A New Front in the Battle Against Tax Havens

By James J. Tobin, Esq.

Ernst & Young LLP, New York, NY


A rather surprising new member has recently climbed aboard the
anti-tax-haven bandwagon: the state of Oregon.  Oregon passed
legislation applicable to taxable years beginning on or after
January 1, 2014, which expands the scope of its water's-edge
unitary regime to include all income or loss, and the appropriate
apportionment factors, of any affiliated (80%-or-more-owned by vote
and value) entity incorporated in any of 39 jurisdictions
specifically listed in the new statute.2 The list, set out
below, seems largely based on work done years ago by the OECD in
listing tax havens and on the tax haven lists used in various
federal legislative proposals over the last several years, by
Senator Levin among others.

The list approach caught me a bit by surprise as in my
experience tax haven or black list systems have gone out of favor
in many countries due to the difficulty of keeping a list current,
which requires keeping up with both legislative developments and
developments in the geo-political landscape around the world. 
Today we more commonly see examples of tax provisions based on
either white lists of "good countries" or more objective tax rate
comparison tests, rather than attempts to keep up to date with the
perceived "bad" actions of countries around the world.  A good
- or perhaps it would be more accurate to say a bad - example of
this newer approach is the very recent Mexican legislative proposal
which would have disallowed deductions for payments to foreign
related parties that were subject to tax on such amounts at a rate
less than 75% of the Mexican statutory rate. Fortunately, as this
article was going to press, this pending proposal was moderated
significantly during the Mexican legislative process, although
there are still aspects that are a cause for concern. And with
respect to list approaches, even if there is an appetite to make
the effort to maintain a "bad country" list, bad is in the eye of
the beholder, as evidenced by the multiple, slightly different
lists that have been used in various federal legislative proposals
over the last several years.

The list of the 39 jurisdictions contained in the Oregon law is
as follows:Andorra, Anguilla, Antigua and Barbuda, Aruba, the
Bahamas, Bahrain, Barbados, Belize, Bermuda, the British Virgin
Islands, the Cayman Islands, the Cook Islands, Cyprus, Dominica,
Gibraltar, Grenada, Guernsey-Sark-Alderney, the Isle of Man,
Jersey, Liberia, Liechtenstein, Luxembourg, Malta, the Marshall
Islands, Mauritius, Monaco, Montserrat, Nauru, the Netherlands
Antilles, Niue, Samoa, San Marino, Seychelles, St. Kitts and Nevis,
St. Lucia, St. Vincent and the Grenadines, the Turks and Caicos
Islands, the U.S. Virgin Islands and Vanuatu.3

I suspect life is a bit tough for tax havens or perceived tax
havens these days. There are huge pressures for transparency and
disclosure by offshore funds, etc. The OECD has been focused on tax
havens for many years and, with an extensive global network of tax
information exchange agreements now in place, most tax authorities
can largely claim victory with respect to undeclared assets and
income. The OECD has effectively ended its tax haven list with its
conclusion that all jurisdictions originally on the list now have
agreed to effective information-sharing provisions. (The original
OECD project was redirected in 2001 to focus on transparency and
not on tax rates or preferential regimes.)

On the corporate tax side, the focus is less on defining a "tax
haven" as such but rather on addressing the inappropriate shift of
profits to low-tax entities, as we see from the whole spectrum of
Actions in the recent OECD Base Erosion and Profit Shifting (BEPS)
comprehensive action plan, which I commented on in my prior
commentary. Nonetheless, jurisdictions that are traditionally
thought of as tax havens do have a clear image problem and they
continue to be the target of specific anti-abuse legislation in
various countries around the world.

Interestingly, France last month published a list of
jurisdictions it considers "uncooperative tax havens," with the
consequence to taxpayers in the listed jurisdictions being a 75%
withholding tax on all capital flows from France. The French list,
however, only contains 10 countries (Bermuda, BVI, Botswana,
Brunei, Guatemala, Jersey, the Marshall Islands, Montserrat, Nauru,
and Niue), four of which (Botswana, Brunei, Guatemala, and
Montserrat) are not (yet) on the Oregon list. So there's a lot to
keep track of. And the lists include several nice targets for some
field research, for which I will be happy to volunteer as winter
approaches here in New York.

I have to wonder why Oregon would feel the need to act with
respect to tax havens, thus taking on the burden of trying to keep
up with the evolving political and global tax issues inherent in
any tax haven designation. And it is not the first U.S. state to do
so, as Montana, Alaska, and West Virginia each has implemented
similar legislation, although it is fair to say that none of them
is a major multinational hub. Interestingly, the California
legislature considered a similar proposal several years ago and
held hearings on the issue, but decided not to get on the

Given the very comprehensive OECD BEPS action plan and the
committed participation of the United States, from the President
(as evidenced by the G8 and G20 leaders' communiques) to the
Treasury Department (as evidenced by its active involvement in the
various OECD working groups), one might have thought it a good time
for a state to defer to the federal government and its role of
ensuring that the U.S. corporate tax base is protected. The state
could rely on Treasury and the IRS to get the size of the pie right
and focus its energy on the size of its slice of that pie. But
apparently that confidence in the efforts of the federal government
is a bit lacking in Oregon, and thus the unanimous passage of this
self-protective legislation.

Now that the legislation has been enacted, what seems to be the
effect of the new Oregon rules? It seems clear that if a U.S.
multinational has an 80%-owned controlled foreign corporation (CFC)
incorporated in a listed jurisdiction, it will have to adjust its
Oregon group's combined taxable income for the profit or loss of
that entity and also will compute apportionment factors taking into
account those of the tax haven CFC. This presumably could produce
either a good or a bad result - the provision is not an anti-abuse
rule so it could result in reduced Oregon tax. It's a pretty short
statutory provision and while I'm not familiar with the broader
Oregon corporate tax regime it does seem to me to raise some
complex additional questions, problems, or opportunities which will
need to be addressed in the implementation.

Questions that come to mind include:

  •   Are tax haven affiliates of foreign parent companies also
    to be included in the unitary base? Because there would not be an
    includible U.S. parent company for the defined affiliated group, I
    would hope not.  Policywise, it would make little sense for
    tax haven entities of a foreign parented group to be included. But
    it's not clear to me from the very high level language in the
    legislation how such entities are to be treated.
  •   Also not clear to me is how "check-the-box" foreign
    disregarded entities are to be treated. I don't see any obvious
    basis for excluding them, given that the legislation keys off of
    foreign incorporation.  However, it seems to me that following
    the federal standards would be the logical approach (assuming logic
    has relevance here).
  •   Because the test for whether a corporation incorporated
    in a tax haven jurisdiction is includible in the Oregon combined
    return is the location of foreign incorporation, if federal
    check-the-box rules are not applied, presumably reverse hybrids
    formed as foreign partnerships would not be covered.
  •   Also, because the test is foreign incorporation,
    presumably tax residence in a foreign country is not relevant. For
    example, due to flexible corporate law provisions, U.K. groups
    often use a Jersey-incorporated but U.K.-tax-resident company
    structure for commercial reasons. Despite such an entity being
    fully subject to U.K. tax, it would seem to fall within the Oregon
    tax haven definition.
  •   No active business exception is provided in the
    legislation. Therefore, true insurance companies in Bermuda and
    real hotel operations in nice beach locations would be covered.
    Perhaps the fact that the apportionment factor of those entities
    would also be included in the Oregon unitary calculation would
    moderate any distortive effects. But one still wonders what the
    policy rationale is for covering active tax haven companies.
  •   In addition, the required inclusion of a tax haven entity
    is not conditioned on there being any connection or relevance to
    the group's U.S. tax base. So a perceived base erosion concern does
    not seem to be the driver for the legislation. Rather, the driver
    seems to be the mere existence of a tax haven entity. It also seems
    there could also be a double tax consequence if the tax haven
    entity is a CFC for which a Subpart F amount was already included
    in the U.S. taxable income of the group.
  •   The legislation requires the inclusion of tax haven
    corporation profits or losses - which seems fair, I guess. 
    But if there is a profit in a tax haven CFC and a loss in a CFC
    which is not incorporated in a tax haven, there would be no offset
    because Oregon, which has what is effectively a water's-edge
    unitary system, essentially prohibits any foreign corporation
    (other than one incorporated in a tax haven) from being included in
    the Oregon consolidated report.  So here's a possible trap for
    the unwary! (Or perhaps the entire legislative provision is itself
    a trap for the unwary.) It would not seem too difficult to arrange
    for a loss in a tax haven CFC isolated from profit in a
    non-tax-haven CFC (particularly given that the statutory listing
    turns on the country of incorporation rather than the country of
    tax residence). Thus, this may represent a potential planning
    opportunity for corporations with a material Oregon tax base worth
    the effort. At a minimum, the Oregon tax savings could help pay for
    the additional costs of compliance with this new statute.
  •   Finally, is this Oregon legislation even constitutional?
    The Commerce Clause of the U.S. Constitution reserves to the
    federal government the ability to act with respect to foreign
    commerce. While the case law is murky in this specific area, the
    U.S. Supreme Court has held in a number of decisions that the
    states cannot impose select obligations on foreign business
    activities that are not uniformly applied to domestic business
    activities as well.4 It seems to me
    questionable that a state can single out business entities
    organized under the laws of specific countries for special tax
    treatment under their tax laws without direction and coordination
    with the U.S. federal government.5

No doubt there are many more issues and open questions that can
and will be posed as this new Oregon provision is applied going
forward. If the state of Oregon is serious about having an
effective rule in this area, it seems to me there is a lot of work
to do to provide detailed guidance, to monitor the geo-political
environment to keep the tax haven list up to date, to consider the
unintended overreaching aspects of this very high level provision
on tax havens, and to figure out how best to enforce what has been
wrought. As an international tax guy, I would suggest a better use
of resources would be to focus on being sure to get the right
Oregon allocation of U.S. taxable profit of a group and leave the
global policy and enforcement matters to the U.S. Treasury
Department and the IRS, the federal agencies that have that mandate
and have lots more (but maybe also not enough) resources to focus
on that agenda.

This commentary also will appear in the November 2013 issue
of the
 Tax Management International Journal.
 For more information, in the Tax Management Portfolios,
see Latcham, 1100 T.M.
, Income Taxes: Definition of a Unitary


  1 The views expressed herein are those of the
author and do not necessarily reflect those of Ernst & Young

  2 Ore. H.B. 2456, §8 amending Ore. Rev. Stat.

  3 Ore. Rev. Stat. §317.715(2)(b).


  4 See, e.g.,Kraft Gen. Foods v. Iowa Dep't of
Revenue & Finance
, 505 U.S. 71 (1992), and Japan Line,
Ltd. v. County of Los Angeles
, 441 U.S. 434 (1979).

  5 The U.S. Supreme Court has clearly stated that
state taxation rules can apply to foreign businesses. See,
 Container Corp. v. Franchise Tax Board,
463 U.S. 159 (1983), Barclays Bank PLC v. Franchise Tax
., 512 U.S. 298, 304 (1994). But we haven't yet seen the
case where the U.S. Supreme Court addressed state intrusion into
relations with specific countries identified in a state