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Sen. Levin’s New Bill: Bad for Corporate Tax Dodgers, Good for People

By Frank Clemente, Campaign Manager, Americans for Tax Fairness

Pretend for a moment that there is never a deadline for you to pay your taxes, that checking one box on your tax form will instantly hide a huge portion of your income from taxation, and that if you have a great idea, you can create a second self, sell them your idea for cheap and then pay your second self to let you use your idea.

If you’re not pretending as you read this, you’re a multinational corporation that stashes a lot of profits in offshore tax havens.

Sen. Carl Levin
Sen. Carl Levin

If you are pretending, you’re probably an actual person — and you should know about Sen. Carl Levin’s Stop Tax Haven Abuse Act (S. 1533), which was recently introduced in Congress. This bill will raise $220 billion over 10 years by closing some of the worst tax loopholes that encourage corporations to shift profits, operations and jobs overseas.

We lose $90 billion every year to these loopholes (p. 1). That money could go a long way towards repairing our crumbling roads and bridges, fixing our schools, researching new medical cures and clean energy sources, and helping small businesses to grow. This bill is a big deal.

Here is what the bill would do.

First, it makes it less profitable for big corporations to move jobs and operations to countries with lower tax rates. As it stands now, big corporations can defer paying their U.S. taxes indefinitely on profits made overseas. Indefinitely, as in no deadline of any kind, ever. While these big corporations get to put off paying their U.S. taxes indefinitely on offshore profits, they can immediately deduct any expenses that they had to pay as they were making those profits.

In other words, a company can close a U.S. operation, pay out severance packages to its laid-off U.S. workers and pay interest on a loan taken out to build a new operation in another country — and immediately write all of these costs off of their taxes, while their profits from their new offshore business grow, free of U.S. taxes.

The Stop Tax Haven Abuse Act will end this madness. It will require corporations to bring their profits back to the U.S. and pay taxes on them before they can deduct any related expenses.

Second, it would require big corporations to report the companies that they own overseas, and all of their profits, to the Internal Revenue Service. One particularly crazy loophole allows corporations to check just one box on an IRS form to make their offshore subsidiaries and their income invisible for tax purposes. They are literally able to hide some of their offshore profits with one swoop of a pen.

The check-the-box rule should not exist. This bill will end it.

Third, this bill would crack down on foreign tax credit manipulation. When companies make money offshore, they pay taxes both in the country where they made the money, and in the U.S. when and if they bring the money back here. They get credits for the taxes that they pay to the country where they made the money (avoiding the kind of “double taxation” corporations sometimes disingenuously complain about anyway). But big corporations will often use extra credits from higher-tax nations to keep from paying U.S. taxes on profits made in low- or no-tax nations.

The Stop Tax Haven Abuse Act would force big corporations to pool their foreign income and foreign tax payments. Not only would this part of the bill bring about $55 billion per year back to the U.S., it would make it a lot less appealing for companies to do business in tax haven countries in the first place.

The last big thing that Sen. Levin’s bill would do is cut down incentives for companies to move their intellectual property and their marketing rights offshore. Many big corporations create shell companies in countries that tax them very little, if at all. They then sell intellectual property — for example, a software license or a drug patent — to their shell company at a discount. The shell company leases the property back to the big corporation at a steep markup. The shell company in the low-tax country pays very little taxes on the marked-up “sale.” The big corporation in the higher-tax country pays most of the expenses, and it can deduct them and lower its taxes. Apple famously does this.

Apple headquarters
Apple corporate headquarters

One of Apple’s shell companies in Ireland has zero employees, and Apple negotiated with Ireland for a tax rate that is less than 1 percent. That’s a real steal. And it’s how Apple booked $74 billion in profits in Ireland over four years and paid almost no taxes to the U.S. or any other country. Sen. Levin’s bill would make it much tougher for companies to play this tax shell game.

These loopholes that allow big corporations to dodge their U.S. taxes by hiding profits and shipping jobs offshore need to end. They leave the rest of us — working people and small businesses who can’t afford fancy accountants, fancy lawyers or overseas subsidiaries — paying the bill. Asking corporations to pay their fair share from offshore operations wouldn’t singlehandedly balance the U.S. budget, but closing these loopholes goes a long way.

Perhaps even more importantly, it’s just plain fair for big corporations to play by the same rules as the rest of us, and for them to invest in the U.S. instead of shifting jobs and profits overseas.

If you’re a person who cares about fairness, join the 16,000 people who have already said they’re standing with Sen. Levin to try to pass this bill.