Corporate Close-Up: State Designated Tax Havens – A Boon or Bane of Globalization?

The world has become a smaller place for some of the most well-known companies and taxing jurisdictions that are seeking to collect what they believe is their fair share of revenue.  According to the U.S. Public Interest Research Group Education Fund ( PIRG ), offshore tax havens cost states a total of $20.7 billion in lost tax revenue. A growing number of states are choosing to enact a statutory list of tax havens in order to recoup corporate tax revenue. So far, Montana, Oregon, and most recently Maine, have introduced legislation that is designed to combat income shifting techniques that exploit ambiguities in the tax code.

However, some argue that state black lists of tax havens are an overly blunt instrument that can result in double taxation.

For purposes of determining tax havens, most states refer to the annual Tax Transparency Report, which is a list of countries that the OECD deems to be non-compliant with global tax transparency and exchange of information procedures. Montana, Oregon, and Maine have chosen to enumerate their own list of foreign jurisdictions that are considered tax havens for corporate tax purposes. These states require multinational corporations to make the water’s edge election to treat income attributable to known tax havens as U.S. income. According to PIRG, Oregon has generated an extra $18 million this year in corporate tax revenue and Montana has raised approximately $40 million in revenue since enacting the statute. Maine expects to generate an additional $10 million over the next two years, PIRG noted.

According to a U.S. PIRG Survey, twenty other states and the District of Columbia have adopted combined reporting statutes, but have chosen not to enact legislation that names foreign jurisdictions as tax havens to be accounted for in corporate combined reports. Without taking this additional step, these states are unable to close the water’s edge loophole and corporations are still able to avoid paying taxes by shifting their U.S. profits to tax havens through foreign subsidiaries.

While U.S. PIRG may staunchly advocate for states enacting a list of tax havens to close the water’s edge loophole, not everyone is in favor of this approach. The Council O n State Taxation (COST) has warned against this “black-listing” approach to tax compliance. COST maintains that it is bad tax policy to brand certain foreign jurisdictions as “tax havens,” because it may result in double taxation of legitimate business activities. COST also maintains that not all companies incorporated in so-called tax havens are engaging in abusive tax avoidance practices. The black-listing approach is overly broad and there are more precise methods of addressing the problem. Furthermore, COST notes that both the Multistate Tax Commission (MTC) and California have rejected this approach as bad policy.

By Radha Mohan

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn : Is it good tax policy for states or an unnecessary burden for multinational corporations for states to create their own list of tax havens?

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