,000 is excluded in 2014). Revenue Procedure 2013-35. http://www.irs.gov/pub/irs-drop/rp-13-35.pdf

[2] IRC sec. 7701(a)(4).

[3] IRC sec. 7701(a)(5).

[4] IRC sec. 957.

[5] IRC sec. 61.

[6] IRC sec. 11.

[7] Thomas L. Hungerford, “The Simple Fix to the Problem of How to Tax Multinational Corporations — Ending Deferral,” Economic Policy Institute, March 31, 2014. http://www.epi.org/publication/how-to-tax-multinational-corporations/#_ref5

[8] IRC sec. 957.

[9] Citizens for Tax Justice, “American Corporations Tell IRS the Majority of Their Offshore Profits Are in 12 Tax Havens,” May 27, 2014. http://ctj.org/ctjreports/2014/05/american_corporations_tell_irs_the_majority_of_their_offshore_profits_are_in_12_tax_havens.php As this report explains, the countries with zero corporate income tax rates or loopholes that facilitate massive tax avoidance are mostly countries that have little in the way of opportunities for real business activities. The figures clearly show that the profits that American corporations report to the IRS that they earn in these countries cannot possibly represent real business profits but are instead profits earned in countries with a normal tax system like the U.S. and then manipulated to appear to be earned in tax havens.

[10] Citizens for Tax Justice, “Dozens of Companies Admit Using Tax Havens,” May 19, 2014. http://ctj.org/ctjreports/2014/05/dozens_of_companies_admit_using_tax_havens.php

[11] Kitty Richards and John Craig, “Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue,” Center for American Progress, January 9, 2014. http://www.americanprogress.org/issues/tax-reform/report/2014/01/09/81681/offshore-corporate-profits-the-only-thing-trapped-is-tax-revenue/

[12] This follows the advice of a former chief of staff to the Joint Committee on Taxation. See Edward D. Kleinbard, “’Competitiveness’ Has Nothing to Do with It,” August 5, 2014. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2476453

[13] Stephen E. Shay, “Mr. Secretary, Take the Tax Juice Out of Corporate Inversions,” Tax Notes, July 28, 2014.

[14] Citizens for Tax Justice, “Proposals to Resolve the Crisis of Corporate Inversions,” August 21, 2014. http://ctj.org/ctjreports/2014/08/proposals_to_resolve_the_crisis_of_corporate_inversions.php

[15] Citizens for Tax Justice, “Medtronic: Still Offshoring,” June 26, 2014. http://www.taxjusticeblog.org/archive/2014/06/medtronic_still_offshoring.php

[16] Richard Phillips, Steve Wamhoff, Dan Smith, “Offshore Shell Games 2014: The Use of Offshore Tax Havens by Fortune 500 Companies,” June 2014. http://ctj.org/ctjreports/2014/06/offshore_shell_games_2014.php

Proposals to Resolve the Crisis of Corporate Inversions

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Several proposals have been offered to address the crisis of American corporations “inverting.” These companies reincorporate as offshore companies to avoid U.S. taxes even as they continue to operate and be managed in the U.S. and benefit from the public investments that American taxpayers support. This report describes these proposals and explains why some are much stronger and more effective than others.

The Basics
The Inversion Crisis Consists of Three Problems which Require Separate Solutions

The inversion crisis actually consists of three related problems which each call for specific solutions. First, loopholes in our tax law allow American corporations to pretend they are based abroad. Second, those corporations claiming to be based abroad (and corporations that really are based abroad) are able to use “earnings stripping” techniques to make profits earned in the U.S. appear to be earned in countries where they will be taxed more lightly or not at all. Third, the profits that American corporations earn offshore are supposed to be taxed by the U.S. when they are brought to the U.S., but after inverting corporations are able to use accounting tricks to escape that rule.

The first problem is simply the absurdity that American corporations can pretend to be foreign corporations, while the second and third problems are the benefits they obtain by doing so. As Edward Kleinbard, former director of the Joint Committee on Taxation (JCT) argues, these benefits, rather than any attempt to enhance “competitiveness,” are the true goals of inversions.[1]

A powerful response would be to address all three problems by taxing “inverted” corporations as American corporations and removing the ability of such companies to earnings strip or access their previously accumulated offshore profits without triggering U.S. taxes.

It is possible that Congress will only address the first problem, by enacting the anti-inversion proposal from President Barack Obama’s recent budget plan and introduced as legislation by Rep. Sander Levin and Senator Carl Levin to tighten the rules around which corporations are treated as American for tax purposes.[2] Or, Congress could instead enact legislation that would address the other two problems — i.e., addressing the motivation for most inversions. The most obvious way to accomplish this would be the enactment of the new legislation that Rep. Sander Levin is reportedly working on to address these problems.

Yet another possibility is that Congress will fail to act and the Obama administration will act on its own to issue regulations authorized under existing law. There is no obvious way that a regulatory change could address the first problem (the loopholes allowing American corporations to pretend to be foreign) but former Treasury official Stephen Shay argues that the administration does have authority to issue regulations that would partially address the other two problems (the motivations for many inversions) which would alleviate the crisis to a large extent.[3] [4]

Loopholes allowing inversions must be closed.

The first problem is that loopholes in our tax law simply allow American corporations to invert. That is, loopholes allow American corporations to pretend, for tax purposes, that they have restructured themselves as foreign companies even though this restructuring exists only on paper. Before 2004, an American corporation might set up a shell corporation in a tax haven like Bermuda and then, as a technical matter, become a subsidiary of that tax haven corporation. Bipartisan legislation enacted in 2004 treats such a company as an American corporation for tax purposes if the former shareholders of the American corporation own more then 80 percent of the newly merged company and there is no substantial business activity in the foreign country.[5]

But American corporations have recently responded by merging with real foreign corporations — albeit smaller ones — to provide the sheen of legitimacy that the 2004 rules require. The arrangements still do not include any actual move of managers or other personnel or any significant change in the business operations, but result in corporations that can pretend to be foreign for tax purposes. The straightforward solution is to treat the company that results from this arrangement as American if the majority of it is owned by the former shareholders of the American company, and to treat is as American if it is managed in the U.S. This is what the Obama-Levin-Levin proposal would do.

Earnings stripping must be stopped.

The second problem is that once a corporation has inverted, it has opportunities to use “earnings stripping” to make profits earned in the U.S. appear to be earned in other countries where they will be taxed more lightly or not at all. In theory, any profits earned in the U.S. are subject to U.S. taxes, whether they are earned by an American-owned company or a foreign-owned company (which an inverted corporation is, technically). But earnings are stripped out of the U.S. when a U.S. corporation (which after inversion is technically the subsidiary of a foreign parent corporation) borrows money from its foreign parent corporation, to which it makes large interest payments that wipe out U.S. income for tax purposes. The loan is really an accounting gimmick, since all the related corporations involved are really one company that is simply shifting money from one part to the other. The interest payments made by the American corporation in effect shift the profits that are really earned in the U.S. to the foreign country for tax purposes.

Restrictions on earnings stripping can take several forms, any of which can be weak or strong depending on how strict the limits are. One approach is to limit the amount of interest that can be deducted for tax purposes to some percentage of income or revenue. Another approach is to limit the deductions to the extent that the American subsidiary’s ratio of debt to equity (loans taken to stock issued) exceeds some set limit. The current (very weak) rule uses these approaches, and some reform proposals would simply lower the percentage of income or revenue that the deductable interest cannot exceed. Another approach would be to limit the interest deductions to the extent that the American subsidiary’s indebtedness is disproportionate relative to the rest of the corporate group (the group of corporations owned by the same foreign parent company). This is the approach taken in the earnings stripping proposal in President Obama’s most recent budget plan, which may be the strongest proposal to stop earnings stripping.

American corporations must not be allowed to avoid the U.S. tax normally due on offshore profits upon repatriation to the U.S.

The third problem is that the profits that American corporations earn offshore are supposed to be taxed by the U.S. when they are officially brought to the U.S. But after inverting, corporations are able to use accounting tricks to escape this rule.

The U.S. theoretically taxes all the profits of American corporations, including the profits earned by offshore subsidiaries. (The U.S. corporate income tax is reduced by whatever corporate income tax has been paid on these profits to foreign governments.) But U.S. corporations are allowed to defer paying U.S. tax until these profits are officially brought to the U.S., which may never happen. As a result, one of the key questions is what will become of the offshore profits that American corporations’ subsidiaries have accumulated offshore (at least officially, since these profits are often in the U.S. in a real economic sense).

In theory, if the U.S. corporation inverts and becomes the subsidiary of a foreign corporation, the profits accumulated by the offshore subsidiaries of the U.S. corporation are still subject to U.S. tax whenever they are repatriated (officially brought to the U.S.) But inverted corporations can easily get around this rule. Money is fungible. The subsidiaries of the U.S. company can loan the money they have accumulated offshore to the foreign company that ostensibly owns the U.S. corporation after inversion, or to another foreign company in the corporate group that is not a subsidiary of the U.S. company. That money can then be used to expand business in the U.S. or buy back stock from the shareholders of the U.S. company. If the offshore accumulated profits of the subsidiaries were directly used for these purposes, that would constitute a repatriation and would trigger U.S. tax. But the inversion allows for the use of loans (as an accounting gimmick) to move the money into the U.S. for that purpose while avoiding the tax.

Proposed solutions generally would enhance the effectiveness of section 956 of the tax code, which is designed to prevent corporations from avoiding the U.S. tax that is due upon repatriation of offshore profits. Before section 956 was enacted in the 1960s, an American corporation could get around the tax by having an offshore subsidiary make an investment in its American operations that was not actually a dividend payment to the American parent company, and thus not considered a taxable repatriation. Section 956 was enacted to treat such investments as repatriations, and to impose U.S. tax at that point. But section 956 applies to investments made by the offshore subsidiaries directly in related American companies. It does not apply when the offshore subsidiaries hopscotch over their American parent company, investing or lending the money to other foreign companies within the corporate group (foreign companies that are not subsidiaries of the American company), which can then use that money for the same purpose without triggering U.S. tax.

Proposals to address this loophole would make section 956 apply when such investments are made by the subsidiaries of the American corporation to other foreign companies in the corporate group in certain situations.

More Details
The Three Problems and Specific Proposals to Address Them

1. Corporations Using Paperwork to Claim to Be Foreign Companies

Problem: Corporations use restructuring that exists only on paper to claim “foreign” status to avoid U.S. taxes.

Solution: Amend the tax laws to refuse to recognize foreign status that exists only on paper.

Proposal: The basic anti-inversion proposal included in President Obama’s most recent budget and then incorporated into the Stop Corporate Inversions Act, provides this solution. The proposal would treat an entity that results from a U.S.-foreign corporate merger as an American corporation if the majority (as opposed to the current threshold of 80 percent) of voting stock is held by the shareholders of the former American corporation. It would also treat the entity resulting from the merger as an American corporation if it is managed and controlled in the U.S. and has significant business activities in the U.S. (Significant business is defined as 25 percent of the corporate group’s employees, payroll, assets or income.)

This proposal would raise $19.5 billion from 2014 through 2014 according to Congress’s official revenue estimator, the Joint Committee on Taxation (JCT). 

Some lawmakers have taken issue with the provision concerning inverted corporations managed in the U.S. They claim that this could encourage corporations to literally and physically move their headquarters, including management and supporting personnel, to a foreign country in order to reduce their tax bill. This seems extremely unlikely. So far there is no evidence of any inverting corporations moving managers offshore. In fact, Ireland, where many inverted corporations claim to be based, appears not to be benefiting from the inversion wave precisely because nothing real is actually moving to Ireland, which consequently does not enjoy any revenue or economic gain.[6] In other words, the danger that corporations might respond to a change in the law by moving management offshore is at best speculative, while the danger of corporate inversions causing a loss of revenue is very real and unfolding before our eyes.

Even if there was any reason to fear that some American corporations would do whatever necessary to be considered “foreign,” even if that means moving management abroad, the answer would be to enact additional provisions that remove the incentives a corporation currently obtains by virtue of being foreign (which are discussed in the following sections) and make these provisions apply to all corporations. Under this approach, even if an American corporation was willing to be acquired in a true, economic sense and was willing to move management offshore, there would be little or no incentive to do so because becoming “foreign” would no longer provide significant benefits.

2. Earnings Stripping by Inverted Corporations

Problem: American corporations that invert to claim foreign status often then engage in “earnings stripping,” the practice of multinational corporations earning profits in the United States reducing or eliminating their U.S. profits for tax purposes by making large interest payments to their foreign affiliates.

Solution: Enact tighter limits on debt taken on by the U.S. part of a multinational corporation (tighten restrictions against earnings stripping).

Proposals:

a) Obama’s fiscal 2015 budget plan

The strongest anti-earnings stripping proposal is the one included in President Obama’s most recent budget plan. It would, with good reason, apply to all corporations, not just those that have inverted. It would allow a multinational corporation doing business in the U.S. to take deductions for interest payments to its foreign affiliates only to the extent that the U.S. entity’s share of the interest expenses of the entire corporate group (the entire group of corporations owned by the same parent corporation) is proportionate to its share of the corporate group’s earnings (calculated by adding back interest deductions and certain other deductible items). A corporation doing business in the U.S. could choose instead to be subject to a different rule, limiting deductions for interest payments to ten percent of “adjusted taxable income” (which is taxable income plus several amounts that are usually deducted for tax purposes).

This proposal would raise $41 billion from 2015 through 2024 according to JCT.

b) Rep. Levin’s discussion draft legislation

A different approach is taken by a proposal in legislation being drafted by Rep. Sander Levin, the ranking member of the House Ways and Means Committee.

It would bar the American corporation (which is technically a subsidiary of a foreign company after an inversion) from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus certain significant deductions that corporations are allowed to take. The current rule (under section 163(j) of the tax code) sets the limit at 50 percent of adjusted taxable income.

This proposal would eliminate the rule that waives that limit if the corporation’s debt does not exceed 150 percent of its equity.

This proposal would also repeal the rule allowing corporations to carry forward any excess limitation (the amount by which the limit on interest deduction exceeds the interest expenses deducted in a given year) to increase their limit in future years.

It would also bar corporations from carrying forward any disallowed interest deductions to more than five years into the future. (The current rules allow disallowed interest payments to be carried forward indefinitely, to be used in any year in which the company has income to deduct from and is not otherwise subject to the limits on interest deductions.)

There is not yet any estimate of the revenue that would be saved under this proposal. It therefore difficult to determine whether it is more effective or less effective than the earnings stripping proposal in the President’s most recent budget plan, which was described above.

c) President Obama’s previous budget plans

The earnings stripping proposal included in the President’s previous budget plans is the template for the proposed change to section 163(j) in Rep. Levin’s discussion draft (described above). But the proposal from the President’s previous budgets was much weaker because it would apply only to companies that are considered inverted under the existing rules, whereas Rep. Levin’s earnings stripping proposal would apply to all corporations.[7]

Limiting this proposal to inverted companies makes it much weaker, as demonstrated by its relatively small estimated revenue impact. This proposal would raise just 2.7 billion from 2014 through 2023 according to JCT, which suggests that it would have little effect.

This should be a warning to lawmakers. If, during the process of legislative negotiations, they are tempted to scale back Rep. Levin’s proposal so that it only applies to inverted corporations (as President Obama had earlier proposed) the policy will likely have very little impact.

d) Camp tax reform plan

The tax reform plan proposed by House Ways and Means chairman Dave Camp also includes an anti-earnings stripping proposal that would amend section 163(j) and is also based on the proposal in President Obama’s older budget plans. Rep. Camp’s proposal is broader in the sense that it would apply to all corporations (not just inverted corporations) but also narrower in the sense that the limits would not be as strict as those proposed by the President.

Rep. Camp’s proposal would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 40 percent of its “adjusted taxable income,” which is defined as taxable income plus certain significant deductions that corporations are allowed to take. (As explained, the current rule sets the limit at 50 percent of adjusted taxable income, while President Obama would set it at 25 percent for inverted companies.)

Another difference is that Rep. Camp’s proposal would not change the rule that waives the limit if the corporation’s debt does not exceed 150 percent of its equity.

Like Levin and Obama, Camp would also repeal the current rule allowing corporations to carry forward to future years any excess limitation. But, unlike the other two, Camp would not change the rule allowing disallowed interest payments to be carried forward to be deducted in future years.

In other words, Rep. Camp’s proposal is less strict in these ways, but also applies to all corporations. The result is that Camp’s proposal has roughly the same revenue impact as President Obama’s old proposal. Rep. Camp’s proposal would raise $2.9 billion from 2015 through 2024 according to JCT.

The revenue impact would be somewhat larger than that if this proposal was enacted on its own. The revenue estimate assumes that it is enacted as part of Rep. Camp’s larger tax reform plan, which also gradually reduces the corporate tax rate to 25 percent. Enacting this earnings stripping proposal on its own, without the reduction in the corporate tax rate, would raise somewhat more.

e) Possible administrative action

Former Treasury official Stephen Shay has proposed that if necessary, the Treasury Department could issue regulations under section 385 of the tax code that would limit earnings stripping for inverted corporations.[8] That section of the law essentially allows Treasury to issue regulations to determine whether an interest in a corporation is treated as debt or equity (stock). Regulations could, Shay explains, reclassify excessive debt taken on by an inverted American company from its (ostensible) foreign parent company as equity. This would mean that any interest payments made by the inverted American corporation would be reclassified as dividends paid on stock, which, unlike interest payments made on debt, are not deductable.

There are probably several ways that Treasury could define the excess indebtedness that would be reclassified as equity. Shay proposes that Treasury provide two calculations, and whichever amount is less would apply.

The first would be any debt that exceeds 110 percent of the debt that the inverted U.S. corporation would have if its debt-to-equity ratio was the same as that of the rest of the corporate group (the rest of the group of corporations owned by the same parent company). (This rule borrows from another provision of Camp’s tax reform plan.)

The second would be the amount of debt for which the interest would exceed 25 percent of the American corporation’s adjusted taxable income (again, income plus certain expenses usually deducted) averaged over the previous three years.

There is no estimate of how much revenue this proposal would save.

3. Inverted Corporations Avoiding the U.S. Tax Due on Accumulated Offshore Profits Upon Repatriation to the U.S.

Problem: Inverted corporations are able to avoid the rule that requires U.S. taxation when an American company repatriates (officially brings to the U.S.) profits of its offshore subsidiaries.

Solution: Strengthen section 956 of the tax code, the provision that is designed to prevent corporations from circumventing the rule that requires U.S. tax paid on offshore subsidiary profits when they are repatriated.

Proposals:

a) Rep. Levin’s discussion draft legislation

Rep. Levin’s discussion draft legislation would strengthen section 956 to impose U.S. tax on certain investments made by offshore subsidiaries of the American company to its ostensible foreign parent company or to other companies within the corporate group when such investments are really ways to indirectly move offshore profits into the U.S. without technically making a taxable repatriation.

Section 956 currently applies when the offshore subsidiaries of an American company invest directly in the U.S. company in some way that is really a repatriation of offshore profits by another name. For example, the offshore subsidiary could lend money to, or guarantee a loan to, its American parent company in a way that has the same effect as paying a dividend to the American parent company. Section 956 treats such investments as repatriation and imposes U.S. tax on them. The reform proposed by Levin would do the same when the investment is done indirectly, routed through a foreign parent company after an inversion or through one of the other companies that is owned by the foreign parent company.

There is currently no revenue estimate for this proposal.

The arcane nature of this reform belies the significance of the problem it addresses. American corporations officially hold, through their offshore subsidiaries, $2 trillion in foreign profits that they have declared to be “permanently reinvested” abroad. In many cases, these profits are really earned in the U.S. or another country with a normal tax system but manipulated through accounting gimmicks to appear to be earned in countries like Bermuda or the Cayman Islands that do not tax corporate profits. Almost none of these profits can be described as “earned,” in a real economic sense, in these tax haven countries, which do not provide nearly enough business opportunities to justify the amount of profits reported there.[9]

In fact, several corporations have acknowledged that if they repatriate these offshore profits, they would pay almost the full U.S. tax rate of 35 percent on them, which indicates that a large portion of these profits have not been taxed by any government, a clear sign that they are largely reported in tax havens.[10]

These corporations would like to access their offshore subsidiaries’ profits (to increase domestic investment or, more likely, to enrich shareholders with dividends or stock buybacks). This would be considered a repatriation of offshore profits, and U.S. taxes would come due — at or near the full 35 percent rate when tax haven profits are repatriated. Naturally, the corporations would like to avoid this tax. Allowing them to do so would essentially reward their offshore tax avoidance.

Section 956 as currently written blocks American corporations from getting around the U.S. tax that is due upon repatriation, but fails when these companies invert and become part of foreign-controlled corporate group. Rep. Levin’s proposal would address this problem.

b) Possible administrative action

Former Treasury official Stephen Shay has argued that this problem (along with earnings stripping) can be resolved through administrative action if Congress fails to act. He cites several sections of the tax code, including 956(e) which says the “Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.” The mergers that corporations use in inversions to claim to be restructured as foreign companies would seem to be such “reorganizations.”

Another section of the law cited by Shay is even more straightforward in providing this authority to the President. Section 7701(1), provides that the “Secretary may prescribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among any 2 or more of such parties where the Secretary determines that such recharacterization is appropriate to prevent avoidance of any tax imposed by this title.”

The techniques used by inverted companies to access their offshore cash (having their offshore subsidiaries lend to or guarantee loans to a foreign parent company or one of its foreign subsidiaries which then finances the American company) would seem to be the sort of “multiple-party financing transaction” mentioned in the provision quoted above.

There is currently no revenue estimate for this proposal.

Shay cites other provisions that seem to grant such authority, so that the question left is not a legal one but a political one. If Congress fails to act and the administration addresses the crisis with regulations, there is no doubt that some members of Congress will accuse it of overstepping its authority, even if that is factually not true. Does the administration have the will to act despite that inevitable backlash? A lot may depend on how that question is answered.

 

 


[1] Edward D. Kleinbard, “’Competitiveness’ Has Nothing to Do with It,” August 5, 2014. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2476453

[2] H.R. 4679, “Stop Corporate Inversions Act of 2014.” http://democrats.waysandmeans.house.gov/bill/hr4679-stop-corporate-inversions-act-2014

[3] Stephen E. Shay, “Mr. Secretary, Take the Tax Juice Out of Corporate Inversions,” Tax Notes, July 28, 2014.

[4] Other prominent tax law experts agree with Shay that current law allows the Treasury Department to do this. See Victor Fleischer, “How Obama Can Stop Corporate Expatriations, for Now,” New York Times, August 7, 2014. http://dealbook.nytimes.com/2014/08/07/how-obama-can-stop-corporate-expatriations-for-now/?_php=true&_type=blogs&_r=0; Steven Rosenthal, “Can Obama Slow Corporate Inversions? Yes He Can,” August 15, 2014. Tax Vox, Tax Policy Center. http://taxvox.taxpolicycenter.org/2014/08/15/can-obama-slow-corporate-inversions-yes-can/

[5] I.R.C. sec. 7874.

[6] Maureen Farrell, “Ireland: U.S. Tax Inversions Aren’t Helping Us Much Either,” Wall Street Journal, July 8, 2014. http://blogs.wsj.com/moneybeat/2014/07/08/ireland-u-s-tax-inversions-arent-helping-us-much-either/

[7] One additional difference is relatively minor: The proposal from the President’s previous budget plans would allow companies to carry forward disallowed interest expenses for ten years, as opposed to the five year limit proposed in Rep. Levin’s discussion draft.

[8] Stephen E. Shay, “Mr. Secretary, Take the Tax Juice Out of Corporate Inversions,” Tax Notes, July 28, 2014.

[9] Citizens for Tax Justice, “American Corporations Tell IRS the Majority of Their Offshore Profits Are in 12 Tax Havens,” May 27, 2014. http://ctj.org/ctjreports/2014/05/american_corporations_tell_irs_the_majority_of_their_offshore_profits_are_in_12_tax_havens.php

[10] Citizens for Tax Justice, “Dozens of Companies Admit Using Tax Havens,” May 19, 2014. http://ctj.org/ctjreports/2014/05/dozens_of_companies_admit_using_tax_havens.php

 

Statement: Despite Walgreens' Decision, Emergency Action Is Still Needed to Stop Corporate Inversions

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Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding emerging reports that Walgreen Co. will announce Wednesday that, although it still plans to buy Switzerland-based Alliance Boots, it will not use legal maneuvers to reincorporate as a Swiss company to avoid U.S. taxes.

“Reports are stating that Walgreen Co. has decided to set aside — for now — plans to avoid U.S. taxes by reincorporating as a foreign company. Only the proverbial fly on the boardroom wall truly knows what led the company to reach this decision. But a single company backing off plans to exploit loopholes in our tax code to dodge U.S. taxes does not fix the fundamental problem.

“Congress and the Obama Administration still need to act quickly because many other American corporations such as Medtronic, AbbVie and Mylan are still pursuing corporate inversions, while other major companies such as Pfizer have indicated that they may pursue inversion in the near future.

“Walgreens is a quintessentially American company and an easy scapegoat. But the company’s initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.

“Congress needs to, at very least, enact the legislation proposed by Sen. Carl Levin and Rep. Sander Levin that would disregard, for tax purposes, attempts by American corporations to claim a foreign status that only exists on paper.

“Refusing to address inversions except as part of comprehensive tax reform would be like refusing to put out a house fire until there is a detailed blueprint for rebuilding the house. Quick action is needed while there is still something to save.” 

State-by-State Figures on Two Child Tax Credit Proposals: President Obama vs. House GOP

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Read this report in PDF.

House Republicans have proposed to let an expansion of the child tax credit for low-income working families expire after 2017. Under their plan, the money that had previously gone to children in low-income families would in effect be used to fund bigger child tax credits for better-off families.

President Obama has proposed to make permanent the expansion for low-income working families. The President’s proposal and the House Republican proposal (H.R. 4935) are each estimated to cost about $11 billion a year. The national and state-by-state figures below illustrate how the benefits of the President’s proposal would mostly help families with incomes under $40,000 while the House Republican proposal would mostly help those with incomes above $100,000.

The child tax credit (CTC) provides families with a maximum tax break of $1,000 per child. It is partially refundable, mean­ing it can (within certain limits) benefit families who are too poor to have any federal income tax liability even before tax credits are taken into account. Under a provision enacted in 2009 and extended since then, the refundable part of the credit equals 15 percent of the portion of a family’s earnings that exceed $3,000, up to the $1,000 per-child limit. If this provision expires as scheduled at the end of 2017, the earnings threshold for the refundable part of the credit will revert from $3,000 to a much higher level ($14,750 in 2018).

The President has proposed, in each of his budget plans since 2009, to make permanent the $3,000 earnings threshold in order to maintain this expansion of the CTC for low-income working families. One argument for his proposal is that the refundable part of the CTC encourages work. Because it is calculated as a percentage of earnings, a family must have a working parent in order to qualify for it.

The House Republican bill, H.R. 4935, would expand the CTC in three ways that do not help the working poor. First, it would index the $1,000 per-child credit amount for inflation, which would not help those who earn too little to receive the full credit. Second, it would increase the income level at which the CTC starts to phase out from $110,000 to $150,000 for married couples. Third, that $150,000 level for married couples and the existing $75,000 income level for single parents would both be indexed for inflation thereafter.

The Internet Does Not Need Special Breaks

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On July 14, Citizens for Tax Justice sent a letter to members of the House of Representatives asking them to vote against the so called "Permanent Internet Tax Freedom Act," which would make permanent law banning state governments from taxing internet access the same way they tax other comparable services.

Read CTJ's letter.

The House approved the bill on July 15. Below is the post on the Tax Justice Blog about this bill.

The House Votes to Treat the Internet Like an Infant

Somehow, arguments that conservative lawmakers usually make about not interfering with the economy and respecting states’ rights have fallen silent as Congress rushes to pass a bill that provides special treatment for an industry that has grown very profitable and powerful.

On Tuesday the House of Representatives voted to make permanent a law banning state and local governments from taxing Internet access just as they tax other goods and services. First enacted as a temporary ban in 1998 (the Internet Tax Freedom Act) under the argument that the Internet was an “infant industry” needing special protection, the ban has been extended several times and is now scheduled to expire on Nov. 1.

As we have argued previously, the infant of 1998 now has the keys to the American economy, and yet Congress is still coddling it by shielding it from taxes that apply to other comparable services, such as cable television and cell phone service.

The pending bill is going one step further than previous extensions by stripping out the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year if they chose to tax Internet access.

Members of Congress will take credit for shielding the Internet from taxes but the cost will be borne entirely by state and local governments. In other words, continuing the ban on taxing Internet access introduces distortions in the economy by favoring some industries over others and it interferes with state governments’ ability to raise revenue in the ways they find most sensible.



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