[Congressional Record Volume 153, Number 15 (Thursday, January 25, 2007)]
[Senate]
[Pages S1194-S1195]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DORGAN (for himself, Mr. Levin, and Mr. Feingold):
  S. 396. A bill to amend the Internal Revenue Code of 1986 to treat 
controlled foreign corporations in tax havens as domestic corporations; 
to the Committee on Finance.
  Mr. DORGAN. Mr. President, today I'm joined by Senators Carl Levin of 
Michigan and Russell Feingold of Wisconsin in re-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.
  Every year, tens of millions of taxpayers work through piles of 
complicated IRS instructions and complex forms to prepare and file 
their tax returns to fulfill their taxpaying responsibility. Some tax 
experts have estimated that taxpayers spend over $100 billion and more 
than 6 billion hours trying to comply with their Federal tax 
obligation.
  That's why every American has a right to be angry when they hear 
repeated press accounts of corporate taxpayers that are shirking their 
tax obligations by actively shifting their profits to foreign tax 
havens or using other inappropriate tax avoidance techniques. The bill 
that we are re-introducing today is a simple and straightforward way to 
try to tackle the offshore tax haven problem. It is virtually identical 
to our bill in the 109th Congress, S. 779, but we have granted 
potentially impacted companies an extra year to comply with its 
provisions.
  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 in the face of these reports, the 
Congress and the administration have shown little interest in stopping 
this hemorrhaging of tax revenues. In fact, a growing body of evidence 
suggests that the tax haven problem is getting much worse and may be 
costing the U.S. Treasury tens of billions of dollars every year.
  Although the Congress did pass legislation a few years ago, which I 
supported, that addresses a narrow problem of a couple dozen corporate 
expatriates that reincorporated overseas, that legislation did nothing 
to deal with the problem of U.S. companies that are setting up tax 
haven subsidiaries offshore to avoid their taxpaying responsibilities 
in this country.
  Around the time of the debate on corporate inversions, a New York 
Times article 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? A couple of years 
ago, 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.

[[Page S1195]]

  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. The same report revealed that 
the Halliburton Company 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.

  But the poster child for offshore tax haven abuses, in my opinion, is 
a five-story building located in the Cayman Islands that thousands of 
companies call home. According to a very good investigative report 
published by David Evans with Bloomberg News in the summer of 2004, 
there is a building named the Ugland House in Grand Cayman that is used 
as the address of 12,748 companies.
  In fact, nearly half of the money U.S. companies earned overseas is 
accounted for in tax havens like the Cayman Islands. A former Joint 
Committee on Taxation economist released a study that looked at the 
amount of profits that U.S. companies are shifting to offshore tax 
havens. He found that U.S. multinational companies had moved hundreds 
of billions of dollars in profits to tax havens for years 1999-2002, 
the latest years for which IRS data was available.
  The legislation we are re-introducing today would help put a stop to 
these tax avoidance schemes. Specifically, our legislation denies tax 
benefits, namely tax deferral, to U.S. multinational companies that set 
up controlled foreign corporations in tax haven countries. This tracks 
the same general approach in legislation passed by the Congress and 
enacted into law that was designed to curb the problem of corporate 
inversions. Our bill builds upon the good work of Senators Baucus and 
Grassley 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 treat U.S. controlled foreign 
subsidiaries that are set up in tax haven countries--but are not 
engaged in a real and active business--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. The bill's list of specific 
tax haven countries subjected to the new rule is based upon the 
previous work by the Organization for Economic Cooperation and 
Development. However, our legislation does give the Secretary of the 
Treasury the ability to add or remove a foreign country from this list 
in appropriate cases. We also give businesses plenty of time, two 
additional years through December 31, 2008, to restructure their tax 
haven operations if they so choose.
  As mentioned, our legislation effectively ends the deferral tax 
benefit for U.S. companies that shift income to offshore inactive tax 
haven subsidiaries. This means, for example, that 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. Under this bill, companies 
that try to move intangible assets--and the income they produce--to tax 
havens would be unsuccessful because that income would still be 
immediately taxable by the United States. The Joint Tax Committee says 
our legislation that will help close this tax shelter game will prevent 
these companies from draining some $15 billion in revenues from the 
U.S. Treasury over the next decade.
  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 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.'' He is 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 also 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.
  In conclusion, it is my hope that the White House and Congress in a 
new spirit of bipartisanship will help in our effort to get this needed 
tax law change enacted into law. I urge my colleagues to support this 
effort by cosponsoring this legislation.
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