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A bill introduced in Congress today called the Corporate Tax Dodging Prevention Act would end “deferral,” the most problematic break in the U.S corporate income tax.
The bill would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on their offshore profits until those profits are “repatriated” (brought to the U.S.).
At an event announcing the proposal this morning, CTJ director Bob McIntyre spoke in favor of the legislation. McIntyre explained:
Because of “deferral,” companies like Apple, Microsoft, Dell and Eli Lilly can shift their U.S. profits, on paper, to foreign tax havens and avoid billions of dollars in taxes that they should be paying. At the end of 2010, just 10 companies, including those just mentioned, report that they had stashed $210 billion offshore, almost all of it in tax havens, and thereby avoided $69 billion in U.S. income taxes.
A recent CRS report found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in five little tax-haven countries, even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.
In total, the JCT [Joint Committee on Taxation] estimates that repealing deferral would add $600 billion to federal revenues over the next decade.
The bill was introduced today in the Senate by Bernie Sanders of Vermont and in the House by Jan Schakowsky of Illinois.
CTJ’s recent working paper on tax reform options explains in detail how ending deferral would improve the corporate income tax. It also explains that President Obama has offered several proposals that would address some of the worst abuses of deferral, but would not be as effective or straightforward as simply repealing deferral.
CTJ has published previous reports and fact sheets explaining why Congress should repeal deferral and should also reject proposals to adopt a “territorial” tax system, which would make matters worse.
Senator Carl Levin of Michigan has introduced bills to limit some of the worst abuses of deferral, and has been discussing similar proposals with other Senators as a way to raise revenue to replace or delay the automatic spending sequestration that is scheduled to go into effect in March.
The bills introduced by Senator Levin also include provisions targeting offshore tax evasion by individuals, in addition to the offshore tax avoidance by corporations. Offshore tax evasion involves hiding income from the IRS in offshore tax havens in ways that are criminal offenses, whereas the offshore tax avoidance by corporations generally involve practices that are not illegal — but that ought to be.
(Senator Levin’s legislation would also address other tax issues, like the “Facebook” loophole for stock options and the “carried interest” loophole.)
Ending deferral has become increasingly important as corporations hold more profits than ever offshore. A recent CTJ report finds that public information from 290 of the Fortunate 500 companies indicate that they hold $1.6 trillion in profits offshore. For many of these corporations, the majority of their “offshore” profits are actually U.S. profits that have been artificially shifted to offshore tax havens and then reported as “foreign” profits.