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Companion bills have been introduced simultaneously in the Senate and House of Representatives that would repeal the rule allowing American corporations to defer paying United States corporate income taxes on their offshore profits until those profits are repatriated.
Bernie Sanders (I – Vermont), an independent member of the Senate Budget Committee, and Jan Schakowsky (D – Illinois), a member of President Barack Obama’s 18-member Fiscal Commission, introduced the bills “to stop profitable corporations from sheltering income in the Cayman Islands and other tax havens,” while the legislation would also “end tax breaks for companies that ship jobs and factories overseas.”
According to the Joint Committee on Taxation, the proposed legislation would provide more than US590bn in additional tax revenue over the next ten years. “At a time when we have a USD16.5 trillion national debt and an unsustainable federal deficit; at a time when roughly one-quarter of the largest corporations in America are paying no federal income taxes; and at a time when corporate profits are at an all-time high, it is past time for corporate America to contribute significantly to deficit reduction,” said Sanders.
“Even as profits grow to record levels, corporations’ share of tax revenues paid has dropped significantly in recent decades. Senator Sanders and I are offering a comprehensive and commonsense solution that would eliminate tax subsidies for big oil companies and corporations that are shipping jobs and profits overseas,” Schakowsky added.
According to a 2008 Government Accountability Office Report, 83 of the Fortune 100 companies in the US have used offshore tax havens to lower their taxes. Currently, US corporations have an estimated USD1.7 trillion of un-repatriated foreign profits deposited outside the US.
The Corporate Tax Fairness Act would reform the tax code by ending the deferral of foreign source income that allows US corporations to avoid paying taxes on overseas profits, until the money is brought back into the US. Corporations are also currently provided with foreign tax credits to offset the amount of taxes paid to other countries.
The bills’ sponsors pointed out that those offshore tax arrangements have provided two perverse incentives for American corporations. “First, it motivates large companies to shift as much of their profits as possible overseas by setting up subsidiaries in the Cayman Islands and other tax haven countries. Second, it allows corporations to receive huge tax breaks for establishing manufacturing facilities in countries with very low or no corporate tax rates. Closing these tax loopholes would reduce the deficit and create jobs that millions of Americans need.”
Under the proposed legislation, corporations would pay US taxes on their offshore profits as they are earned – “the US would tax their profits no matter where they are generated.”
US corporations would still continue to get a credit against their US taxes for foreign taxes they pay. When an American corporation has profits in a country with lower corporate taxes than the US, they would pay the US government the difference between the foreign rate and the US rate. When an American corporation has profits in a country with higher corporate taxes than the US, they would pay nothing to the US.
However, the bills would also close the current provision that allows US corporations to claim foreign tax credits for taxes paid on foreign income that is not subject to current US tax. Companies are now able to use such credits to pay less tax on their US taxable income than they would if it was all from US sources. The Corporate Tax Fairness Act would limit foreign tax credits to offset income only from the country in which it is earned.
In addition, the Act would prevent corporations from avoiding US taxes by claiming to be foreign companies through the establishment of a post office box in another country, even though their management and control operations are primarily located in the US; and would eliminate the possibility for big oil companies to characterize royalty payments to foreign governments as foreign taxes, allowing them to lower their taxes in the US.
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