Just Taxes Blog by ITEP

Two New Bills Would Plug Major Loopholes in Our Offshore Corporate Tax System

April 6, 2017

A new pair of bills introduced by Representative Lloyd Doggett (D-TX) this week would crack down on loopholes that allow corporations and individuals to avoid paying their fair share in taxes.

Rep. Doggett’s Stop Tax Haven Abuse Act, which was sponsored by Senator Sheldon Whitehouse (D-RI) in the Senate, would close a number of the most harmful loopholes in the current international tax code. Taken together, the provisions of the bill would reduce international tax avoidance by $278 billion over 10 years.

Corporations’ use of offshore tax gimmicks have grown so out of control that companies have now accumulated a stunning $2.6 trillion hoard of money offshore for tax avoidance purposes. The bill wouldn’t entirely solve the problem of tax haven abuse, but it could ensure corporations are paying part of the estimated $100 billion they avoid each year in taxes. Some of the key components of the bill include provisions that would:

  • Reduce corporate inversions by treating the corporation resulting from the merger of a U.S. and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company, or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).
  • Disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called “earnings stripping,” a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation to wipe out U.S. income for tax purposes.
  • Require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors.
  • Repeal the “check-the-box” rule and the “CFC look-through rules” that allow companies to shift profits to tax havens by letting them 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.

Rep. Doggett’s other new tax-related bill, the Corporate EXIT Fairness Act, takes direct aim at one of the main drivers of corporate inversions. Under the current tax code, companies have a huge incentive to invert or become a foreign corporation (at least on paper) because they can permanently avoid paying taxes on accumulated offshore earnings. Doggett’s legislation would require inverted companies to pay the full amount of taxes they owe on offshore earnings if they become a foreign company, which means that avoiding taxes on unrepatriated earnings will no longer be a factor in making that decision.

The bill also contains the same anti-inversion provisions in the Stop Tax Haven Abuse Act that tighten rules around what constitutes a domestic corporation.

What differentiates Rep. Doggett’s exit tax bill from similar bills is that it would require all expatriating companies to pay what they owe on their offshore earnings, rather than just those companies that are engaging in a transaction that meets the definition of an inversion. This makes the bill even more effective in that it reduces the offshoring tax incentive across the board and allows the bill to work as a complement to other anti-inversion legislation.

Rather than moving to an even more loophole-ridden corporate tax code as the House GOP has proposed, lawmakers should be considering reforms such as those in the Stop Tax Haven Abuse Act and the Corporate EXIT Fairness Act that crack down on offshore tax avoidance.


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