Tax Haven Legislation: Debunking the Myths

Transcription

1 Spring Audit Session / Income Tax Conference Memphis, TN April 21, 2015 Tax Haven Legislation: Debunking the Myths Charles Fischer Sr. Manager, National Multistate Tax Services Deloitte Tax LLP [email protected] Evan Hoffman Sr. Manager, State Government Affairs Organization for International Investment [email protected] Ferdinand S. Hogroian Sr. Tax & Legislative Counsel [email protected] Topics Covered Existing Tax Haven Provisions Current Legislative Proposals Arguments by Proponents and Opponents of Tax Haven Designations Tax Haven Revenue Loss Estimates The Tax Haven Approach: A Global Outlier Impact on Foreign Direct Investment What Comes Next? 2 1

2 Existing Tax Haven Provisions Five states (Alaska, Montana, Oregon, Rhode Island, and West Virginia) plus D.C. currently have some form of a tax haven provision that seeks to include certain foreign entities in a state s unitary combined return Rhode Island and Oregon are the most recent, with Oregon effective for the 2014 tax year and Rhode Island effective in 2015 Most states have chosen to go with one of two approaches, either defining a tax haven on the basis of a list of foreign jurisdictions (commonly referred to as a blacklist approach) or by employing a facts and circumstances test modeled after the MTC s tax haven definition 3 Blacklist Approach Montana and Oregon are currently the only two states to employ a statutory blacklist approach that identifies specific countries as tax havens Tax haven classification is based on whether the foreign corporation is incorporated in a listed jurisdiction Lists typically include around 40-plus foreign countries Luxembourg is notably on the tax haven list of both states 4 2

3 MTC Approach Many states, including RI, WV, and DC, have leveraged the tax haven definition provided in the MTC s model combined reporting statute, which designates the following traits: No or nominal effective tax on the relevant income and Has laws or practices that prevent effective exchange of information for tax purposes with other governments; Lacks transparency; Facilitates the establishment of foreign-owned entities without the need for a substantive local presence; Excludes resident taxpayers from the tax regime s benefits or prohibits businesses that benefit from operating in the local market; or Has created a tax regime which is favorable for tax avoidance, including whether the jurisdiction has a significant untaxed offshore financial or other services sector relative to its overall economy 5 Alaska Approach Alaska utilizes neither the blacklist nor the MTC approach, but instead has developed its own definition of a tax haven that is facts and circumstances driven In Alaska, a tax haven jurisdiction is a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90% of the U.S. rate Further, in order for the Alaska tax haven provision to apply, the foreign corporation must either: Have 50% or more of its sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, made directly or indirectly to one or more members of the unitary return; or Not conduct any significant economic activity 6 3

4 Current Legislative Activity States looking to expand the scope of current tax haven definitions Montana and Oregon proposed to update their current blacklists by adding jurisdictions such as Hong Kong, the Netherlands, and Switzerland, and in the case of Montana, Ireland as well States looking to add tax haven provisions to existing combined reporting statutes and choosing to go the blacklist route Maine, Massachusetts, and New Hampshire States with combined reporting bills or proposals that include tax haven provisions and tend to follow the MTC approach Alabama, Florida, Kentucky, and Pennsylvania Vermont has a bill that would require the Tax Commissioner to study and provide recommendations on how to include tax haven income in the Vermont tax base 7 Arguments by Proponents of Tax Haven Legislation Asserted $20 billion state tax revenue loss Perception of tax avoidance by US multinationals Belief multinationals hide profits in island economies and low tax jurisdictions Failure to act at the federal level justifies state self help Income should be aligned with value creation and substance (Big) Business does not pay its fair share Small business disadvantaged, unable to use tax haven loopholes 8 4

5 Problems with Tax Haven Legislation: the Arbitrary Nature of the Lists The lists are based on an outdated OECD list developed for transparency & information sharing Not limited to island economies, and includes low tax rate and other tax favorable characteristics US PIRG reports reflect 66% of tax haven profits booked to these five low rate countries: Netherlands, Ireland, Singapore, Luxembourg, and Switzerland The faulty premise of tax haven legislation: profits booked to these countries are per se tax evasion Potential constitutional infirmity (and guaranteed litigation) resulting from tax haven approach 9 Tax Haven Revenue Loss Estimates: The Numbers Game U.S. PIRG and Citizens for Tax Justice (CTJ) have provided widely publicized estimates for state revenue losses from offshore tax havens However, the numbers fluctuate wildly, casting doubt on their legitimacy Until recently, the PIRG/CTJ estimates for state corporate income tax revenue losses totaled about $20 billion However, in 2014, based on more recent information from a few states that currently have tax haven statutes, PIRG issued a new estimate of $1.68 billion for the revenue that could be recaptured with tax haven legislation (or $1.015 billion for states with existing combined reporting requirements) For instance, the revised numbers lower the estimates for individual states dramatically: for CA ($3.34 billion to $246.4 million); for New York ( $1.93 billion to $141.6 million); and Massachusetts ($991 million to $79 million) Despite the new estimates, PIRG has not disavowed the earlier estimates Source: U.S. PIRG, Closing the Billion Dollar Loophole, Winter

6 Tax Loss Estimates: Dependence on Low Tax Jurisdictions The U.S. PIRG/ CTJ studies make the assumption that any profits booked to so-called tax haven countries are attributable to tax evasion The studies use terms such as offshore shell games and loopholes, tax dodging The PIRG/CTJ studies like to use examples of American multinational corporations with subsidiaries in Island economies such as Bermuda, the Cayman Islands, and the Bahamas But according to their own studies, 66 percent of the profits booked to the largest so-called tax haven countries are booked to Netherlands, Ireland, Singapore, Luxembourg, and Switzerland These are major trading partners of the U.S. and countries that have low tax rates and other tax favorable features (including incentives for specific industries), but certainly not the no-tax jurisdictions portrayed by the PIRG/CTJ studies Source: U.S. PIRG/CTJ, Offshore Shell Games, June Tax Haven Approach Out of Synch with Other States (and the World) A small minority of states reference tax havens, only two with lists States have other tools, including transfer pricing, business purpose/substance, addback, etc. Other state methods focus on specific transactions, income streams, or corporate structures not blacklisting entire nations Tax havens are a selective form of worldwide unitary combination that ignores lessons of the 1980 s Destructive to foreign trade and investment, contrary to states own interests in economic growth 12 6

7 Foreign Direct Investment (FDI) Grows America s Economy Employment 5.8 Million American Jobs More than 5 percent of all private sector employment 18% of U.S. Manufacturing Workforce 33% higher wages than economy wide average Economic Impact 21 percent of U.S. exports 15 percent of U.S. research and development expenditures $200 billion in annual property, plant and equipment purchases U.S. is losing ground in global race for FDI FDI Stock in Select Economies as Percentage of Total World Stock 38% Source: UNCTADStat Canada France Germany Japan United Kingdom United 5.8 % States % 6.3 % 3.6 % 4.2 % 3.3 % 2.8 % 2.5 %.6 % 0.6 %

8 FDI Pie is Growing, but US is Losing 15 FDI Barrier: Tax Haven List Legislation Global companies want to operate in markets that align with global norms Tax Haven policy violates spirit of tax treaties and leads to double taxation Firms will be subject to punitive taxation because of their foreign heritage No one knows the global company that will make the next billion dollar investment Uncertainty of which jurisdictions will be added to list FDI Barrier 16 8

9 Where to Next? Tax haven proposals proliferate, but is there a shelf life on this fundamentally flawed approach? Given the challenges, where are states likely to go from here? What is acceptable to include in the state water s edge? A leaky water s edge has its own flaws, arbitrariness of the tax haven approach notwithstanding What do we see on the horizon? 17 9