Citizen Works

Offshore Tax Haven and Tax Shelter Reform
Legislative Overview

Stemming the tide of U.S. companies reincorporating in offshore tax havens remains an important issue for many in Congress. At a time of national sacrifice and rising deficits, a few dozen corporations are taking advantage of a loophole that allows them to avoid potentially tens of millions of dollars in annual taxes by headquartering in a tax haven but keeping their operations in the United States.

A number of Senators and Congressmen, mostly Democrats (but a few notable Republicans, like John McCain (R-Ariz.) and Charles Grassley (R-Iowa)) have spoken out against this "unpatriotic" practice and urged legislation to stop these corporate tax dodgers. For them, the issue tends to be pretty straightforward -- at a time of war, U.S. companies shouldn't be abandoning America and absconding to tax havens.

The business response, from the U.S. Chamber of Commerce, is that these companies are responding to a burdensome tax code and are only doing what they need to do to stay competitive globally (and preserve jobs). Some tax-cutting conservatives (Like House Ways and Means Committee Chair Bill Thomas (R-Calif.)) have pointed to the reincorporation trend as evidence that corporations are taxed too heavily. (As a point of reference: in 1940, corporations and individuals roughly split the U.S. tax bill; today corporations pay just 13.7%, according to Business Week)

Currently, the leading proposal to curb corporate expatriation is a bill called the Corporate Patriot Enforcement Act, which essentially denies tax benefits to companies that reincorporate in offshore tax havens. In the House, the bill was introduced by Rep. Richard Neal (D-Mass.) as HR 737, with 152 co-sponsors and 187 signatures for a discharge petition (to bring the bill to a floor vote). The bill remains stuck in Thomas's Ways and Means Committee. The Senate version (S. 384) was introduced by minority whip Harry Reid (D-Nev.) with three co-sponsors. That bill is stuck in the Senate Finance Committee. The Joint Committee on Taxation has estimated this bill would recover $4 billion in lost tax revenue over 10 years.

Sen. Evan Bayh (D-Ind.), meanwhile, has introduced a similar bill (S. 513), which would also recover $4 billion from offshore tax avoidance. Bayh's bill changes the definition of what constitutes a U.S. company by linking it to the location of the company's shareholders rather than their post office box address. Bayh's bill also establishes new disclosure requirements so that companies seeking to relocate must provide basic information to shareholders regarding the nature of the move. Companies must also provide the Securities and Exchange Commission (SEC) with a list of shareholders that voted for the expatriation, which would be available to the public through the Freedom of Information Act. Bayh's bill remains in committee.

Another approach is to ban government contracts for companies that incorporate in offshore tax havens. Rep. Neal estimated that corporate expatriates got $848.7 million in government contracts, $628.9 of them Defense- and Homeland Security-related. This was the approach taken last year by the late Senator Paul Wellstone, who supported an amendment to the defense spending bill to ban contracts for tax traitors. The amendment passed, but was later removed in secretive conference hearings. The House also passed a similar provision with an overwhelming 318-110 vote, only to meet the same conference hearing fate. This time around, Sen. Mark Dayton (D-Minn.), honored Wellstone's memory by introducing the Wellstone Memorial Renegade Corporation Act of 2003 (S. 134), which would amend the Homeland Security Bill to ban contracts with corporate expatriates (unless it goes counter to national security). Dayton's bill is in committee.

Though the offshore reincorporation trend offers a stark image of corporate tax avoidance, much of the lost IRS revenue comes from more mundane tax shelters that result from dedicated lawyers and accountants scouring the sprawling tax code for loopholes. Corporations then use these loopholes to represent their finances one way to investors and another way to the IRS. In 1998 (the most recent year for which data has been analyzed), the difference between book accounts and tax accounts was $159 billion. A recent Joint Committee on Taxation report on Enron revealed that despite claiming $2.3 billion in profit between 1996 and 1999, Enron also managed to report a $3 billion tax loss to the IRS.

One way to approach this issue is to mandate disclosure, so that investors and the public can analyze these differences in hopes of closing the gap and assessing the actual health of a corporation's business. . In that vein, Rep. Lloyd Doggett (D-Texas) has introduced the Corporate Accountability Tax Gap Act of 2003 (HR 1556), which essentially requires corporations to disclose the same information to the IRS and shareholders.

Doggett has also introduced the Abusive Tax Shelter Shutdown and Taxpayer Accountability Act of 2003 (HR 1555), which strengthens the penalties and enforcement mechanisms for the IRS to crack down on individual and corporate tax shelter abuse and could save as much as $15 billion over ten years. Essentially, the bill clarifies the judicial doctrine of "economic substance," a doctrine that judges have used to challenge transactions that have no economic purpose other than to avoid taxes. In recent years, however, the use of this doctrine has faded.

Most of the same tax shelter provisions have been incorporated into Senator Grassley's CARE Act (S. 476), a bill designed mostly to make it easier to donate to charities. That bill passed out of the Senate Finance Committee and is ready for a floor vote.

On the subject of corporations avoiding more taxes, there's a bill (The Homeland Investment Act, HR 767, introduced by Rep. Phil English (R-Penn.)) that would allow corporations to avoid paying taxes on deferred foreign earnings for a year. Essentially, companies keep overseas profits overseas because as soon as they bring them home, they have to pay taxes on them. English's bill reduces the tax rate from 35% to 5.25% for a year, which he says will bring $135 billion of foreign earnings here. But some fear this could just wind up being a free ride for a lot of corporations.

Last Updated April 8, 2003