BILL ANALYSIS
AJR 12
Page 1
ASSEMBLY THIRD READING
AJR 12 (Block)
As Amended June 3, 2009
Majority vote
REVENUE & TAXATION 6-3
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|Ayes:|Charles Calderon, Beall, | | |
| |Coto, Ma, Portantino, | | |
| |Saldana | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Hagman | | |
| | | | |
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SUMMARY : Requests that the United States (U.S.) President and
Congress enact legislation that closes the corporate federal tax
loopholes relating to tax haven countries. Specifically, this
bill :
1)States all of the following legislative findings and
declarations:
a) In bad economic times, states are forced to cut
essential services or raise taxes in order to balance their
budgets; and, recapturing lost revenues otherwise due to a
state is one mechanism by which government can reduce
painful cuts without raising new taxes.
b) A U.S. corporation is taxed on all of its income,
regardless of source, and is allowed a credit for any taxes
paid to a foreign country. A U.S. corporation can operate
globally in foreign countries directly through a branch or
indirectly through its ownership in a foreign subsidiary.
c) The Organization for Economic Cooperation and
Development prepared reports identifying tax haven
countries and financial privacy jurisdictions.
d) The U.S. Department of Treasury has found that some U.S.
corporations have aggressively moved income to offshore
jurisdictions to avoid U.S. taxes and the U.S. Senate
Permanent Subcommittee on Investigations released findings
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regarding the growth of multinational corporations' use of
tax haven countries to shelter income.
e) President Obama has voiced his support for efforts to
combat offshore tax evasion and the U.S. Commissioner of
the Internal Revenue Service (IRS) stated that it is a top
priority for the IRS.
f) U.S. Senator Carl Levin introduced the Stop Tax Haven
Abuse Act on March 2, 2009, to target offshore tax abuses
that deny the U.S. Treasury an estimated $100 billion in
revenue each year.
g) Some states have enacted legislation to include the
income and apportionment factors of affiliated corporations
doing business in, or having income derived from, or
attributed to, a tax haven country.
h) California permits corporations that conduct business in
this state to elect to calculate their state corporate tax
liability based on income only from sources within the U.S.
i) As identified by federal officials, corporations are
known to redirect income to foreign subsidiaries located in
offshore tax haven countries to hide those corporations'
true income and to avoid paying their fair share of state
tax. The Franchise Tax Board (FTB) estimates that
California incurs an annual revenue loss of approximately
$130 million due to corporations' sheltering income in tax
haven countries.
2)Respectfully requests the U.S. President and Congress to enact
legislation that would close the corporate federal tax
loopholes currently allowing the sheltering of income in
offshore tax haven countries and would, instead, promote
transparency, cooperation, and tax compliance.
3)Requires the Chief Clerk of the Assembly to transmit copies of
this resolution to the President and the Vice President of the
U. S., to the Speaker of the House of Representatives, to the
Majority Leader of the Senate, and to each Senator and
Representative from California in the U.S. Congress.
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FISCAL EFFECT : Unknown but probably none.
COMMENTS : The author states that "California corporations are
stashing millions of dollars in overseas tax haven countries,
and are avoiding paying their fair share of taxes to the state
through code loopholes. President Obama and the U.S. Congress
have hinted they would like to close these loopholes at the
federal level, in which case California would benefit as well.
I applaud their efforts and hope the California Legislature can
join me by passing AJR 12, which will encourage the federal
government to act to solve the tax haven abuse loopholes."
What is the problem with incorporating a subsidiary in a tax
haven country? Some corporations and individuals use tax havens
to avoid payment of U.S. taxes. Generally, a tax haven is a
foreign jurisdiction that maintains corporate, bank, and tax
secrecy laws and industry practices that make it very difficult
for other countries to find out whether their citizens are using
the tax haven to avoid paying their taxes. (Statement of
Senator Carl Levin on Introducing The Stop Tax Haven Abuse Act,
Tax Analyst, December 2009, p. 4). Data released by the
Commerce Department indicates that, as of 2001, almost half of
all foreign profits of U.S. corporations were in tax havens.
Further, a study released by Tax Notes, September 2004, found
that American companies were able to shift $149 billion of
profits to 18 tax haven countries in 2002, up 68% from $88
billion in 1999. In January 2009, a report issued by the
Government Accounting Office (GAO) shows that out of the 100
largest U.S. publicly traded corporations, 83 have subsidiaries
in tax havens. For example, Morgan Stanley has 273, Citigroup
has 427, and Oracle has 77 tax haven subsidiaries.
U.S. Senator Levin, in his statement, gives a simplified example
of how U.S. corporations may transfer taxable income from the
U.S. to tax havens to escape taxation. He states that, "Suppose
a profitable U.S. corporation establishes a shell corporation in
a tax haven. The shell corporation has no office or employees,
just a mailbox address. The U.S. parent transfers a valuable
patent to the shell corporation? [and then] begin to pay a hefty
fee to the shell corporation for use of the patent, reducing its
U.S. income through deducting the patent fees and thus shifting
taxable income out of the United States to the shell
corporation. The shell corporation declares a portion of the
fees as profit, but pays no U.S. tax since it is a tax haven
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resident." In addition, the shell corporation may lend its
funds to the U.S. parent that, in turn, will pay interest on the
loan to the shell corporation, shifting more taxable income out
of the U.S. to the tax haven. Often, those subsidiaries of U.S.
companies are shell corporations that are engaged in no or very
little business activity. (Id, at p. 6)
Under existing California law, income and apportionment factors
of those subsidiaries located in tax haven countries are not
included in the water's-edge return of the parent company,
unless the subsidiaries are certain affiliated entities such as,
for example, an export trade corporation, a domestic
international sales corporation, a foreign sales corporation, or
a controlled-foreign corporation with Subpart F income.
Consequently, companies that manage to shift some of its income
to their subsidiaries in tax haven countries will pay less tax
to California.
Proposed federal legislation: Section 103 of the Stop Tax Haven
Abuse Act would deny tax benefits for foreign corporations
managed and controlled in the United States. It focuses on the
situation where a corporation is incorporated in a tax haven as
a mere shell operation with little or no physical presence or
employees in the jurisdiction. The impetus for this legislation
came from a hearing held by the U.S. Senate Finance Committee in
July 2008. The Committee considered the findings made by GAO
with regard to the infamous Ugland House, a five-story building
that is located in the Cayman Islands and is the official
address for over 18,800 registered companies. GAO determined
that about half of the alleged Ugland House tenants have a
billing address in the United States and were not actual
occupants of the building. In fact, GAO found that none of the
nearly 19,000 companies registered at the Ugland House was an
actual occupant. The only occupant of that building was a
Cayman law firm that established and registered those companies.
Section 103 of the Stop Tax Haven Abuse Act states that, if a
corporation is publicly traded or has aggregate gross assets of
$50 million or more, and its management and control occurs
primarily within the United States, then that corporation will
be treated as a U.S. domestic corporation for income tax
purposes. Section 103 provides an exception for foreign
corporation with U.S. parents but makes clear that mere
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existence of a U.S. parent corporation is not sufficient to
shield a foreign corporation from being treated as a domestic
corporation. According to U.S. Senator Levin, the proposed
federal legislation "would put an end to the unfair situation
where some U.S.-based companies pay their fair share of taxes,
while others who set up a shell corporation in a tax haven are
able to defer or escape taxation, despite the fact that their
foreign status is nothing more than a paper fiction." (Statement
of Senator Carl Levin on Introducing The Stop Tax Haven Abuse
Act, Tax Analyst, December 2009, p. 13).
How would California benefit from the proposed federal
legislation? If the Stop Tax Haven Abuse Act is enacted into
law, it will change taxpayers' behavior and, presumably, put an
end to financial gimmicks used by certain corporate taxpayers to
avoid or minimize their U.S. taxes. Most likely, California
would indirectly benefit from that change in the taxpayers'
behavior. It is unclear, however, and depends on the specific
federal act, whether California would need to conform to the new
federal law to see an actual increase in state tax collection.
Similar legislation: AB 1178 (Block), introduced in this
legislative session, would require multinational corporations
that elect to file tax returns based only on income earned
inside the U.S., known as the water's-edge method, to include
the entire income and apportionment factors of any related
corporation doing business in or having income derived from or
attributable to a tax haven.
AB 34 (Ruskin), introduced in the 2005-06 legislative session,
was nearly identical to AB 1178 and would have required
taxpayers filing on a water's-edge basis to include the income
and apportionment factors of affiliated corporations doing
business in, or having income derived from or attributable to, a
tax haven. AB 34 failed to pass out of the Assembly.
AB 441 (Chu), introduced in the 2005-06 legislative session,
would have required a corporation that makes a water's-edge
election to include the income and apportionment factors of
certain foreign affiliates. AB 441 failed to pass out of the
Assembly.
SB 663 (Migden), Chapter 22, Statutes of 2006, clarified
specific provisions of the franchise tax law relating to
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water's-edge taxpayer and reformed the water's-edge procedure by
replacing existing rules creating a contract between the
taxpayer and FTB with election procedures.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001445