BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | AJR 12|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: AJR 12
Author: Block (D)
Amended: 06/03/09 in Assembly
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-0, 6/23/10
AYES: Wolk, Alquist, Padilla
NO VOTE RECORDED: Walters, Ashburn
ASSEMBLY FLOOR : 49-27, 7/13/09 - See last page for vote
SUBJECT : Offshore tax haven jurisdictions
SOURCE : Author
DIGEST : This resolution requests that the President and
the Congress of the United States enact legislation that
closes the corporate federal tax loopholes currently
allowing the sheltering of income in offshore tax haven
countries, and, instead, promotes transparency,
cooperation, and tax compliance.
ANALYSIS : 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.
CONTINUED
AJR 12
Page
2
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 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
CONTINUED
AJR 12
Page
3
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 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 AB 11,
(Petris), of 1966, and double weighted the sales factor in
SB 1176 (Kopp), Chapter 946, Statutes of 1993.
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. This
resolution specifically cites Senator Carl Levin's Stop Tax
Haven Abuse Act, introduced March 2, 2009. This resolution
directs the Chief Clerk of the Assembly to distribute the
resolution to specified individuals.
Comments
The author's office states, "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
CONTINUED
AJR 12
Page
4
income wrongly stored overseas."
The Stop Tax Haven Abuse Act . While this bill 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: (1) codifies 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; (2) creates 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 exists 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; (3) makes Dividend-Based Payments Subject to
U.S. Withholding - closes loopholes allowing equity swaps
and stock loans used to evade tax; (4) strengthens Tax
Shelter Penalties, prohibits Tax Shelter Patents, and
prohibits Contingency Fee Arrangements - these measures
deter abusive tax shelters by limiting accountants', tax
attorneys', and firms' profitability when offering tax
shelter strategies.
FISCAL EFFECT : Fiscal Com.: No
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Beall, Block, Blumenfield,
Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Feuer,
Fong, Fuentes, Furutani, Galgiani, Hall, Hayashi,
Hernandez, Hill, Huber, Huffman, Jones, Krekorian, Lieu,
Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, John A.
CONTINUED
AJR 12
Page
5
Perez, V. Manuel Perez, Portantino, Ruskin, Salas,
Saldana, Skinner, Solorio, Swanson, Torlakson, Torres,
Torrico, Yamada, Bass
NOES: Adams, Anderson, Bill Berryhill, Tom Berryhill,
Blakeslee, Conway, Cook, DeVore, Duvall, Emmerson,
Fuller, Gaines, Garrick, Gilmore, Hagman, Harkey,
Jeffries, Knight, Logue, Miller, Nestande, Niello,
Nielsen, Silva, Smyth, Audra Strickland, Tran
NO VOTE RECORDED: Evans, Fletcher, Villines, Vacancy
DLW:do 6/24/10 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
**** END ****
CONTINUED