BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AJR 12 - Block
Amended: June 3, 2010
Hearing: June 23, 2010 Fiscal: No
SUMMARY: Requests Congress to Close Corporate Federal Tax
Loopholes Currently Allowing the Sheltering of
Income in Offshore Tax haven Countries
EXISTING FEDERAL LAW provides that all income of a
corporation regardless of source is taxable, and allows a
credit for taxes paid to foreign countries. Foreign
corporations only file returns in the United States for
income effectively connected with a trade or business in
the United States, or income from specified U.S
investments, called noneffectively connected income.
EXISTING FEDERAL LAW, the Hiring Incentives to Restore
Employment Act, signed by President Obama in March, 2010,
enacted changes in the following areas:
1. Reporting on certain foreign accounts
2. Repeal of certain foreign exceptions to registered
bond requirements
3. Disclosure of information with respect to foreign
financial assets
4. Penalties for underpayments attributable to
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undisclosed foreign financial assets
5. Modification of statute of limitations for
significant omission of income in
connection with foreign assets
6. Reporting of activities with respect to passive
foreign investment companies
7. Secretary of the Treasury permitted to require
financial institutions to file certain returns related
to withholding on foreign transfers electronically
8. Clarifications with respect to foreign trusts which
are treated as having a
United States beneficiary
9. Presumption that foreign trust has United States
beneficiary
10. Uncompensated use of trust property
11. Reporting requirement of United States owners of
foreign trusts
12. Minimum penalty with respect to failure to report
on certain foreign trusts
13. Substitute dividends and dividend equivalent
payments received by foreign
persons treated as dividends
EXISTING STATE LAW determines the portion of a
multi-state or multi-national corporation's net income is
taxable by California using "formulary apportionment,"
under which three apportionment factors are computed: a
property factor (the amount of property the corporation has
in California divided by it's total (nation-wide or
world-wide) property); a payroll factor (California payroll
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divided by total payroll); and a sales factor (California
sales divided by total sales). The actual amount of income
apportioned to California using this formula is computed by
adding the payroll factor, the property factor and twice
the sales factor, then dividing that sum by four (the
so-called "double-weighted sales factor"). The formula
serves to calculate a corporation's tax due in an amount
equal to its demand on public services, assuming that
taxpayers derive profits from the effective marshalling of
labor and capital in the presence of a market. The
formula comes from the Universal Division of Tax Purposes
Act (UDITPA), a model statute developed by the National
Conference on Uniform State Laws in 1957. California
adopted UDITPA and the apportionment formula in 1966 (AB
11, Petris), and double weighted the sales factor in 1993
(SB 1176, Kopp). Notwithstanding the above, taxpayers may
annually elect to use the above three-factor,
double-weighted sales or sales factor-only apportionment
starting in the 2010 taxable year (ABx3 15, Krekorian and
SBx3 15, Calderon, 2009).
THIS RESOLUTION makes a request from the Legislature
to the President and Congress to close corporate federal
tax loopholes currently allowing the sheltering of income
in offshore tax haven countries, and instead, promotes
transparency, cooperation, and tax compliance. The measure
specifically cites Senator Carl Levin's Stop Tax Haven
Abuse Act, introduced March 2, 2009. The resolution
directs the Chief Clerk of the Assembly to distribute the
resolution to specified individuals.
FISCAL EFFECT:
According to Committee Staff, AJR 12 has no direct
fiscal costs.
COMMENTS:
A. Purpose of the Bill
The author provides the following statement:
AJR 12 - Block Page 4
AJR 12 Would request that the President and Congress
of the United States enact legislation the closes
federal tax loopholes which corporations use to
shelter taxable income in overseas tax haven
countries. This resolution encourages transparency,
cooperation, and tax compliance by corporations, and
would allow for states to see added benefit from
recaptured income wrongly stored overseas.
B. The Stop Tax Haven Abuse Act
While AJR 12 is not specific about the exact action
the Legislature wants Congress to enact, it does cite
Senator Levin's Stop Tax Haven Abuse Act (S. 506), which
was also introduced in the House (H.R. 1265, Doggett), some
of which was enacted as part of the HIRE Act listed above.
Senator Levin states that "tax abuses rob the U.S. treasury
of an estimated $100 billion each year, reward tax dodgers
using offshore secrecy to hide money, and offload the tax
burden onto the backs of middle class families." Some of
the remaining parts of S. 506 would:
Codify the Economic Substance Doctrine - Currently,
case law allows the IRS to disallow deductions or
losses that have no substantive economic effect. S.
506 codifies this body of case law into federal law.
Create the Initial Tax Haven List - S. 506 names 34
different countries as tax havens, and allows the
Secretary of the Treasury to add and delete
jurisdictions. A rebuttable presumption would exist
that a taxpayer shifted assets to an entity in one of
these counties was in control of that entity, that the
assets were taxable income, and that a financial
account with a balance of more than $10,000 in one of
these countries must be reported to the IRS. The IRS
could reclassify certain foreign corporations located
in these jurisdictions as U.S corporations.
Make Dividend-Based Payments Subject to U.S.
Withholding - closes loopholes allowing equity swaps
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and stock loans used to evade tax.
Strengthen Tax Shelter Penalties, Prohibit Tax
Shelter Patents, and Prohibit Contingency Fee
Arrangements - these measures deter abusive tax
shelters by limiting accountants', tax attorneys', and
firms' profitability when offering tax shelter
strategies.
These provisions have not been enacted. Critics state
that these steps will be ineffective because foreign
enforcement is very difficult, the measure's definition of
tax haven is ambiguous and unworkable, fails to account for
other Countries' interests, and that firms will simply
migrate from tax havens to countries that have preferential
tax regimes if Congress enacts the measure<1>. Instead,
they argue that the U.S. should offer these tax haven
jurisdictions cash for information, and create a
transnational, multilateral institution with powers
necessary to end offshore tax evasion.
C. Bad Boys, Bad Boys
In recent months, federal authorities have chalked up
some significant victories against individuals, firms and
countries that seek to shelter income from U.S taxation,
including:
Liechtenstein and Switzerland agreed to enter into
Tax Information Exchange Agreements with the United
States in line with the model agreement developed by
the Organization for Economic Cooperation and
Development (OECD). Luxembourg, Austria, Andorra,
Monaco and others are pledging to do the same.
UBS entered into a deferred prosecution agreement
with the United States, agreeing that it conspired
with clients to defraud the U.S. government out of tax
----------------------
<1> Todero, Anthony. "The Stop Tax Haven Abuse Act: A
Unilateral Solution to a Multilateral Problem", Minnesota
Journal of International Law. Vol 19:1 (2009.
AJR 12 - Block Page 4
revenues. UBS paid a $750 million fine, and agreed
not to open client accounts without alerting the
Internal Revenue Service. UBS agreed to supply 4,500
names of clients to the IRS. The Swiss parliament
ratified the release of the names on June 17th.
The OECD announced that all 87 countries in its
Global Forum on Transparency and Information Exchange
agreed to adopt the OECD model agreement on tax
information sharing.
U.S. authorities have initiated a voluntary program
allowing U.S taxpayers amnesty from criminal
prosecution in exchange for coming forward and paying
back taxes.
Support and Opposition
Support:
Oppose:
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Consultant: Colin Grinnell