US States Complain Over Corporate Abuse Of Tax Law Loopholes

by Glen Shapiro, LawAndTax-News.com, New York

17 July 2003

In its report entitled 'Corporate Tax Sheltering And The Impact On State Corporate Income Tax Revenue Collections', the US Multistate Tax Commission (MTC) has revealed that as much as $12.4 billion in corporate income taxes may have been lost to state governments in 2001 as a result of tax shelter use and loopholes in the US tax code.

The report, which examined the use of both domestic and international tax sheltering arrangements, revealed that California's estimated losses as a result of corporate tax evasion were higher than any other state's, coming in at around $1.3 billion. However, Illinois, Texas, and Pennsylvania followed closely behind, the MTC announced.

According to the study, the most common tax sheltering practices employed by corporations located in the United States include:

- Creating separate corporations to house 'intangibles' (e.g., trademarks) and then siphoning profits away from taxation in the states in which the companies actually do business;

- Using complex interpretations of tax laws to create so-called 'nowhere income' that is earned by a corporation but then not reported to states that impose corporate income taxes;

- Reincorporating strictly for tax income purposes in Bermuda, or other 'tax havens';

- Shifting taxable income away from the U.S. to other nations through the pricing of goods and services involved in transactions between jointly owned companies.

The report concluded that: 'The lost revenue attributable to domestic and international income tax sheltering is adding to the size of state budget deficits while undermining the equity and integrity of state tax systems,' continuing:

'It is not enough to say that state corporate tax revenues are declining just because of federal tax law changes or state tax-cutting during the 1990’s. It is apparent that various corporations are increasingly taking advantage of structural weaknesses and loopholes in the state corporate tax systems.'

Speaking following the release of the study on Tuesday, representatives from several of the states which participated, expressed the hope that lawmakers will now begin working in earnest towards closing some of the loopholes which currently exist in federal and state tax legislation.

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