Stop Tax Haven Abuse Act Would Curb Some of the Worst Multinational Corporations’ Tax Dodges

Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.

Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.

The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.

Among the key features of the “Stop Tax Haven Abuse Act” are the following:

■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.

■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.

■ Current tax rules allow U.S. corporations to 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. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.

■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.

For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.