Daily Tax Update - June 13, 2013: Ways and Means Hearing on Tax Reform: Tax Havens, Base Erosion, and Profit-Shifting

THE DAILY TAX UPDATE WILL BE PUBLISHED ON JUNE 17

Ways and Means Hearing on Tax Reform: Tax Havens, Base Erosion, and Profit-Shifting:  Today, the House Ways and Means held a hearing on “U.S. and foreign multinational corporations’ use of tax havens (low- and no-tax jurisdictions) to avoid tax and shift profits outside the United States and erode the U.S. tax base.”

In his opening remarks, Chairman Camp said, “Oftentimes, multinational businesses reduce their tax liability by separating the jurisdiction in which income is booked for tax purposes from the jurisdiction in which the economic activity occurs.  The result of these practices is ‘erosion’ of the tax base in a jurisdiction where the activity takes place.  We’ve all heard and read about these practices, and as we will hear today, the commentary on these practices varies greatly.  As policymakers engaged in the tax reform debate, it is clear that there is no perfect system for taxing corporate income.  But it is also important to bear in mind, that these activities are the consequence of bad laws, not bad companies.  In my mind, the fact that the current tax code allows companies to achieve these tax results strengthens the case for comprehensive tax reform.”  Camp continued, “And let me just say that it is important to remember that the most effective anti-base erosion rule is a lower corporate tax rate.  But unfortunately, while a lower rate is necessary, the rate alone is not sufficient.”

Camp said that in the discussion draft circulated by the Committee, “Option C (the carrot and stick proposal) received, and continues to receive, the most support from the business community.  And our close work with the staff of the Joint Committee on Taxation leads us to believe it is an effective safeguard. Under Option C, all foreign income attributable to intangibles – whether or not owned by the U.S. parent or a foreign subsidiary – would be taxed by the United States at a substantially lower rate of 15 percent (minus any credits for foreign taxes paid on the same income). This approach provides a deduction for income related to intangibles kept in the United States (the carrot) and an immediate inclusion for income related to intangibles held abroad (the stick).  In other words, companies would feel less pressure to shift income to low-tax jurisdictions because that income would be taxed at the same rate –whether it is earned in the United States or Bermuda.”  Camp added, “The result of this approach would be that moving intangibles to tax havens would have little or no appeal since the income earned from those intangibles would be taxed at the same rate regardless of location.”  

The witnesses were:

Mr. Pascal Saint-Amans
Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD)
Testimony

Mr. Edward Kleinbard
Professor of Law, University of Southern California Gould School of Law
Testimony

Mr. Paul Oosterhuis
Partner, Skadden Arps Slate Meager & Flom LLP
Testimony

Mr. Saint-Amans testified, “In the area of tax, the core work of the OECD has been to develop, on the basis of international consensus, common standards to eliminate double taxation for cross border investments, specifically the Model Tax Convention (which serves as the basis for over 3,000 bilateral tax treaties) and the Transfer Pricing Guidelines (which provide common standards for allocating income among members of a group of affiliated companies). These instruments have been critical in promoting economic growth by removing barriers to crossborder investment, most importantly by preventing double taxation and by providing the certainty and stability necessary for international investment.”

Mr. Saint-Amans discussed the OECD report, Addressing Base Erosion and Profit Shifting, released in February 2013, nothing that the report “identifies key pressure areas giving rise to opportunities for BEPS.”  Mr. Saint-Amans added that “a key concern of many countries is the use of excess interest expense to erode the tax base. . . .” 

Mr. Kleinbard focused on the discussion draft, stating “I think that its anti-abuse rules are too complex and too narrowly constructed, and that the key parameters of its thin capitalization rule must be robustly specified if it is to accomplish its purpose. (I also believe that a thin capitalization rule is needed in the wholly-domestic context as well.) The situation is quite desperate, as evidenced by the ease with which a quintessentially retail firm like Starbucks has been able to generate stateless income, and we must  ensure that the future U.S. international tax system is not only ‘competitive’ but also appropriate in the outcomes it engenders. I recognize that there is something of a consensus around the idea of a territorial system with anti-abuse constraints (or a ‘hybrid’ system, as some prefer), but I respectfully submit that there is a far simpler alternative that is more resistant to tax gaming, that is ‘competitive,’ and that is economically defensible. I have in mind genuine worldwide tax consolidation, combined with a corporate tax rate squarely in the middle of the pack of peer countries’ rates. Worldwide consolidation is not the same as ‘ending deferral,’ because true worldwide tax consolidation means that foreign losses are currently deductible against domestic income. Symmetry in treatment between income and loss is an important economic desideratum.”  He added, “Finally, without regard to the fate of tax reform legislation, I urge the Committee to work with other Committees of the House to put onto a fast track legislation requiring every U.S. firm to publish a worldwide disclosure matrix of its actual tax burdens by jurisdiction.”

Mr. Oosterhuis testified, “Corporate profit shifting and tax base erosion is an important issue that must be faced by both governments and corporations. But any honest and productive discussion of the topic must begin by first considering where profit should be located; only then can we begin to determine whether it has been improperly shifted. I would suggest that a corporation’s place of residence or the location of its activities or how much foreign tax it pays are not likely to provide useful – and certainly not complete – measures of profit shifting. A focus that is geared towards the location of sales and the matching of income and expenses is far more likely to produce useful measures of – and thus productive solutions to – the issue of U.S. profit shifting and base erosion.”

Senate Finance Committee Releases Tax Reform Options Paper on Tax-Exempt Organizations and Charitable Giving:  Today, the Senate Finance Committee released the ninth in a series of options papers on tax reform. 

The document can be accessed via: Tax-Exempt Organizations and Charitable Giving

Miscellaneous Guidance Released:
Revenue Procedure 2013-28 provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with (1) nationwide average purchase prices for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.