Filed under: Financial Reform, Global Economy, U.S. Government, Tax Cuts, Tax Laws
So far a compromise is nowhere in sight. That's just fine for a group of organizations working under the common name Financial Accountability & Corporate Transparency Coalition. They claim that two of the proposed extensions are nothing more than rampant corporate giveaways that let multinationals avoid taxes by stashing profits overseas.
Forget $45 billion. The two extensions together are "loopholes" that could cost the federal government up to $80 billion in tax revenue over ten years, according to Jaimie Woo, a tax and budget associate with U.S. Public Interest Research Group, a member of FACT. "The tax breaks are [nominally] meant to stimulate the economy and business, but at the end of the day these two loopholes really don't," Woo said in an interview with DailyFinance. "The reason they're put back in is because of these serious corporate lobbying effort."
CFC Look-Through Rule
The first provision is called the CFC look-through rule, which provides exceptions in laws that govern controlled foreign corporations, or CFCs. These wholly owned subsidiaries of American companies are set up to operate in other countries. Under the law, so-called active income of CFCs, like money made selling services or goods, is only recognized as taxable income by the U.S. parent when that money is brought back to this country, or repatriated. Passive income from interest, royalties and licenses is immediately recognized and taxable.
The look-through rule says that certain passive income, such as rents or royalties on patents and other intellectual property, is treated differently and does not have to be immediately taxed. The rule allows companies to create complex structures, such as an Irish subsidiary that owns intellectual property initially created by the American firm, leases it back for a substantial royalty payment, and then pays a large cut to a division in Bermuda that has no corporate taxes at all. The Irish CFC gets to deduct that payment under Ireland's tax laws. "Now the income isn't taxed anywhere," Woo said.
Active Financing Exception
The active financing exception is a rule specially written for the financial services industry. Interest on money lent by CFCs would normally be considered passive income and something that would immediately be taxable for U.S.-based corporations. Because the interest and fees, the primary income of institutions like banks, are now treated as passive income, all that profit can be held overseas as well and not taxed.
"Our position is no corporate should be allowed to defer those taxes offshore until they repatriate the money back," Woo said. "All the companies get that as a special giveaway. These American corporations use American infrastructure, education, our economy, and then manipulate a lot of their CFCs and tax bills. They should pay the taxes they owe."
As DailyFinance has previously reported, in comparison with tax avoidance techniques like these, widely criticized corporate inversions are chump change.
"We have a system in place presently that shelters companies from U.S. taxes on their foreign earnings, and through the system we also have a continuing exportation of American jobs," said Martin Press, a tax attorney with the law firm Gunster, Yoakley & Stewart. "The Democrats and the Republicans have tried to make some attempts at reform in this area, but many of these attempts are more political than corrective. What the United States needs is a really thoughtful review of our policies in regard to American companies operating overseas, and we're not politically at that point yet."
For close to a decade, Democrats and Republicans have agreed to kick this particular can down the road. With the amount of lobbying pressure the business community brings, even with all the acrimony in Washington at the moment, chance are eventually the can will again sail off into the horizon.