October 1, 2009
Congressional report focuses on international tax avoidance and evasion:
The annual cost to the federal government of offshore tax abuses may reach as high as $100 billion per year, according to a Congressional Research Service (CRS) report released on Sept. 18. (R40623 - Tax Havens: International Tax Avoidance and Evasion) The government loses income tax revenue from individuals and corporations when profits and income are shifted into low-tax countries known as tax havens. Multinational firms are adept at artificially shifting profits from high-tax to low-tax jurisdictions, the report noted. One such method is to shift debt to high-tax jurisdictions. “Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely,” CRS said. Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned outside the U.S. There are several legislative proposals that address the problem of tax havens and associated evasion issues, including the Stop Tax Haven Abuse Act (S. 506, H.R. 1265; draft proposals by the Senate Finance Committee; two other related measures, S. 386 and S. 569; and an Obama administration proposal. “Most provisions to address profit shifting by multinational firms would involve changing the tax law by repealing or limiting deferral, limiting the ability of foreign tax credit to offset income, addressing check-the-box [a regulation introduced in the late '90s with provisions that were originally intended to simplify questions of whether a firm was a corporation or a partnership and that had unintended consequences for foreign firms], or even formula apportionment,” the report said. The administration's proposals include one to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Individual evasion could be reduced by proposals to increase information reporting and expand enforcement by shifting the burden of proof to the taxpayer and increasing penalties.