"Tax deferrals benefit only a narrow slice of the business community, are expensive, and discourage investment in America".

GAO Points to Problems with Corporate Tax Deferral

WASHINGTON, D.C. (NOVEMBER 7, 2013)

BY MICHAEL COHN

A new report from the Government Accountability Office examines corporate tax deferral, highlighting the distortionary impact on the economy.Corporate tax deferral expenditure confers the benefit of effectively reducing a multinational corporation’s taxes by delaying the taxation of certain income of foreign subsidiaries of U.S. corporations until it is repatriated to the U.S. parent as dividends. The GAO was asked by Congress to examine issues related to tax expenditures for corporate tax deferral. The report uses GAO's tax expenditures evaluation guide to determine what is known about the deferral of income for controlled foreign corporations; deferred taxes for certain financial firms on income earned overseas; and the graduated corporate income tax rate. The GAO combined the two deferral provisions for evaluation purposes.

“This report is another reminder that any serious budget agreement must control tax expenditures,” said Doggett. “Multinationals are already advantaged over domestic businesses. Eliminating even more taxes on their profits abroad will only promote shipping more jobs abroad. Tax deferrals benefit only a narrow slice of the business community, are expensive, and discourage investment in America. ”

Corporate Tax LegislationTo address international corporate tax avoidance,  a package of three bills have been introduced that would close loopholes and ask multinationals to pay a more fair share in federal taxes—the Stop Tax Haven Abuse Act, the International Tax Competitiveness Act, and the Fairness in International Taxation Act. 

The Stop Tax Haven Abuse Act (H.R. 1554) aims to close several different loopholes by deterring the use of tax havens for tax evasion and strengthening the enforcement of our tax laws. One provision would prevent U.S.-run corporations from avoiding U.S. taxes by filing a piece of paper abroad and pretending to be foreign. The bill would also require SEC-registered corporations to report annually on the number of employees, sales, financing, tax obligations, and tax payments on a country-by-country basis, shedding more light on the extent of use of tax havens. This bill also provides for additional penalties for failing to disclose offshore holdings and for promoting abusive tax shelters.

The International Tax Competitiveness Act (H.R. 1555) addresses the practice of developing a trademark, patent, or copyright in the U.S. and then transferring that intellectual property abroad to avoid taxes on the massive amounts of income generated by it. This bill would treat income from the U.S. intellectual property as U.S. income and tax it accordingly.

The Fairness in International Taxation Act (H.R. 1556) would end the current practice of treaty shopping to avoid U.S. taxes. The United States has tax treaties with a number of trading partners that reduce the amount of taxes that a U.S. based entity owes on interest and royalties paid to a foreign parent. Since many of these foreign parent companies are set up in tax havens, these companies now bypass U.S. tax by routing the payment through a tax-treaty country that then just transfers the funds to the tax-haven parent. This bill would end that legal fiction and say that you only get the tax-treaty discount if the parent company is actually located in a tax-treaty country.

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