[Congressional Record Volume 151, Number 43 (Wednesday, April 13, 2005)]
[Senate]
[Pages S3564-S3565]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DORGAN (for himself and Mr. Levin):
  S. 779. A bill to amend the Internal Revenue Code of 1986 to treat 
controlled foreign corporations established

[[Page S3565]]

in tax havens as domestic corporations; to the Committee on Finance.
  Mr. DORGAN. Mr. President, today I'm joined by Senator Levin of 
Michigan in introducing legislation that we believe will help the 
Internal Revenue Service (IRS) combat offshore tax-haven abuses and 
ensure that U.S. multinational companies pay the U.S. taxes that they 
rightfully owe.
  Tens of millions of taxpayers will be rushing to file their tax 
returns in the next few days in order to fulfill their taxpaying 
responsibility by the April 15 filing deadline. Some tax experts 
estimate that taxpayers will spend over $100 billion and more than 6 
billion hours this year trying to comply with their federal tax 
obligation. It's no wonder that many Americans are frustrated with the 
current tax system and would gladly welcome substantive efforts to 
simplify it.
  However, this frustration changes to anger when the taxpayers who pay 
their taxes on time each year discover that many corporate taxpayers 
are shirking their tax obligations by actively shifting their profits 
to foreign tax havens or using other inappropriate tax avoidance 
techniques. The bill that Senator Levin and I are introducing today is 
a simple and straightforward way to try to tackle the offshore tax-
haven problem.
  Specifically, our legislation denies tax benefits, namely tax 
deferral, to U.S. multinational companies that set up controlled 
foreign corporations in tax-haven countries by treating those 
subsidiaries as domestic companies for U.S. income tax purposes. This 
tracks the same general approach embraced and passed by the Congress in 
other tax legislation designed to curb the problem of corporate 
inversions.
  We have known for many years that some very profitable U.S. 
multinational businesses are using offshore tax havens to avoid paying 
their fair share of U.S. taxes. But Congress has really done very 
little to stop this hemorrhaging of tax revenues. In fact, recent 
evidence suggests that the tax-haven problem is getting much worse and 
may be draining the U.S. Treasury of tens of billions of dollars every 
year.
  The New York Times got it right when it suggested that ``instead of 
moving headquarters offshore, many companies are simply placing patents 
on drugs, ownership of corporate logos, techniques for manufacturing 
processes and other intangible assets in tax havens . . . The companies 
then charge their subsidiaries in higher-tax locales, including the 
U.S., for the use of these intellectual properties. This allows the 
companies to take profits in these havens and pay far less in taxes.''
  How pervasive is the tax-haven subsidiary problem? Last year, the 
Government Accountability Office (GAO), the investigative arm of 
Congress, issued a report that Senator Levin and I requested that gives 
some insight to the potential magnitude of this tax avoidance activity. 
The GAO found that 59 out of the 100 largest publicly-traded federal 
contractors in 2001--with tens of billions of dollars of federal 
contracts in 2001--had established hundreds of subsidiaries located in 
offshore tax havens.

  According to the GAO, Exxon-Mobil Corporation, the 21st largest 
publicly traded federal contractor in 2001, has some 11 tax-haven 
subsidiaries in the Bahamas. Halliburton Company reportedly has 17 tax-
haven subsidiaries, including 13 in the Cayman Islands, a country that 
has never imposed a corporate income tax, as well as 2 in Liechtenstein 
and 2 in Panama. And the now infamous Enron Corporation had 1,300 
different foreign entities, including some 441 located in the Cayman 
Islands.
  More recently, former Joint Committee on Taxation economist Martin 
Sullivan released a study that looked at the amount of profits that US. 
companies are shifting to offshore tax havens. He found that U.S. 
multinationals had moved hundreds of billions of profits to tax havens 
for years 1999-2002, the latest years for which IRS data is available.
  Although Congress passed legislation, which I supported, that 
addresses the problem of corporate expatriates that reincorporate 
overseas, that legislation did nothing to deal with the problem of U.S. 
companies that are setting up tax-haven subsidiaries to avoid their 
taxpaying responsibilities in this country.
  The legislation that we are introducing builds upon the good work of 
Senators Grassley and Baucus and other members of the Senate Finance 
Committee by extending similar tax policy changes to cover the case of 
U.S. companies and their tax-haven subsidiaries.
  Specifically, our legislation would do the following: 1. Treat U.S. 
controlled foreign subsidiaries that are set up in tax-haven countries 
as domestic companies for U.S. tax purposes. In other words, we would 
simply treat these companies as if they never left the United States, 
which is essentially the case in these tax avoidance motivated 
transactions.
  2. List specific tax-haven countries subject to the new rule (based 
upon the previous work by the Organization for Economic Cooperation and 
Development) and give the Secretary of the Treasury the ability to add 
or remove a foreign country from this list in appropriate cases.
  3. Provide an exception where substantially all of a U.S. controlled 
foreign corporation's income is derived from the active conduct of a 
trade or business within the listed tax-haven country.
  4. Make these proposed changes effective beginning after December 31, 
2007. This will give businesses ample time to restructure their tax-
haven operations if they so choose.
  This legislation will help end the tax benefits for U.S. companies 
that shift income to offshore tax-haven subsidiaries. For example, any 
efforts by a U.S. company to move profits to the subsidiary through 
transfer pricing schemes will not work because the income earned by the 
subsidiary would still be immediately taxable by the United States. 
Likewise, any efforts to move otherwise active income earned by a U.S. 
company in a high-tax foreign country to a tax haven would cause the 
income to be immediately taxable by the United States. Companies that 
try to move intangible assets--and the income they produce--to tax 
havens would be unsuccessful because the income would still be 
immediately taxable by the United States.
  Let me be very clear about one thing. This legislation will not 
adversely impact U.S. companies with controlled foreign subsidiaries 
that are located in tax havens and doing legitimate and substantial 
business. The legislation expressly exempts a U.S.-controlled foreign 
subsidiary from its tax rule changes when substantially all of its 
income is derived from the active conduct of a trade or business within 
a listed tax-haven country.
  In 2002, then-IRS Commissioner Charles Rossotti told Congress that 
``nothing undermines confidence in the tax system more than the 
impression that the average honest taxpayer has to pay his or her taxes 
while more wealthy or unscrupulous taxpayers are allowed to get away 
with not paying.'' Last week, IRS Commissioner Everson echoed similar 
sentiments at a Senate Transportation-Treasury Appropriations 
Subcommittee hearing I attended on the IRS's FY 2006 budget request.
  They are absolutely right. It's grossly unfair to ask our Main Street 
businesses to operate at a competitive disadvantage to large 
multinational businesses simply because our tax authorities are unable 
to grapple with the growing offshore tax avoidance problem. It is 
outrageous that tens of millions of working families who pay their 
taxes on time every year are shouldering the tax burden of large 
profitable U.S. multinational companies that use tax-haven 
subsidiaries.
  I hope that Congress will act promptly to enact legislation to curb 
these tax-haven subsidiary abuses. I urge my colleagues to cosponsor 
this bill.

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