Sanders Announces Bill to Reduce Tax Haven Abuse

"At a time when we have a $18.2 trillion national debt and an unsustainable federal deficit; at a time when many of the largest corporations in America are paying no federal income taxes; and at a time when corporate profits are at an all-time high, it is past time for corporate America to pay their fair share in taxes so that we can create the millions of jobs this country needs," Sanders said at a Capitol news conference.

Eighty-three of the Fortune 100 companies in the United States have used offshore tax havens to lower their taxes, according to the most recent Government Accountability Office study.

Sanders' bill and a companion measure introduced today in the House by Rep. Jan Schakowsky (D-Ill.) would yield more than $590 billion in revenue over the next decade, according to the Joint Committee on Taxation.

"Over the past 30-40 years, virtually every time Americans have been asked to make 'tough choices,' it has resulted in disproportionate harm to low- and middle-income individuals and families," said Schakowsky. "Cuts to programs that help Americans get ahead and stay ahead have been significant, while tax breaks have been handed out like candy to captains of industry and the behemoth corporations they run. Most perversely, these tax breaks have incentivized moving revenue and jobs overseas. It's time that we end that skewed system, and the Stop Corporate Tax Dodging Act would help us do that."

Sanders' proposal would generate more than $590 billion in revenue over the next decade, experts say.

The ranking member of the Senate Budget Committee, Sanders announced the bill introduction during a news conference with groups releasing a report on how the tax shelter loophole has harmed many small businesses.

The bill also would remove tax code incentives for U.S. companies to ship American jobs and factories abroad -- tax breaks which have contributed to the loss of millions of manufacturing jobs and the closure of some 60,000 American factories since 2000. "That has also got to change," Sanders said.

Under current law, U.S. corporations are allowed to defer or delay U.S. income taxes on overseas profits until the money is brought back into the United States. U.S. corporations are also provided foreign tax credits to offset the amount of taxes paid to other countries. Under the legislation, corporations would pay U.S. taxes on their offshore profits as they are earned. The legislation would take away the tax incentives for corporations to move jobs offshore or to shift profits offshore because the U.S. would tax their profits no matter where they are generated.

Sanders was joined at the news conference by Bob McIntyre, executive director of Citizens for Tax Justice, Jamie Woo of Public Interest Research Group, and Bryan McGannon, policy director for the American Sustainable Business Council.

A detailed summary of Sanders bill can be found here.

1. Ending the rule allowing American corporations to defer paying federal income taxes on profits of their offshore subsidiaries. (Section 2 of the bill.)

Current law allows American corporations to defer paying U.S. income taxes on profits of their offshore subsidiaries until those profits are "repatriated" (officially brought to the U.S.) which may not happen for years, if ever. As a result, American corporations would rather report foreign profits than domestic profits to the I.R.S. Deferral therefore creates an incentive to either move operations and jobs to a lower-tax country, or to use accounting gimmicks to make U.S. profits appear to be earned in a lower-tax country.

The Congressional Research Service has indicated that the cost of this tax avoidance to the U.S. Treasury approaches or exceeds $100 billion annually. The Corporate Tax Dodging Prevention Act would end this tax avoidance by ending the rule allowing deferral of U.S. income taxes on offshore profits.

Under this legislation, American corporations would still be allowed a credit that reduces their federal income tax liability by an amount equal to income taxes paid to foreign governments on these profits. This foreign tax credit exists under current law and already prevents double-taxation of profits.

2. Closing loopholes allowing American corporations to artificially inflate or accelerate their foreign tax credits. (Section 4 of the bill.)

When U.S. corporations earn profits overseas, taxes paid to the foreign country are credited against U.S. tax liabilities, in order to avoid double-taxation. Under current rules and tax planning strategies, corporations are allowed to claim foreign tax credits for taxes paid on foreign income that is not subject to current U.S. tax (meaning foreign tax credits in excess of what is needed to avoid double-taxation). As a result, companies are able to use such credits to pay less tax on their U.S. taxable income than they would if it was all from U.S. sources -- providing them with a competitive advantage over companies that invest in the United States. Under the Corporate Tax Dodging Prevention Act, foreign tax credits generated by profits earned in one country could not be used against U.S. income taxes on profits earned in another country.

3. Preventing American corporations from claiming to be foreign by using a tax haven post office box as their address. (Section 5 of the bill.)

Some companies claim to be based in a tax haven like the Cayman Islands even though their presence in these locations consist of nothing more than a post office box and their actual staff is still located in the U.S. Today, a single five-floor office building in the Cayman Islands is claimed as the address for over 18,000 corporations, demonstrating how easy it is for companies to pretend to be based there. Under the Corporate Tax Dodging Prevention Act, a corporation could not claim to be foreign if their management and control operations are primarily located in the U.S.

4. Preventing American corporations from avoiding U.S. taxes by inverting. (Section 7 of the bill.)

Another way American corporations avoid U.S. taxes is by inverting. In an inversion, an American corporation acquires or merges with a (usually much smaller) foreign company and then claims that the newly merged company is a foreign one for tax purposes -- even though the majority of the ownership is unchanged and little or no personnel or operations have actually moved offshore.

Under the Corporate Tax Dodging Prevention Act, the U.S. would continue to tax such a company as an American corporation so long as it is still majority owned by the owners of the American party to the merger or acquisition.

5. Prevent foreign-owned corporations from stripping earnings out of the U.S. by manipulating debt expenses. (Section 6 of the bill.)

Foreign controlled multinational corporations sometimes load up their U.S. affiliates with excessive debt as a way to shift profits out of the U.S. The foreign-owned U.S. affiliates then make interest payments to foreign companies that result in deductions that reduce or wipe out their U.S. income for tax purposes. Often the loans are made between commonly owned companies, which means they are really an accounting fiction and the only real consequence is a lower U.S. income tax bill.

Under the Corporate Tax Dodging Prevention Act, a U.S. affiliate of a foreign-owned multinational corporation would not be allowed to deduct interest expenses that are disproportionate to its share of income of the entire corporate group (entire group of corporations owned by the same parent company). The U.S. affiliate could choose instead to be subject to a different rule limiting deductions for interest payments to ten percent of its income.

6. Preventing large oil companies from disguising royalty payments to foreign governments as foreign taxes. (Section 3 of the bill.)

U.S. taxpayers are taxed on their income worldwide, but are entitled to a dollar-for-dollar tax credit for any income taxes paid to a foreign government. U.S. oil and gas companies have been disguising royalty payments to foreign governments as foreign taxes in order to claim foreign tax credits. The Corporate Tax Dodging Prevention Act would close this loophole which amounts to a U.S. subsidy for foreign oil production for the five largest oil companies.