[Congressional Record Volume 159, Number 124 (Thursday, September 19, 2013)]
[Senate]
[Pages S6648-S6661]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Ms. COLLINS (for herself and Mr. Carper):
S. 1528. A bill to establish a national mercury monitoring program,
and for other purposes; to the Committee on Environment and Public
Works.
Ms. COLLINS. Mr. President, today along with Senator Carper, I am
introducing the Comprehensive National Mercury Monitoring Act. This
bill would ensure that we have accurate information about the extent of
mercury pollution in our Nation.
A comprehensive national mercury monitoring network is needed to
protect human health, safeguard fisheries, and track the effect of
emissions reductions in the U.S. This tracking is particularly
important in light of increasing mercury emissions from other
countries. By accurately quantifying regional and national changes in
atmospheric deposition, ecosystem contamination, and bioaccumulation of
mercury in fish and wildlife in response to changes in mercury
emissions, a monitoring network would help policy makers, scientists,
and the public to better understand the sources, consequences, and
trends in United States mercury pollution.
Mercury is a potent neurotoxin of significant ecological and public
health concern, especially for children and pregnant women. It is
estimated that approximately 410,000 children born in the U.S. were
exposed to levels of mercury in the womb that are high enough to impair
neurological development. Mercury exposure has gone down as U.S.
mercury emissions have declined; however, levels remain unacceptably
high.
[[Page S6649]]
Each new scientific study seems to find higher levels of mercury in
more ecosystems and in more species, and the issue of mercury emissions
is growing in importance around the world. At present, scientists must
rely on limited information to understand the critical linkages between
mercury emissions and environmental response and human health.
Successful design, implementation, and assessment of solutions to the
mercury pollution problem require comprehensive long-term information.
A system for collecting such information, such as we have for acid rain
and other pollution, does not currently exist for mercury--a much more
toxic pollutant. We must have more comprehensive information and we
must have it soon; otherwise, we risk making misguided policy
decisions.
Specifically, the Comprehensive National Mercury Monitoring Act would
direct EPA, in conjunction with the Fish and Wildlife Service, U.S.
Geological Survey, National Park Service, the National Oceanic and
Atmospheric Association, and other appropriate Federal agencies, to
establish a national mercury monitoring program to measure and monitor
mercury levels in the air and watersheds, water and soil chemistry, and
in marine, freshwater, and terrestrial organisms at multiple sites
across the Nation.
The act would establish a scientific advisory committee to advise on
the establishment, site selection, measurement, recording protocols,
and operations of the monitoring program.
The act would establish a centralized database for existing and newly
collected environmental mercury data that can be freely accessed on the
Internet and that is compatible with similar international efforts.
The act would require a report to Congress every 2 years on the
program, including trend data, and an assessment of the reduction in
mercury deposition rates that need to be achieved in order to prevent
adverse human and ecological effects every 4 years; and
The act would authorize $95 million over 3 years to carry out the
act.
We must establish a comprehensive, robust national mercury monitoring
network to provide the data needed to help make decisions that can
protect the people and environment of Maine and the entire Nation.
______
By Mr. LEVIN (for himself, Mr. Whitehouse, Mr. Begich, and Mrs.
Shaheen):
S. 1533. A bill to end offshore tax abuses, to preserve our national
defense and protect American families and businesses from devastating
cuts , and for other purposes; to the Committee on Finance.
Mr. LEVIN. Mr. President, I am introducing today, along with my
colleagues Senators Whitehouse, Begich and Shaheen, the Stop Tax Haven
Abuse Act, legislation that is geared to stop the estimated $150
billion yearly drain on the U.S. treasury caused by offshore tax
abuses. Offshore tax abuses are not only undermining public confidence
in our tax system, but widening the deficit and increasing the tax
burden for the rest of American families and businesses.
This bill eliminates incentives to send U.S. profits and jobs
offshore, combats offshore tax abuses, and raises revenues needed to
fund our national security and essential domestic programs. Its
provisions could be part of an alternative deficit reduction package to
substitute for sequestration this year, but should be adopted in any
event because the loopholes we would close serve no economic purpose
and shouldn't exist even if there were no deficit.
We should close these loopholes on principle. They are blatantly
unfair, and we should end them, regardless of our deficit, regardless
of whether sequestration is in effect. But surely, at a time when
sequestration is harming families, national security, life-saving
research, students and seniors, we should close these loopholes and
dedicate the revenue to ending sequestration.
The bill is supported by a wide array of small business, labor and
public interest groups, including the Financial Accountability and
Corporate Transparency, FACT, Coalition, Americans for Tax Fairness,
Tax Justice Network-USA, Citizens for Tax Justice, AFL-CIO, SEIU,
American Sustainable Business Council, Business for Shared Prosperity,
South Carolina Small Business Chamber of Commerce, Friends of the
Earth, New Rules for Global Finance, U.S. Public Interest Research
Group, Global Financial Integrity, Jubilee USA Network, and Public
Citizen.
Frank Knapp, president and CEO of the South Carolina Small Business
Chamber of Commerce, has explained small business support for the bill
this way:
Small businesses are the lifeblood of local economies. We
pay our fair share of taxes and generate most of the new
jobs. Why should we be subsidizing U.S. multinationals that
use offshore tax havens to avoid paying taxes? Big
corporations benefit immensely from all the advantages of
being headquartered in our country. It's time to end tax
haven abuse and level the playing field.
The Stop Tax Haven Abuse Act is a product of the investigative work
of the Permanent Subcommittee on Investigations which I chair. For more
than 12 years, the Subcommittee has conducted inquiries into offshore
tax avoidance abuses, including the use of offshore corporations and
trusts to hide assets and shift income abroad, the use of tax haven
banks to set up secret accounts, and the use of U.S. bankers, lawyers,
accountants and other professionals to devise methods of taking
advantage of tax loopholes that Congress never intended. Over the
years, my Subcommittee has learned a lot about these offshore tricks,
and we have designed this bill to fight back by closing many of these
tax loopholes and strengthening offshore tax enforcement.
The 113th Congress is the sixth Congress in which I have introduced a
comprehensive bill to combat offshore and tax shelter abuses. A number
of provisions from past bills have made it into law, such as measures
to curb abusive foreign trusts, close offshore dividend tax loopholes,
and strengthen penalties on tax shelter promoters.
In recent years, Congress has made a little progress in the offshore
tax battle. In 2010, we enacted into law the economic substance
doctrine, which up to then had been a judicially created policy. The
law now authorizes courts to strike down phony business deals with no
economic purpose other than to avoid the payment of tax. Getting the
economic substance doctrine enacted was a victory many years in the
making.
Also in 2010, Congress enacted the Baucus-Rangel Foreign Account Tax
Compliance Act or FATCA, which is designed to flush out hidden offshore
bank accounts. Foreign banks have engaged in a massive lobbying effort
to weaken its disclosure requirements, but most U.S. banks have had it
with foreign banks using secrecy to attract U.S. clients and want those
foreign banks to have to meet the same disclosure requirements U.S.
banks do. Starting next year, foreign financial institutions will have
to agree to comply with FATCA's disclosure requirements, which include
disclosing to the IRS all accounts held by U.S. persons, or else begin
incurring a 30 percent withholding tax on all investment income
received from the United States.
President Obama, who when in the Senate cosponsored the 2005 and 2007
versions of this bill we're introducing today, is a longtime opponent
of offshore tax evasion. And just weeks ago, the G-20 leaders declared
international tax avoidance by multinational corporations to be a
global concern, and pledged to work cooperatively to end abuses.
The bottom line is that each of us has a legal and civil obligation
to pay taxes, and most Americans fulfill that obligation. It is time to
force the tax scofflaws, the tax dodgers, and the tax avoiders to do
the same, and for us to take the steps needed to end their use of
offshore tax havens. It is also time to recapture those unpaid taxes to
pay for critical government services, including strengthening our
education, health care, and defense to help replace the absurd
sequestration approach with an alternative balanced deficit reduction
package that includes revenues as one component.
The bill we are introducing today is a stronger, more streamlined
version of the Stop Tax Haven Abuse Act introduced in the last
Congress. This enhanced version includes key provisions from the last
bill that have not yet been enacted into law, several provisions
implementing the President's budget recommendations, and new provisions
to stop the offshore tax haven
[[Page S6650]]
abuses featured in hearings held and bipartisan reports filed during
the last Congress by my Subcommittee.
The provisions retained from the prior version of the bill include,
with some clarifying or strengthening language, special measures to
deal with foreign jurisdictions and financial institutions that
significantly impede U.S. tax enforcement. They include tougher
disclosure, evidentiary and enforcement provisions for accounts at
foreign financial institutions that do not comply with FATCA; and the
treatment of offshore corporations as domestic corporations for tax
purposes when managed and controlled primarily from the United States.
They also include stronger disclosure requirements for offshore
accounts and offshore entities opening U.S. financial accounts, and
closure of a tax loophole benefiting financial swaps that send money
offshore. In addition, they mandate new disclosure requirements to stop
multinational corporate tax evasion by requiring publicly traded
corporations to disclose basic information about their employees,
revenues and tax payments on a country-by-country basis.
The new provisions in this bill would eliminate tax provisions
encouraging the offshoring of jobs and profits by deferring corporate
tax deductions for expenses associated with moving and operating
offshore unless and until the corporation repatriates the offshore
profits produced by those operations and pays taxes on them. Another
set of new provisions would end transfer pricing abuses by immediately
taxing any excess income received by foreign affiliates to which U.S.
intellectual property rights have been transferred, and limiting income
shifting through U.S. property transfers offshore. Other new provisions
would require foreign tax credits to be calculated on a pooled basis to
stop the manipulation of those tax credits to dodge U.S. taxes. Still
another new bill provision would end tax gimmicks involving the use of
the so-called ``check-the-box'' and ``CFC look-through'' rules for
offshore entities. Finally, a new bill provision would close the short-
term loan loophole used by some corporations to avoid paying taxes on
offshore income that is effectively repatriated.
Let me now go through each of the bill sections to explain the tax
abuses they address and how they would work.
Title I--Deterring the Use of Tax Havens for Tax Evasion
The first title of the bill concentrates on combating tax havens and
their financial institutions around the world that assist U.S.
taxpayers in hiding their assets, avoiding U.S. tax enforcement
efforts, and dodging U.S. taxes. It focuses on strengthening tools to
stop tax haven jurisdictions and tax haven banks from facilitating U.S.
tax evasion, to expose hidden offshore assets, and to eliminate
incentives for U.S. persons to send funds offshore.
Section 101--Special Measures Where U.S. Tax Enforcement Is Impeded
The first section of the bill, Section 101, which is carried over
from the last Congress and which passed the Senate in 2012 as part of
another bill but did not make it through conference, would allow the
Treasury Secretary to apply an array of sanctions against any foreign
jurisdiction or foreign financial institution that the Secretary
determined was significantly impeding U.S. tax enforcement.
We have all seen the press reports about tax haven banks that have
deliberately helped U.S. clients evade U.S. taxes. In 2008, UBS,
Switzerland's largest bank, admitted doing just that, paid a $780
million fine, and promised to stop opening accounts for U.S. persons
without reporting them to the IRS. Earlier this year, Switzerland's
oldest bank, Wegelin & Co., pleaded guilty to conspiring with U.S.
taxpayers to hide more than $1.2 billion in secret Swiss bank accounts
and closed its doors. These are just a few examples of how some foreign
banks knowingly impede U.S. tax enforcement efforts, and why the United
States needs to be better armed with the tools needed to deal with
them.
This bill section also has added significance now that Congress has
enacted the Foreign Account Tax Compliance Act or FATCA requiring
foreign financial institutions with U.S. investments to disclose all
accounts opened by U.S. persons or pay a hefty withholding tax on all
of the U.S. investment income they receive. FATCA has begun to go into
effect, but some foreign financial institutions are saying that they
will refuse to adopt FATCA's approach and will instead stop holding any
U.S. investments. While that is their right, the question being raised
by some foreign banks planning to comply with FATCA is what happens to
the non-FATCA institutions that take on U.S. clients and don't report
the accounts to the United States. Right now, the U.S. government has
limited ways to take effective action against foreign financial
institutions that open secret accounts for U.S. tax evaders. Section
101 of our bill would change that by providing a powerful new tool to
deter and stop non-FATCA-compliant institutions from facilitating U.S.
tax evasion.
Section 101 is designed to build upon existing Treasury authority to
take action against foreign financial institutions that engage in money
laundering by extending that same authority to the tax area. In 2001,
the Patriot Act gave Treasury the authority under 31 U.S.C. 5318A to
require domestic financial institutions and agencies to take special
measures with respect to foreign jurisdictions, financial institutions
or transactions found to be of ``primary money laundering concern.''
Once Treasury designates a foreign jurisdiction or financial
institution to be of primary money laundering concern, Section 5318A
allows Treasury to impose a range of requirements on U.S. financial
institutions in their dealings with the designated entity--all the way
from requiring U.S. financial institutions, for example, to provide
greater information than normal about transactions involving the
designated entity to prohibiting U.S. financial institutions from
opening accounts for that foreign entity.
This Patriot Act authority has been used sparingly, but to telling
effect. In some instances Treasury has employed special measures
against an entire country, such as Burma, to stop its financial
institutions from laundering funds through the U.S. financial system.
More often, Treasury has used the authority narrowly against a single
problem financial institution, such as a bank in Syria, to stop
laundered funds from entering the United States. The provision has
clearly succeeded in giving Treasury a powerful tool to protect the
U.S. financial system from money laundering abuses.
The bill would authorize Treasury to use that same tool against
foreign jurisdictions or financial institutions found by Treasury to be
``significantly impeding U.S. tax enforcement.'' Treasury could, for
example, require U.S. financial institutions that have correspondent
accounts for a designated foreign bank to produce information on all
transactions by that foreign bank executed through a U.S. correspondent
bank. Alternatively, Treasury could prohibit U.S. financial
institutions from opening accounts for a designated foreign bank,
thereby cutting off that foreign bank's access to the U.S. financial
system. Those types of sanctions could be as effective in ending tax
haven abuses as they have been in curbing money laundering.
In addition to extending Treasury's ability to impose special
measures against foreign jurisdictions or financial institutions
impeding U.S. tax enforcement, the bill would add a new measure to the
list of possible sanctions that could be applied: it would allow
Treasury to instruct U.S. financial institutions not to authorize or
accept credit or debit card transactions involving a designated foreign
jurisdiction or financial institution. Denying tax haven banks the
ability to issue credit or debit cards for use in the United States,
for example, offers an effective new way to stop U.S. tax avoiders from
obtaining access to funds hidden offshore.
This provision is estimated by the Joint Committee on Taxation to
raise $880 million over ten years. It was passed by the Senate last
year as an amendment to help pay for the transportation bill, but,
ultimately, did not make it into law. This non-controversial,
completely discretionary power aimed at foreign facilitators of U.S.
tax evasion should be enacted into law without further delay.
Section 102--Strengthening FATCA
Section 102 of the bill is a new section that seeks to clarify, build
upon,
[[Page S6651]]
and strengthen the Foreign Account Tax Compliance Act, or FATCA, to
flush out hidden foreign accounts and assets used by U.S. taxpayers to
evade paying U.S. taxes. The law is currently designed to become
effective in stages, beginning in 2013, and will eventually require
disclosure of accounts held by U.S. persons at foreign banks, broker-
dealers, investment advisers, hedge funds, private equity funds and
other financial firms.
Some foreign financial institutions are likely to choose to forego
maintaining accounts for U.S. persons rather than comply with FATCA's
disclosure rules. If some foreign financial institutions decide not to
participate in the FATCA system, that's their business. But if U.S.
taxpayers start using those same foreign financial institutions to hide
assets and evade U.S. taxes to the tune of $100 billion per year,
that's our business. The United States has a right to enforce our tax
laws and to expect that financial institutions will not assist U.S. tax
cheats.
Section 101 of the bill would provide U.S. authorities with the means
to take direct action against foreign financial institutions that
decide to operate outside of the FATCA system and allow U.S. clients to
open hidden accounts. If the U.S. Treasury determines that such a
foreign financial institution is significantly impeding U.S. tax
enforcement, Section 101 would give U.S. authorities a menu of special
measures that could be taken in response, including prohibiting U.S.
banks from doing business with that institution.
Section 102, in contrast, does not seek to take action against a non-
FATCA institution, but instead seeks to strengthen U.S. tax enforcement
tools with respect to U.S. persons opening accounts at those
institutions. Section 102 would also help clarify when foreign
financial institutions are obligated to disclose certain accounts to
the United States under FATCA.
Background. In 2006, the Permanent Subcommittee on Investigations
released a report with six case histories detailing how U.S. taxpayers
were using offshore tax havens to avoid payment of the taxes they owed.
These case histories examined an internet-based company that helped
persons obtain offshore entities and accounts; U.S. promoters that
designed complex offshore structures to hide client assets and even
providing clients with a how-to manual for going offshore. They also
examined U.S. taxpayers who diverted business income offshore through
phony loans and invoices; a one-time tax dodge that deducted phantom
offshore stock losses from real U.S. stock income to shelter that
income from U.S. taxes; and a 13-year offshore network of 58 offshore
trusts and corporations built by American brothers Sam and Charles
Wyly. Each of these case histories presented the same fact pattern in
which the U.S. taxpayer, through lawyers, banks, or other
representatives, set up offshore trusts, corporations, or other
entities which had all the trappings of independence but, in fact, were
controlled by the U.S. taxpayer whose directives were implemented by
compliant offshore personnel acting as the trustees, officers,
directors, or nominee owners of the offshore entities.
In the case of the Wylys, the brothers and their representatives
communicated Wyly directives to a so-called trust protector who then
relayed the directives to the offshore trustees and corporate officers.
In the 13 years examined by the Subcommittee, the offshore trustees and
corporate officers never once rejected a Wyly request and never once
initiated an action without Wyly approval. They simply did what they
were told, and directed the so-called independent offshore trusts and
corporations to do what the Wylys wanted. A U.S. taxpayer in another
case history told the Subcommittee that the offshore personnel who
nominally owned and controlled his offshore entities, in fact, always
followed his directions, describing himself as the ``puppet master'' in
charge of his offshore holdings.
When the Subcommittee discussed these case histories with financial
administrators from the Isle of Man, the regulators explained that none
of the offshore personnel were engaged in any wrongdoing, because their
laws permit foreign clients to transmit detailed, daily instructions to
offshore service providers on how to handle offshore assets, so long as
it is the offshore trustee or corporate officer who gives the final
order to buy or sell the assets. They explained that, under their law,
an offshore entity is considered legally independent from the person
directing its activities so long as that person follows the form of
transmitting ``requests'' to the offshore personnel who retain the
formal right to make the decisions, even though the offshore personnel
always do as they are asked.
The Subcommittee case histories illustrate what the tax literature
and law enforcement experience have shown for years: that the business
model followed in offshore secrecy jurisdictions is for compliant
trustees, corporate administrators, and financial institutions to
provide a veneer of independence while ensuring that their U.S. clients
retain complete and unfettered control over ``their'' offshore assets.
That's the standard operating procedure offshore. Offshore service
providers pretend to own or control the offshore trusts, corporations
and accounts they help establish, but what they really do is whatever
their clients tell them to do.
Rebuttable Evidentiary Presumptions. The reality behind these
offshore practices makes a mockery of U.S. laws that normally view
trusts and corporations as independent actors. They invite tax
avoidance and tax evasion. To combat these abusive offshore practices,
Section 102(g) of the bill would implement a bipartisan recommendation
in the Levin-Coleman 2006 report by establishing several rebuttable
evidentiary presumptions that would presume a U.S. taxpayer controls
offshore entities that they create, finance, or from which they
benefit, unless the U.S. taxpayer presents clear and convincing
evidence to the contrary.
The presumptions would apply only in civil judicial or administrative
tax or securities enforcement proceedings examining offshore entities
or transactions. They would place the burden of producing evidence from
offshore jurisdiction on the taxpayer who chose to open an offshore
account at a non-FATCA compliant financial institution and who has
access to the information, rather than placing the burden on the
federal government that has little practical ability to get the
information.
Section 102(g)(1) would establish three evidentiary presumptions in
civil tax enforcement efforts. First is a presumption that a U.S.
taxpayer who ``formed, transferred assets to, was a beneficiary of, had
a beneficial interest in, or received money or property or the use
thereof'' from an offshore entity, such as a trust or corporation,
controls that entity. Second is a presumption that funds or other
property received from offshore are taxable income, and that funds or
other property transferred offshore have not yet been taxed. Third is a
presumption that a financial account controlled by a U.S. taxpayer in a
foreign country contains enough money--$10,000--to trigger an existing
statutory reporting threshold and allow the IRS to assert the minimum
penalty for nondisclosure of the account by the taxpayer.
Section 102(g)(2) would establish two evidentiary presumptions
applicable to civil proceedings to enforce U.S. securities laws. The
first would specify that if a director, officer, or major shareholder
of a U.S. publicly-traded corporation creates, finances, or benefits
from an offshore entity, that U.S. corporation would be presumed to
control that offshore entity. The second presumption would provide that
securities nominally owned by an offshore entity are presumed to be
beneficially owned by any U.S. person who controlled that offshore
entity.
All of these presumptions are rebuttable, which means that the U.S.
person who is the subject of the presumptions could provide clear and
convincing evidence to show that the presumptions were factually
inaccurate. To rebut the presumptions, a taxpayer could establish, for
example, that an offshore corporation really was controlled by an
independent third party, or that money sent from an offshore account
really represented a nontaxable gift instead of taxable income. If the
taxpayer wished to introduce evidence from a foreign person, such as an
offshore banker, corporate officer, or trust administrator, to
establish those
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facts, that foreign person would have to appear in the U.S. proceeding
in a manner that would permit cross examination.
The bill also includes several limitations on the presumptions to
ensure their operation is fair and reasonable. First, criminal cases
would not be affected by this bill, which would apply only to civil
proceedings. Second, the presumptions would come into play only if the
IRS or SEC were to challenge a matter in an enforcement proceeding.
Third, the bill recognizes that certain classes of offshore
transactions, such as corporate reorganizations, may not present a
potential for abuse and accordingly authorizes Treasury and the SEC to
issue regulations or guidance identifying such classes of transactions
to which the presumptions would not apply.
An even more fundamental limitation on the presumptions is that they
would apply only to U.S. persons who directly or through an offshore
entity choose to do business with a ``nonFATCA institution,'' meaning a
foreign financial institution that has not adopted the FATCA disclosure
requirements and instead takes advantage of banking, corporate, and tax
secrecy laws and practices that make it very difficult for U.S. tax
authorities to detect financial accounts benefiting U.S. persons.
FATCA's disclosure requirements were designed to combat offshore
secrecy and flush out hidden accounts being used by U.S. persons to
evade U.S. taxes. Section 102(g) would continue the fight by allowing
federal authorities to benefit from rebuttable presumptions regarding
the control, ownership and assets of offshore entities that open
accounts at financial institutions outside the FATCA disclosure system.
These presumptions would allow U.S. law enforcement to establish what
we all know from experience is normally the case in an offshore
jurisdiction: that a U.S. person who creates, finances, or benefits
from an offshore entity controls that entity; that money and property
sent to or from an offshore entity involves taxable income; and that an
offshore account that has not been disclosed to U.S. authorities should
become subject to inspection. U.S. law enforcement needs to establish
those facts presumptively, without having to pierce the secrecy veil,
because of the difficulty of getting access to the relevant
information. At the same time, U.S. persons who chose to transact their
affairs through accounts at a non-FACTA institution are given the
opportunity to lift the veil of secrecy and demonstrate that the
presumptions are factually incorrect. These rebuttable evidentiary
presumptions would provide U.S. tax and securities law enforcement with
powerful new tools to end tax haven abuses.
FATCA Disclosure Obligations. In addition to establishing
presumptions, Section 102 would make several changes to clarify and
strengthen FATCA's disclosure obligations.
Section 102(b) would amend 26 U.S.C. Section 1471 to make it clear
that the types of financial accounts that must be disclosed by foreign
financial institutions under FATCA include not just savings, money
market or securities accounts, but also transaction accounts, such as
checking accounts, that some banks might claim are not depository
accounts. This section would also make it clear that financial
institutions may not omit from their disclosures client assets in the
form of derivatives, including swap agreements.
Section 102(c) would amend 26 U.S.C. 1472 to clarify when a
withholding agent ``knows or has reason to know'' that an account is
directly or indirectly owned by a U.S. person and must be disclosed to
the United States. The bill provision would make it clear that the
withholding agent would have to take into account information obtained
as the result of ``any customer identification, anti-money laundering,
anti-corruption, or similar obligation to identify accountholders.'' In
other words, if a foreign bank knows, as a result of due diligence
inquiries made under its anti-money laundering program, that a non-U.S.
corporation was beneficially owned by a U.S. person, the foreign bank
would have to report that account to the IRS--it could not treat the
offshore corporation as a non-U.S. customer. That approach is already
implied in the existing statutory language and is part of the
regulations that have been issued to implement FATCA, but this
amendment would make it crystal clear.
Section 102(c) would also amend the law to make it clear that the
Treasury Secretary, when exercising authority under FATCA to waive
disclosure or withholding requirements for non-financial foreign
entities, can waive those requirements only for a class of entities
that the Secretary identifies as ``posing a low risk of tax evasion.''
A variety of foreign financial institutions have pressed Treasury to
issue waivers under Section 1472, and this amendment would make it
clear that such waivers are possible only when the risk of tax evasion
is minimal.
Section 102(d) would amend 26 U.S.C. 1473 to clarify that the
definition of ``substantial United States owner'' includes U.S. persons
who are beneficial owners of corporations or the beneficial owner of an
entity that is one of the partners in a partnership. While the current
statutory language already implies that beneficial owners are included,
this amendment would leave no doubt.
Section 102(e) would amend 26 U.S.C. 1474 to make two exceptions to
the statutory provision which makes account information disclosed to
the IRS by foreign financial institutions under FATCA confidential tax
return information. The first exception would allow the IRS to disclose
the account information to federal law enforcement agencies, including
the SEC and bank regulators, investigating possible violations of U.S.
law. The second would allow the IRS to disclose the name of any foreign
financial institution whose disclosure agreement under FATCA was
terminated, either by the institution, its government, or the IRS.
Financial institutions should not be able to portray themselves as
FATCA institutions if, in fact, they are not.
Section 102(f) would amend 26 U.S.C. 6038D, which creates a new tax
return disclosure obligation for U.S. taxpayers with interests in
``specified foreign financial assets,'' to clarify that the disclosure
requirement applies not only to persons who have a direct or nominal
ownership interest in those foreign financial assets, but also to
persons who have a beneficial ownership interest in them. While the
existing statutory language implies this broad reporting obligation,
the amendment would make it clear.
Finally, Section 102(a) would amend a new annual tax return
obligation established in 26 U.S.C. 1298(f) for passive foreign
investment companies (PFICs). PFICs are typically used as holding
companies for foreign assets held by U.S. persons, and the intent of
the new Section 1298(f) is to require all PFICs to begin filing annual
informational tax returns with the IRS. The current statutory language,
however, limits the disclosure obligation to any U.S. person who is a
``shareholder'' in a PFIC, and does not cover PFICs whose shares may be
nominally held by an offshore corporation or trust, but beneficially
owned by a U.S. person. The bill provision would broaden the PFIC
reporting requirement to apply to any U.S. person who ``directly or
indirectly, forms, transfers assets to, is a beneficiary of, has a
beneficial interest in, or receives money or property or the use
thereof'' from a PFIC. That broader formulation of who should file the
new PFIC annual tax return would ensure that virtually all PFICs formed
by, financed by, or benefiting U.S. persons are required to file
informational returns with the IRS.
Section 103--Corporations Managed and Controlled in the United States
Section 103 of the bill focuses on corporations which claim foreign
status--often in a tax haven jurisdiction--in order to avoid payment of
U.S. taxes, but then operate right here in the United States in direct
competition with domestic corporations that are paying their fair
share.
This offshore game is all too common. In 2008, the Senate Finance
Committee held a hearing describing a trip made by GAO to the Cayman
Islands to look at the infamous Ugland House, a five-story building
that is the official address for over 18,800 registered companies. GAO
found that about half of the alleged Ugland House tenants--around 9,000
entities--had a billing address in the United States and were not
actual occupants of the building. In fact, GAO determined that none of
the companies registered at the Ugland
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House had office space or actual employees there. GAO found that the
only true occupant of the building was a Cayman law firm, Maples and
Calder.
Here's what the GAO wrote:
Very few Ugland House registered entities have a
significant physical presence in the Cayman Islands or carry
out business in the Cayman Islands. According to Maples and
Calder partners, the persons establishing these entities are
typically referred to Maples by counsel from outside the
Cayman Islands, fund managers, and investment banks. As of
March 2008 the Cayman Islands Registrar reported that 18,857
entities were registered at the Ugland House address.
Approximately 96 percent of these entities were classified as
exempted entities under Cayman Islands law, and were thus
generally prohibited from carrying out domestic business
within the Cayman Islands.
Section 103 of the bill is designed to address the Ugland House
problem. It focuses on the situation where a corporation is
incorporated in a tax haven as a mere shell operation with little or no
physical presence or employees in the jurisdiction. The shell entity
pretends it is operating in the tax haven even though its key personnel
and decisionmakers are in the United States. This set up allows the
owners of the shell entity to take advantage of all of the benefits
provided by U.S. legal, educational, financial and commercial systems
and at the same time avoid paying U.S. taxes.
My Subcommittee has seen numerous companies exploit this situation,
declaring themselves to be foreign corporations even though they really
operate out of the United States. For example, thousands of hedge funds
whose managers live and work in the United States play this game to
escape taxes and avoid regulation. In an October 2008 Subcommittee
hearing, three sizeable hedge funds, Highbridge Capital which is
associated with JPMorgan Chase, Angelo Gordon, and Maverick Capital,
acknowledged that, although all claimed to be Cayman Island
corporations, none had an office or a single full time employee in that
jurisdiction. Instead, their offices and key decisionmakers were
located and did business right here in the United States.
According to a Wall Street Journal article, over 20 percent of the
corporations that made initial public offerings or IPOs in the United
States in 2010, were incorporated in Bermuda or the Cayman Islands, but
also described themselves to investors as based in another country,
such as the United States. The article also described how Samsonite, a
Denver-based company, reincorporated in Luxembourg before going public.
Too many of these tax-haven incorporations appear to have no purpose
other than having the advantage of operating in the United States while
avoiding U.S. taxation and undercutting U.S. competitors who pay their
taxes.
Still another illustration of the problem came to light earlier this
year, in a Subcommittee hearing which disclosed that Apple, a prominent
U.S. corporation, had established three wholly-owned subsidiaries in
Ireland that claimed the bulk of Apple's foreign sales income, while
also claiming not to be tax resident in any country. All three of
Apple's Irish subsidiaries were run by personnel located primarily in
the United States. Under Irish law, because the management of the
corporations was not in Ireland, they were not considered tax residents
of Ireland. Under U.S. law, because the corporations were formed in
Ireland, they were not considered tax residents of the United States.
They were neither here nor there, and paid no corporate income taxes
anywhere.
Section 103 would put an end to such corporate fictions and
unjustified tax avoidance by profitable multinational corporations
through offshore loopholes. It provides that if a corporation is
publicly traded or has aggregate gross assets of $50 million or more,
and its management and control occurs primarily in the United States,
then that corporation will be treated as a U.S. domestic corporation
for income tax purposes.
To implement this provision, Treasury is directed to issue
regulations to guide the determination of when management and control
occur primarily in the United States, looking at whether
``substantially all of the executive officers and senior management of
the corporation who exercise day-to-day responsibility for making
decisions involving strategic, financial, and operational policies of
the corporation are located primarily within the United States.''
This new section relies on the same principles regarding the true
location of ownership and control of a company that underlie the
corporate inversion rules adopted in the American Jobs Creation Act of
2005. Those inversion rules, however, do not address the fact that some
entities directly incorporate in foreign countries and manage their
businesses activities from the United States. Section 103 would level
the playing field and ensure that entities which incorporate directly
in another country are subject to a similar management and control
test. Section 103 is also similar in concept to the substantial
presence test in the income tax treaty between the United States and
the Netherlands that looks to the primary place of management and
control to determine corporate residency.
To address, in particular, the many investment companies that
incorporate in tax havens but operate with investment managers who live
and work in the United States, Section 103 specifically directs
Treasury to issue regulations to specify that, when investment
decisions are being made in the United States, the management and
control of that corporation shall be treated as occurring primarily in
the United States, and that corporation shall be subject to U.S. taxes
in the same manner as any other U.S. corporation.
The section would provide exceptions for private companies that once
met the section's test for treatment as a domestic corporation but,
during a later tax year, fell below the $50 million gross assets test,
do not expect to exceed that threshold again, and are granted a waiver
by the Treasury Secretary.
If enacted into law, Section 103 would put an end to the unfair
situation where some U.S.-based companies pay U.S. taxes, while their
competitors set up a shell corporation in a tax haven and are able to
defer or escape taxation, despite the fact that their foreign status is
nothing more than a paper fiction. This provision has been estimated by
the Joint Committee on Taxation to raise $6.6 billion in tax revenues
over ten years.
Section 104--Increased Disclosure of Offshore Accounts and Entities
Offshore tax abuses thrive in secrecy. Section 104(a) attempts to
overcome offshore secrecy practices by creating two new disclosure
mechanisms requiring third parties to report offshore transactions
undertaken by U.S. persons.
The first disclosure mechanism focuses on U.S. financial institutions
that open a U.S. account in the name of an offshore entity, such as an
offshore trust or corporation, and learn from an anti-money laundering
due diligence review, that a U.S. person is the beneficial owner behind
that offshore entity. In the Wyly case history examined by the
Subcommittee, for example, three major U.S. financial institutions
opened dozens of accounts for offshore trusts and corporations that
they knew were associated with the Wyly family.
Under current anti-money laundering law, all U.S. financial
institutions are supposed to know who is behind an account opened in
the name of, for example, an offshore shell corporation or trust. They
are supposed to obtain this information to safeguard the U.S. financial
system against misuse by terrorists, money launderers, and other
criminals.
Under current tax law, a bank or securities broker that opens an
account for a U.S. person is also required to give the IRS a 1099 form
reporting any capital gains or other reportable income earned on that
account. However, the bank or securities broker need not file a 1099
form if the account is owned by a foreign entity not subject to U.S.
tax law. Problems arise when an account is opened in the name of an
offshore entity that is nominally not subject to tax, but which the
bank or broker knows, from its anti-money laundering review, is owned
or controlled by a U.S. person who is subject to tax. The U.S. person
should be filing a tax return with the IRS reporting the income of the
``controlled foreign corporation.'' However, since he or she knows it
is difficult for the IRS to connect an offshore accountholder to a
particular taxpayer, the U.S. person
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may feel safe in not reporting that income. That complacency might
change, however, if the U.S. person knew that the bank or broker who
opened the account and learned of the connection had a legal obligation
to report any account income to the IRS.
Under current law, the way the regulations are written and typically
interpreted, the bank or broker can treat an account opened in the name
of a foreign corporation as an account that is held by an independent
entity that is separate from the U.S. person, even if it knows that the
foreign corporation is acting merely as a screen to hide the identity
of the U.S. person, who exercises complete authority over the
corporation and benefits from any income earned on the account. Many
banks and brokers contend that the current regulations impose no duty
on them to file a 1099 form or other form disclosing that type of
account to the IRS.
The bill would strengthen current law by expressly requiring a bank
or broker that knows, as a result of its anti-money laundering due
diligence or otherwise, that a U.S. person is the beneficial owner of a
foreign entity that opened an account, to disclose that account to the
IRS by filing a 1099 or equivalent form reporting the account income.
This reporting obligation would not require banks or brokers to gather
any new information--financial institutions are already required to
perform anti-money laundering due diligence for accounts opened by
offshore shell entities. The bill would instead require U.S. financial
institutions to act on what they already know by filing the relevant
form with the IRS.
This section would require such reports to the IRS from two sets of
financial institutions. The first set is financial institutions that
are located and do business in the United States. The second set is
foreign financial institutions which are located and do business
outside of the United States, but are voluntary participants in either
the FATCA or Qualified Intermediary program, and have agreed to provide
information to the IRS about certain accounts. Under this section, if a
foreign financial institution has an account under the FATCA or QI
program, and the accountholder is a non-U.S. entity that is controlled
or beneficially owned by a U.S. person, then that foreign financial
institution would have to report any reportable assets or income in
that account to the IRS. While foreign financial institutions are
already required to report such accounts under FATCA regulations,
Section 104(a) would provide a clear statutory foundation for those
regulatory provisions and extend them to U.S. financial institutions as
well.
The second disclosure mechanism created by Section 104(a) targets
U.S. financial institutions that open foreign bank accounts for U.S.
clients at non-FATCA institutions, meaning foreign financial
institutions that have not agreed under FATCA to disclose to the IRS
the accounts they open for U.S. persons. Past Subcommittee
investigations have found that some U.S. financial institutions help
their U.S. clients both to form offshore entities and to open foreign
bank accounts for those entities, so that their clients do not even
need to leave home to set up an offshore structure. Since non-FATCA
institutions, by definition, have no obligation to disclose the
accounts to U.S. authorities, Section 104(a) would instead impose that
disclosure obligation on the U.S. financial institution that helped set
up the account for its U.S. client.
Section 104(b) would impose the same penalties for the failure to
report such accounts as apply to the failure to meet other reporting
obligations of withholding agents.
Section 105--Closing the Swaps Offshore Loophole
Section 105 of the bill targets a tax loophole benefiting swap
dealers and other parties that enter into swap arrangements, which I
call the swaps offshore loophole.
In simple terms, a swap is a financial contract in which two parties
typically bet against each other on the performance of a referenced
financial instrument or on the outcome of a referenced event over a
specified period of time. The bet can be about whether a commodity
price or stock value will go up or down over time, whether one foreign
currency or interest rate will gain or lose value compared to another
during the covered period, or whether a corporate bond or sovereign
country will default before a specified date. Those swaps are generally
referred to as commodity, equity, interest rate, foreign currency, or
credit default swaps. Sometimes swaps are used, not to place bets, but
to allocate revenue streams over time. For example, in a ``total return
swap,'' one party may promise to pay the other party all financial
returns produced by a referenced financial instrument during the
covered period. In many swaps, one party makes a series of payments to
the other during the covered period to reflect the change in value of
the swap over time.
Ten years ago, few people outside of financial circles had ever heard
of a swap, but we all learned a great deal about them during the
financial crisis. We watched AIG teeter on the brink of bankruptcy from
issuing credit default swaps whose collateral calls it could not meet,
needing a $182 billion rescue with taxpayer dollars. Since then, we
have seen credit default swaps play roles in financial crises around
the world from Greece to Ireland to Portugal. We have also learned that
virtually all major U.S. banks engage in interest rate and foreign
currency swaps, and have seen U.S. cities like Detroit incur major
losses from entering into complex interest rate swaps that went sour.
We have also learned that global swap markets have grown so large that,
by the end of 2012, according to the Bank for International
Settlements, their dollar value topped $560 trillion.
Well it turns out that there's a tax angle that promotes not only
swaps dealing, but also offshore finagling. That's because U.S. tax
regulations currently allow swap payments that are sent from the United
States to someone offshore to be treated as non-U.S. source income that
may escape U.S. taxation. Let me repeat that. Under existing IRS
regulations, swap payments sent from the United States are deemed to be
non-U.S. source income to the recipient for U.S. tax purposes. That is
because current IRS regulations deem the ``source'' of the swap payment
to be where the payment ends up--the exact opposite of the normal
meaning of the word ``source.''
You can imagine the use that some hedge funds that are managed here
in the United States, but are incorporated offshore and maintain post
office boxes and bank accounts in tax havens, may be making of that tax
loophole. They can tell their swap counterparties in the United States
to send any swap payments to their offshore post box or bank account,
tell Uncle Sam that those payments are legally considered non-U.S.
source income, and count the swap payments they receive as foreign
income not subject to U.S. tax. Hedge funds are likely far from alone
in sheltering their swap income from taxation by sending it offshore.
Banks, securities firms, other financial firms and a lot of commercial
firms may be doing the same thing.
Our bill would shut down that offshore game simply by recognizing
reality--that swap payments sent from the United States are U.S. source
income subject to taxation.
Title II--Other Measures to Combat Tax Haven Abuses
The second title of the bill concentrates on strengthening key
domestic measures used to combat offshore tax abuse. Its provisions
focus on strengthening corporate offshore disclosure requirements and
nondisclosure penalties, anti-money laundering safeguards used to
screen incoming offshore funds, procedures to authorize John Doe
summonses used to uncover the identities of tax dodgers, and Foreign
Bank Account Reports used to identify assets held offshore.
Section 201--Country-By-Country Reporting
Section 201 of the bill would tackle the problem of offshore secrecy
that currently surrounds most multinational corporations by requiring
them to provide basic information on a country-by-country basis to the
investing public and government authorities.
Many multinationals today are complex businesses with sprawling
operations that cross multiple international boundaries. In many cases,
no one outside of the corporations themselves knows much about what a
particular corporation is doing on a per
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country basis or how its country-specific activities fit into the
corporation's overall performance, planning, and operations.
The lack of country-specific information deprives investors of key
data to analyze a multinational's financial health, exposure to
individual countries' problems, and worldwide operations. There is also
a lack of information to evaluate tax revenues on a country-specific
basis to combat tax evasion, financial fraud, and corruption by
government officials.
The lack of country-specific information impedes efficient tax
administration and leaves tax authorities unable to effectively analyze
transfer pricing arrangements, foreign tax credits, business
arrangements that attempt to play one country off another to avoid
taxation, and illicit tactics to move profits to tax havens.
For example, earlier this year, the Subcommittee hearing on Apple
disclosed for the first time that it had three wholly owned
subsidiaries in Ireland which claimed the bulk of Apple's sales income,
but also claimed not to be tax resident in any country. One of those
subsidiaries, Apple Operations International, had no physical presence
at any address and, in thirty years of existence, no employees. It was
run entirely from the United States, but claimed it was not a U.S. tax
resident. Over a four year period from 2009 to 2012, it declared $30
billion in revenues, but paid no corporate income tax in the United
States, Ireland, or any other jurisdiction. Apple Sales International,
a second Irish subsidiary, received sales revenue over a three-year
period, from 2009 to 2011, totaling $74 billion, but did not declare
any of that income in the United States and apparently only a tiny
fraction in Ireland. In 2011, for example, it paid no corporate income
taxes at all in the United States and only $10 million in taxes in
Ireland on $22 billion in income, producing an overall tax rate of
five-hundreds of one percent. It is far from clear that either U.S. or
Irish tax authorities were fully aware of the actions taken by Apple to
avoid taxation in both countries.
Apple is far from alone. Over the last two years, other multinational
corporations, including Starbucks, Amazon, Google, and others, have
been excoriated for failing to pay taxes in countries where they have
massive sales. Earlier this month, leaders of the G-20 countries
declared aggressive multinational corporate tax avoidance through
profit shifting was a global problem, and called for profits to be
taxed where economic activities added value or produced profits. The G-
20 leaders, including President Obama, committed their countries to
engaging in automatic information sharing to stop tax evasion and to
support an ongoing effort by the Organization for Cooperation and
Economic Development the OECD to develop global tax principles aimed at
ending corporate profit shifting and tax avoidance. They also endorsed
an ongoing OECD effort to develop a standard template for multinational
corporations to disclose their income and taxes on a per country basis.
Section 201 of our bill would help the United States carry out its G-
20 commitment to combat multinational tax avoidance while also
assisting U.S. investors and tax administrators to identify U.S.
corporations engaged in profit shifting and tax avoidance. The bill
would accomplish those objectives by requiring corporations that are
registered with the Securities and Exchange Commission to provide an
annual report with basic information about their operations on a
country-by-country basis. Three types of information would have to be
provided: the approximate number of corporate employees per country;
the total amount of pre-tax gross revenues assigned by the corporation
to each country; and the total amount of tax obligations and actual tax
payments made by the corporation in each jurisdiction. This information
would have to be provided by the corporation in a publicly available
annual report filed with the SEC.
The bill requires disclosure of basic data that multinational
corporations should already have. The data would not be burdensome to
collect. It's just information that is not routinely released by many
multinationals. It is time to end the secrecy that now enables too many
multinationals to run circles around tax administrators.
In the case of the United States, the value of country-by-country
data would provide critical information in the fight against rampant
corporate tax evasion. An article by Professor Kimberly Clausing
estimated that, in 2008 alone, ``the income shifting of multinational
firms reduced U.S. government corporate tax revenue by about $90
billion,'' which was ``approximately 30 percent of corporate tax
revenues.'' Think about that. Profit shifting--in which multinationals
use various tactics to shift income to tax havens to escape U.S. taxes
is--responsible for $90 billion in unpaid taxes in a single year. Over
ten years, that translates into $900 billion--nearly a trillion
dollars. It is unacceptable to allow that magnitude of nonpayment of
corporate taxes to continue year after year in light of the mounting
deficits facing this country and the sequestration that has been
imposed.
Treasury data shows that the overall share of federal taxes paid by
U.S. corporations has fallen dramatically, from 32 percent in 1952, to
about 9 percent last year. A 2008 report by the Government
Accountability Office found that, over an eight-year period, about 1.2
million U.S. controlled corporations, or 67 percent of the corporate
tax returns filed, paid no federal corporate income tax at all, despite
total gross receipts of $2.1 trillion. A more recent study found that,
over a recent three year period, 30 of the largest U.S. multinationals,
with more than $160 billion in profits, paid no federal income taxes at
all. A 2013 GAO report found that, contrary to the statutory corporate
income tax rate of up to 35 percent, in 2010, overall, large profitable
corporations actually paid an effective tax rate of just 12.6 percent.
At the same time that corporations are dodging payment of U.S. taxes,
corporate misconduct is continuing to drain the U.S. treasury of
billions upon billions of taxpayer dollars to combat mortgage fraud,
oil spills, bank bailouts, and more.
Corporate nonpayment of tax involves a host of issues, but transfer
pricing and offshore tax dodging by multinationals is a big part of the
problem. Section 201 of the bill would take the necessary first step to
stop transfer pricing abuses by requiring clear disclosures of basic
corporate data on a country-by-country basis.
Section 202--$1 Million Penalty for Hiding Offshore Stock Holdings
Section 202 of the bill addresses a different offshore abuse. In
addition to tax abuses, the 2006 Subcommittee investigation into the
Wyly case history uncovered a host of troubling transactions involving
U.S. securities held by the 58 offshore trusts and corporations
associated with the two Wyly brothers. Over the course of a number of
years, the Wylys had obtained about $190 million in stock options as
compensation from three U.S. publicly traded corporations at which they
were directors and major shareholders. Over time, the Wylys transferred
those stock options to the network of offshore entities they had
established.
The investigation found that, for years, the Wylys had generally
failed to report the offshore entities' stock holdings or transactions
in their filings with the Securities and Exchange Commission (SEC).
They did not report those stock holdings on the ground that the 58
offshore trusts and corporations functioned as independent entities,
even though the Wylys continued to direct the entities' investment and
other activities. The public companies where the Wylys were corporate
insiders also failed to include in their SEC filings information about
the company shares held by the offshore entities, even though the
companies knew of their close relationship to the Wylys, that the Wylys
had provided the offshore entities with significant stock options, and
that the offshore entities held large blocks of the company stock. On
other occasions, the public companies and various financial
institutions failed to treat the shares held by the offshore entities
as affiliated stock, even though they were aware of the offshore
entities' close association with the Wylys. The investigation found
that, because both the Wylys and the public companies had failed to
disclose the holdings of the offshore entities, for 13 years federal
regulators had been unaware of those stock holdings and the
relationships between the offshore entities and the Wyly brothers.
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Corporate insiders and public companies are already obligated by
current law to disclose stock holdings and transactions of offshore
entities affiliated with a company director, officer, or major
shareholder. In fact, in 2010, the SEC filed a civil complaint against
the Wylys in connection with their hidden offshore holdings and alleged
insider trading. Current penalties, however, appear insufficient to
ensure compliance in light of the low likelihood that U.S. authorities
will learn of transactions that take place in an offshore jurisdiction.
To address this problem, Section 202 of the bill would establish a new
monetary penalty of up to $1 million for persons who knowingly fail to
disclose offshore stock holdings and transactions in violation of U.S.
securities laws.
Sections 203 and 204--Anti-Money Laundering Programs
The next two sections of the bill seek to establish preventative
programs to screen offshore money being sent into the United States
through private investment funds.
The Subcommittee's 2006 investigation showed that the Wyly brothers
used two hedge funds and a private equity fund controlled by them to
funnel millions of untaxed offshore dollars into U.S. investments.
Other Subcommittee investigations provide extensive evidence of the
role played by U.S. formation agents in assisting U.S. persons to set
up offshore structures as well as U.S. shell companies later used in
illicit activities, including tax evasion, money laundering, and other
misconduct. Because hedge funds, private equity funds, and formation
agents are as vulnerable as other financial institutions to money
launderers seeking entry into the U.S. financial system, the bill
contains two provisions aimed at ensuring that these groups know who
their clients are and do not transmit suspect funds into the U.S.
financial system.
Currently, hedge funds and private equity funds are free to transmit
substantial offshore funds into the United States without the same
safeguards that apply to other financial institutions--anti-money
laundering programs that require them to know their customers,
understand where substantial funds are coming from, and report
suspicious activity. There is no reason why this sector of our
financial services industry should continue to serve as an unfettered
gateway into the U.S. financial system for substantial funds that could
be connected to tax evasion, money laundering, terrorism, drug
trafficking, or other misconduct.
In 2001, after the 9/11 terrorist attack, the Patriot Act required
all U.S. financial institutions to put anti-money laundering programs
in place. Eleven years ago, in 2002, in compliance with the Patriot
Act, the Treasury Department proposed anti-money laundering regulations
for hedge funds and private equity companies, but never finalized them.
In 2008, the Department withdrew them with no explanation. Section 203
of the bill would require Treasury to get back on track and issue final
anti-money laundering regulations for investment advisors to hedge
funds and private equity companies registered with the SEC. Treasury
would be free to draw upon its 2002 proposal, and would have 180 days
after enactment of the bill to propose a rule and another 270 days to
finalize it and put in place the same types of safeguards that now
apply to all other financial firms.
In addition, Section 204 of the bill would add formation agents to
the list of persons with anti-money laundering obligations. For the
first time, those engaged in the business of forming corporations,
trusts, and other entities, both offshore and in the 50 States, would
be responsible for knowing who their clients are and avoiding suspect
funds. The bill directs Treasury to develop anti-money laundering
regulations for this group in a little over a year. Treasury's key
anti-money laundering agency, the Financial Crimes Enforcement Network,
testified before the Subcommittee in 2006, that it was considering
drafting such regulations but seven years later has yet to do so.
Section 204 also creates an exemption for government personnel and for
attorneys who use paid formation agents when forming entities for their
clients. Because paid formation agents would already be subject to
anti-money laundering obligations under the bill, there would be no
reason to simultaneously subject attorneys using their services to the
same anti-money laundering requirements.
We expect and intend that, as in the case of all other entities
required to institute anti-money laundering programs, the regulations
issued in response to this bill would instruct hedge funds, private
equity funds and formation agents to adopt risk-based procedures that
would concentrate their due diligence efforts on clients and funds that
pose the highest risks of injecting suspect funds into the United
States.
Section 205--IRS John Doe Summons
Section 205 of the bill focuses on an important tool used by the IRS
in recent years to uncover taxpayers involved in offshore tax schemes,
known as a John Doe summons. Section 205 would make three technical
changes to make the use of a John Doe summons more effective in
offshore and other complex investigations.
A John Doe summons is an administrative IRS summons used to request
information in cases where the identity of a taxpayer is unknown. In
cases involving a known taxpayer, the IRS may issue a summons to a
third party to obtain information about that U.S. taxpayer, but must
also notify the taxpayer who then has 20 days to petition a court to
quash the summons to the third party. With a John Doe summons, however,
the IRS does not have the taxpayer's name and does not know where to
send the taxpayer notice, so the statute substitutes a procedure in
which the IRS must instead apply to a court for advance permission to
serve the summons on the third party. To obtain approval of the
summons, the IRS must show the court, in public filings to be resolved
in open court, that: (1) the summons relates to a particular person or
ascertainable class of persons, (2) there is a reasonable basis for
concluding that there is a tax compliance issue involving that person
or class of persons, and (3) the information sought is not readily
available from other sources.
In recent years, the IRS has used John Doe summonses to obtain
information about taxpayers operating in offshore secrecy
jurisdictions. For example, the IRS obtained court approval to serve a
John Doe summons on a Swiss bank, UBS AG, to obtain the names of
thousands of U.S. clients who opened UBS accounts in Switzerland
without disclosing those accounts to the IRS. That landmark effort to
overcome Swiss secrecy laws led to the bank's turning over thousands of
U.S. client names to the United States and to the Swiss government's
announcing it would no longer use its secrecy laws to protect U.S. tax
evaders. In earlier years, the IRS obtained court approval to issue
John Doe summonses to credit card associations, credit card processors,
and credit card merchants, to collect information about taxpayers using
credit cards issued by offshore banks. This information has led to many
successful cases in which the IRS has identified funds hidden offshore
and recovered unpaid taxes.
Currently, however, use of the John Doe summons process is time
consuming and expensive. For each John Doe summons involving an
offshore secrecy jurisdiction, the IRS has had to establish in court
that the involvement of accounts and transactions in that offshore
secrecy jurisdiction meant that there was a significant likelihood of
tax compliance problems. To relieve the IRS of the need to make this
same proof over and over in court after court, the bill would provide
that, in any John Doe summons proceeding involving a class defined in
terms of a correspondent or payable-through account involving a non-
FATCA institution, the court may presume that the case raises tax
compliance issues. This presumption would then eliminate the need for
the IRS to repeatedly establish in court the obvious fact that accounts
at non-FATCA institutions raise tax compliance issues.
In addition, Section 205 would streamline the John Doe summons
approval process in large ``project'' investigations where the IRS
anticipates issuing multiple summonses to definable classes of third
parties, such as banks or credit card associations, to obtain
information related to particular taxpayers. Right now, for each
summons issued in connection with a
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project, the IRS has to obtain the approval of a court, often having to
repeatedly establish the same facts before multiple judges in multiple
courts. This repetitive exercise wastes IRS, Justice Department, and
court resources, and fragments oversight of the overall IRS
investigative effort.
To streamline this process and strengthen court oversight of IRS use
of John Doe summons, the bill would authorize the IRS to present an
investigative project, as a whole, to a single judge to obtain approval
for issuing multiple summonses related to that project. In such cases,
the court would retain jurisdiction over the case after approval is
granted, to exercise ongoing oversight of IRS issuance of summonses
under the project. To further strengthen court oversight, the IRS would
be required to file a publicly available report with the court on at
least an annual basis describing the summonses issued under the
project. The court would retain authority to restrict the use of
further summonses at any point during the project.
Section 206--FBAR Investigations and Suspicious Activity Reports
Section 206 of the bill contains several provisions to strengthen the
ability of the IRS to enforce the Foreign Bank Account Report (FBAR)
requirements and clarify the right of access by IRS civil enforcement
authorities to Suspicious Activity Reports.
Under present law, a person controlling a foreign financial account
with over $10,000 is required to check a box on his or her income tax
return and, under Title 31, also file an FBAR form with the IRS.
Treasury has delegated to the IRS responsibility for investigating FBAR
violations and assessing FBAR penalties. Because the FBAR enforcement
jurisdiction derives from Title 31, however, the IRS has set up a
complex process for when its personnel may use tax return information
when acting in its role as FBAR enforcer. The tax disclosure law, in
Section 6103(b)(4) of the tax code, permits the use of tax information
only for the administration of the internal revenue laws or ``related
statutes.'' To implement this statutory requirement, the IRS currently
requires its personnel to determine, at a managerial level and on a
case by case basis, that the Title 31 FBAR law is a ``related
statute.'' Not only does this necessitate a repetitive determination in
every FBAR case before an IRS agent can look at the potential non-
filer's income tax return to determine if such filer checked the FBAR
box, but it also prevents the IRS from comparing FBAR filing records to
bulk data on foreign accounts received from tax treaty partners to find
non-filers.
One of the stated purposes for the FBAR filing requirement is that
such reports ``have a high degree of usefulness in . . . tax . . .
investigations or proceedings.'' 31 U.S.C. Sec. 5311. If one of the
reasons for requiring taxpayers to file FBARs is to use the information
for tax purposes, and if the IRS has been charged with FBAR enforcement
because of the FBARs' close connection to tax administration, common
sense dictates that the FBAR statute should be viewed as a ``related
statute'' for tax disclosure purposes. Section 206(a) of the bill would
make that clear by adding a provision to Section 6103(b) of the tax
code deeming FBAR-related statutes to be ``related statutes,'' thereby
allowing IRS personnel to make routine use of tax return information
when working on FBAR matters.
The second change that would be made by Section 206 is an amendment
to simplify the calculation of FBAR penalties. Currently the penalty is
determined in part by the balance in the foreign bank account at the
time of the ``violation.'' The violation has been interpreted to have
occurred on the due date of the FBAR return, which is June 30 of the
year following the year to which the report relates. The statute's use
of this specific June 30th date can lead to strange results if money is
withdrawn from the foreign account after the reporting period closed
but before the return due date. To eliminate this unintended problem,
Section 206(b) of the bill would instead calculate the penalty using
the highest balance in the account during the covered reporting period.
The third part of Section 206 relates to Suspicious Activity Reports
or SARs, which financial institutions are required to file with the
Financial Crimes Enforcement Center (FinCEN) of the Treasury Department
when they encounter suspicious transactions. FinCEN is required to
share this information with law enforcement, but currently does not
permit IRS civil investigators access to the information, even though
IRS civil investigators are federal law enforcement officials. Sharing
SAR information with civil IRS investigators would likely prove very
useful in tax investigations and would not increase the risk of
disclosure of SAR information, because IRS civil personnel operate
under the same tough confidentiality rules as IRS criminal
investigators. In some cases, IRS civil agents are now issuing an IRS
summons to a financial institution to get access, for a production fee,
to the very same information the financial institution has already
filed with Treasury in a SAR. Section 206(c) of the bill would end that
inefficient and costly practice by making it clear that ``law
enforcement'' includes civil tax law enforcement.
Title III--Ending Corporate Offshore Tax Avoidance
The first two titles of the bill focus primarily on strengthening
tools needed to identify, stop, and punish offshore tax evasion,
concentrating on activities that, for the most part, are already
illegal. Another problem, however, are actions taken by multinational
corporations to exploit loopholes in our tax code. Title III of the
bill seeks to close loopholes that contribute to offshore tax abuse and
create incentives for U.S. corporations to send jobs and operations
offshore. Most of these provisions are modeled after recommendations
made by the President in his budget proposals.
Earlier this month, the G-20 leaders endorsed efforts to prevent tax
avoidance and tax evasion through offshore structures. They stated that
``international tax rules, which date back to the 1920's, have not kept
pace with the changing business environment, including the growing
importance of intangibles and the digital economy.'' They agreed that
base erosion and profit shifting (BEPS) deprives countries across the
world of the funds needed to finance their governments, and results in
an unfair burden on the citizens who must make up the lost revenues
through increased taxes. The G-20 leaders issued a declaration that
``we must move forward in fighting BEPS practices so that we ensure a
fair contribution of all productive sectors to the financing of public
spending in our countries.''
The provisions we are offering today would help do just that.
Section 301--Allocation of Expenses and Taxes on the Basis of
Repatriation of Foreign Income
Section 301 addresses two key loopholes in the taxation of
multinational corporations. First, it would stop corporations from
taking current deductions for expenses arising from moving assets and
operations abroad while being able to still defer paying U.S. income
taxes on the income generated from those assets and operations.
Offshore Expenses. Under current law, a multinational corporation can
lower its U.S. taxes by taking deductions for offshore expenses
currently, while deferring paying taxes on its related income. For
example, if a U.S.-based company borrows money in the United States to
build a factory offshore, then it can deduct currently the interest
expense it pays on the loan from its U.S. taxes. It can also deduct
currently the expenses of moving materials to the offshore factory and
for operating the offshore factory on an ongoing basis. But the company
doesn't have to pay U.S. taxes on any of the income arising from its
offshore factory operations until it chooses to return that income to
the United States. The end result is that the multinational corporation
currently deducts the offshore expenses from its taxable income, while
deferring taxes on the offshore income related to those expenses. That
deduction-income mismatch creates a tax incentive for corporations to
move their operations, jobs, and profits offshore.
Section 301 of the bill would eliminate that offshore incentive by
allowing multinationals to claim deductions only for the expenses of
producing foreign income when they have repatriated the income back to
the U.S. parent corporation and paid taxes on it. For corporations that
choose to immediately repatriate, and thus pay taxes
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on, their foreign earnings, the bill would present no change from
current tax policy. But for multinational corporations that park their
overseas earnings outside the United States, and defer paying any taxes
on those earnings, the bill would no longer allow them to claim U.S.
tax deductions for expenses associated with those same overseas
operations, again, unless and until they return the profits to the
United States and pay taxes on them.
It simply does not make sense for American taxpayers to subsidize the
offshoring of American jobs and operations--but that is exactly what
the current tax code is doing. The bill being introduced today would
stop that unjustified tax subsidy.
This provision has been proposed in various forms in the President's
budget proposals, and is estimated by the Joint Committee on Taxation
to raise $60 billion over ten years.
Foreign Tax Credits. The second loophole addressed by Section 301
would fix a complex mathematical game played by multinational
corporations with how they calculate their foreign tax credits. Our
proposal, which the President has included in his budget proposals,
would close the loophole that allows multinationals to use excess
foreign tax credits from higher tax jurisdictions to shelter income run
through lower tax jurisdictions from U.S. taxes. There is bipartisan
agreement that this issue needs to be addressed.
The first part of this mathematical game is straightforward. Under
current law, the tax code protects U.S. taxpayers from double taxation
of foreign income by allowing them to claim a foreign tax credit for
taxes paid to a foreign jurisdiction. Those foreign tax credits can be
used to offset U.S. income taxes owed by the corporation.
Here is an example. Suppose ABC Corporation, a U.S. multinational
corporation, has $100 in income in Higher Tax Country where it is taxed
at 40 percent, and another $100 in income in Lower Tax Country where it
is taxed at 0 percent. Because ABC Corp. paid $40 in taxes to Higher
Tax Country, it would generate a $40 foreign tax credit which it could
immediately use to lower its U.S. taxes when it repatriates the foreign
income.
Now here is where it gets a bit more complex. Under current law, the
corporation can use some of the foreign tax credits generated from
paying taxes in one country to shield from U.S. taxes foreign income
attributed to another country, including a tax haven.
Right now, if a corporation earns foreign tax credits from a higher
tax jurisdiction and those tax credits exceed the amount used to offset
the corporation's U.S. tax liability upon repatriation, current law
allows those excess credits to be applied to offset U.S tax on income
repatriated from a lower-tax jurisdiction, typically a tax haven.
Let's go back to our example, using the current maximum U.S.
corporate tax rate of 35 percent. ABC Corp. has generated a $40 foreign
tax credit from the taxes it paid to Higher Tax Country. The $40
foreign tax credit allows ABC Corp. to repatriate all $100 of its
income from Higher Tax Country free of U.S. tax. Since that income had
already been taxed by Higher Tax Country, it is reasonable under the
principle of avoiding double taxation that the corporation should not
have to pay any further U.S. tax on that income.
But repatriating that $100 would use up only $35 of the corporation's
$40 foreign tax credit, with a $5 foreign tax credit left over. Under
current law, the corporation could then repatriate another $14 of
offshore income from Lower Tax Country, and use its left over $5
foreign tax credit to shelter that income from U.S. taxes. But foreign
tax credits are supposed to prevent double taxation of the same income,
not shield foreign income from any taxation at all. By allowing that
use of excess foreign tax credits, the tax code encourages
multinationals to run income through tax havens.
To change that outcome, the bill would require corporations to pool
their foreign tax credits. The bill would then limit the amount of tax
credits that could be used, by allowing only that percent of its
foreign tax credits equal to the percent of foreign income that the
corporation has repatriated that year. For example, if the corporation
repatriated only 10 percent of its foreign income, it could use only 10
percent of its foreign tax credits.
By aggregating the foreign tax credits of multinational corporations,
the bill would remove the tax incentive for locating offshore income in
low-tax jurisdictions, while leveling the global playing field for
multinationals operating in multiple countries. The Joint Committee on
Taxation has estimated that this provision would raise $55 billion over
10 years.
Section 302--Excess Income from Transfers of Intangibles to Low-taxed
Affiliates
Section 302 of the bill addresses the problem of corporate transfers
of intangible property offshore, an area rampant with tax abuse.
Intangible property includes such valuable items as patents,
trademarks, and marketing and distribution rights. Under U.S. tax law,
if a multinational corporation has valuable intellectual property, it
can sell that property to its wholly-owned offshore subsidiary. So long
as the corporation complies with a set of complicated ``transfer
pricing'' rules, the corporation can then treat any income generated
from that intellectual property as offshore income, and defer paying
U.S. taxes on it.
Current transfer pricing rules are intended to ensure that the U.S.
parent receives fair compensation in return for the sale of its
property rights to its offshore subsidiary, but these rules are not
working.
Last year, the Subcommittee held a hearing exposing how the current
system works in a case history involving Microsoft. The hearing showed
how Microsoft sold key intellectual property rights to an Irish
subsidiary it had established for $2.8 billion. That subsidiary then
turned around and sold the rights to other Microsoft offshore
subsidiaries for $9 billion, immediately shifting more than $6 billion
in profits offshore, without paying any U.S. taxes.
But Microsoft did not stop there. The U.S. parent also sold the right
to market its products in North and South America to another offshore
subsidiary and then bought back from that same subsidiary the right to
sell Microsoft products in the United States in exchange for payment of
licensing fees. In 2011, its offshore licensing agreement translated
into Microsoft sending 47 cents of every U.S. sales dollar to its
offshore subsidiary, shifting even more U.S. source income offshore. In
total, over a three-year period, Microsoft used its transfer pricing
gimmick to avoid paying $4.5 billion in U.S. corporate income taxes, or
$4 million in taxes per day. Think about that. Microsoft products are
developed here. They are sold here, to customers here. And yet
Microsoft paid no taxes here on nearly half of its U.S. sales income,
because current U.S. tax law allowed Microsoft to send that money
offshore and defer indefinitely paying U.S. taxes on it.
The code currently includes provisions, particularly Sections 367(d)
and 482, designed to stop multinationals from improperly transferring
property offshore to avoid U.S. taxes. Those provisions, and the
corresponding regulations, require that transfers of property from a
U.S. parent to a ``controlled foreign corporation,'' or CFC, be
conducted at an ``arms-length'' price. The problem, however, is that
determining an arms-length price for an intellectual property
transaction demands analysis of complex facts with no decisive evidence
of the proper price. Every case requires expensive and time consuming
analysis by the IRS as well as expensive and time consuming litigation
if the IRS decides to try to overturn an abusive transaction.
Section 302 of the bill would help erect a backstop to prevent unfair
valuations of intellectual property being used to send money offshore.
Specifically, if evidence indicated that the transferred property's
value exceeded 150 percent of the transfer price, and it was
transferred to a tax haven, then all gross income attributed to the use
of such transferred property over 150 percent of the costs allocated to
such gross income would be treated as Subpart F income subject to U.S.
taxation. In the case of Microsoft, for example, since the re-transfer
of its intellectual property rights for $9 billion exceeded the
original transfer price of $2.8 billion by more than 150 percent, it
would have triggered taxation on the excess amount. While the Microsoft
transactions may very well violate existing transfer pricing laws based
on
[[Page S6659]]
arms-length determinations, Section 302 would make explicit that when
offshore transfers result in large profits being transferred to an
offshore CFC, those excess profits are subject to immediate taxation by
the United States, without mandating a complex arms-length evaluation.
Section 302 has been designed to avoid taxation of legitimate
business transfers. For example, to avoid capturing income related to
legitimate business operations by the foreign subsidiary using
intangible property, income derived from such subsidiary's actual use
in the country would be entirely excluded from any excess income
calculation. Further, to avoid impacting legitimate operations that
simply earn high rates of return due to a business success, the
provision targets only profits that are not taxed by the foreign
jurisdiction. To do so, this provision exempts income that is taxed by
a foreign jurisdiction at a rate of more than 15 percent, with a phase
out set for rates between 10 percent and 15 percent. In most cases,
this exemption would limit the impact of the provision so that it would
affect only subsidiaries located in tax haven jurisdictions, which, of
course, are the most likely candidates for abuse.
We are not alone in targeting transfer pricing abuses involving
intellectual and other intangible property. The international community
has recognized the severity of these abuses when the G-20 leaders
recently called for ``ensuring that profits associated with the
transfer and use of intangibles are appropriately allocated in
accordance with (rather than divorced from) value creation.'' The
leaders went on to endorse ``developing transfer pricing rules or
special measures for transfer of hard-to-value intangibles.''
Section 302 does not change U.S. transfer pricing rules generally.
Instead it simply creates a backstop to ensure that a corporation
cannot avoid taxes by transferring its property to an offshore
subsidiary in a tax haven, and then enjoy windfall profits far in
excess of the transfer price without paying U.S. taxes. While the new
transfer pricing provision would still depend upon strong enforcement
by the IRS, it would put in place a new bright-line approach that would
deter some of the worst offshore transfer pricing abuses now going on.
Section 302 has been estimated by the Joint Committee on Taxation to
raise $21.5 billion over ten years.
Section 303--Limitations on Income Shifting Through Intangible Property
Transfers
As just noted, our current tax code makes it far too easy for U.S.
multinational corporations to shift intangible property to tax havens
through transfer pricing and other similar schemes. In addition, as
noted earlier, tax enforcement authorities are faced with the
difficulty of valuing each property involved in a questionable transfer
pricing transaction.
Section 303 would address these problems by clarifying current law
that the IRS is fully authorized to use certain common sense valuation
methods for determining the proper valuation of intangible property
transfers. Specifically, this section authorizes Treasury to promulgate
rules regarding the valuation of transferred intangible property. In
particular, if deemed the ``most reliable means of valuation'' by the
Secretary, tax enforcement officials would be allowed to aggregate
offshore transfers by a company for the purpose of valuation. And,
under this provision, tax officials could consider realistic
alternatives to the transfer in developing their valuations, if such
alternatives would lead to the most reliable valuation.
By providing tax enforcement authorities with the flexibility needed
to perform realistic and more accurate assessments of the value of
transferred intangible property, we would improve both the accuracy of
enforcement and the fairness of our tax code. The Joint Committee on
Taxation has estimated that this provision would raise about $1.7
billion over ten years.
Section 304--Repeal of ``Check-the-Box'' Rule for Foreign Entities and
the CFC ``Look-Through'' Rule
Section 304 of the bill addresses another key offshore tax abuse: use
of the so-called ``check-the-box'' and CFC ``look-through'' rules to
avoid paying U.S. corporate income taxes on passive offshore income.
Both provisions enable multinational corporations to avoid taxation of
offshore passive income which, under Subpart F of the tax code, is
supposed to be taxed. Both provisions discourage repatriation of
offshore profits, discourage U.S. investment, and deprive the U.S.
Treasury of tens of billions of dollars.
To better understand this Section, it may be helpful to examine some
general tax principles and a little bit of history. The first principle
is that, if a U.S. corporation earns income from an active business
activity offshore, the corporation generally owes no U.S. tax until the
income is returned to the United States. This principle is known as
deferral. It is meant to defer taxes on active businesses such as a
U.S. parent's foreign subsidiary selling products in another country.
The deferral principle is also subject to a big exception in Subpart
F of the tax code. Subpart F provides that deferral of taxes is not
permitted for passive, inherently mobile income such as interest,
dividend, or royalty income. The reason is that passive income can be
earned anywhere--in the United States or outside of it--and, if taxes
are deferred on offshore passive income, it would create an enormous
incentive for U.S. corporations to send their funds offshore. To
eliminate that incentive, Subpart F makes passive income immediately
taxable, even when the income is offshore. Subpart F's effort to remove
the incentive to send U.S. funds offshore, however, has been largely
undermined by regulations, temporary statutory changes, and weak IRS
enforcement, not to mention numerous tax gimmicks devised by
multinational corporations.
One key problem is the 1997 so-called ``check-the-box'' regulation,
which allows a business enterprise to declare what type of legal entity
it wants to be considered for federal tax purposes by simply checking a
box. This rule was issued by the IRS without any statutory direction.
It was intended to stop expensive and unproductive litigation and
confusion over whether to treat business entities as taxable entities
or as flow-through entities whose taxes had to be paid by their owners.
It was in response to many states creating new business forms in the
years leading up to its adoption. Since different states used different
names with slightly different characteristics, the regulation was
intended to help provide relief for taxpayers who were having
difficulty determining whether they should be taxed at the entity
level, or have the income pass through to its owners. It was almost
exclusively viewed as a domestic tax law issue.
Almost as soon as it was issued, however, multinational corporations
began to use the rule, not as a way of determining who should be taxed,
but as a way to get around paying any taxes at all on passive offshore
income under Subpart F.
A little over a year after its adoption, after it became clear that
the rule would be abused to circumvent Subpart F taxation of passive
income, Treasury attempted to revoke the check the box option. That
effort was met with such opposition from industry groups, however, that
it was abandoned. In 2006, in response to corporate pressure to provide
a statutory basis for the check the-box rule, Congress enacted Section
954(c)(6), the so-called CFC look-through rule, which excludes certain
passive income transferred between related offshore entities from
Subpart F taxation. That provision was so costly, however, that it was
enacted for only a three-year period. After it expired in 2009, the
provision was revived and has been twice extended, both times on a
temporary basis. It is currently in effect, but will expire at the end
of this year unless extended again.
Using the check-the-box and CFC look-through rules to avoid Subpart F
taxation requires planning and multiple offshore subsidiaries, which is
why it benefits large multinational corporations, giving them an
advantage over their domestic competitors. One common tactic has been
for a U.S. parent corporation to establish an offshore subsidiary that
earns active sales income whose taxes can be deferred indefinitely. The
U.S. parent also establishes other subsidiaries in tax havens and
typically drains money from the active business by requiring it to pay
dividends, interest on intercompany loans, royalty income, or licensing
fees to the tax haven subsidiaries. Then, instead of paying taxes on
that passive income under Subpart F, the U.S. parent uses the check-
the-box rule to
[[Page S6660]]
treat its tax haven subsidiaries as ``disregarded entities,'' making
them invisible for U.S. tax purposes and leaving only the active
business whose taxes can be deferred indefinitely.
The 2012 Apple hearing held by my Subcommittee provided a real life
example. That hearing disclosed that Apple Inc., the U.S. parent,
formed three wholly owned subsidiaries in Ireland, as well as
subsidiaries in other countries that actually sold Apple products in
Europe, Asia and Africa. Apple required the sales businesses to
transfer most of their profits to one of the Irish subsidiaries, Apple
Sales International, through licensing and other fees. In three years,
those businesses sent sales revenues to Apple Sales International
totaling $74 billion. Apple Sales International did not keep all of
those funds; it issued dividends totaling $30 billion to another Apple
Irish subsidiary, Apple Operations International. Under Subpart F, both
Apple Sales International and Apple Operations International should
have paid U.S. taxes on the passive income they received, but neither
did. Instead, Apple Inc. used check-the-box to treat its Irish
subsidiaries as disregarded entities for tax purposes and then deferred
taxes on the sales income of their active business subsidiaries, even
though those businesses did not actually retain most of the sales
income. The end result was that check-the-box enabled Apple to
circumvent Subpart F's immediate taxation of its offshore passive
income.
The loss to the U.S. Treasury from these types of offshore check-the-
box arrangements is enormous. Investigations conducted by my
Subcommittee have found, for example, that for fiscal years 2009, 2010
and 2011, Google used check-the-box to defer taxes on over $24.2
billion in offshore passive income covered by Subpart F. Microsoft
deferred $21 billion in the same period.
Section 304 would put an end to this type of tax avoidance and
revitalize Subpart F by prohibiting the application of the check-the-
box rule to offshore entities and by eliminating the CFC look-through
rule altogether. The Joint Committee on Taxation has estimated that
this provision would raise $78 billion over ten years.
Section 305--Prohibition on Offshore Loan Abuse
The final provision in the bill, Section 305, addresses another
offshore abuse uncovered by my Subcommittee: the misuse of tax
provisions that allow offshore funds to be repatriated tax free to the
United States when provided as short term loans.
To understand this Section, it is again important to examine some
general tax principles. One of those principles is that a U.S. parent
corporation is supposed to be taxed on any profits sent to it by an
offshore subsidiary, which is often called ``repatriation.'' If an
offshore subsidiary loans money to its U.S. parent, that is also
subject to U.S. taxes. In both cases, the funds sent to the United
States are to be treated as taxable dividends.
Once again, however, those simple tax principles have been subverted
in practice by complex exclusions and limitations. Section 956 of the
tax code is the provision that makes a loan from an offshore affiliate
to a U.S. parent subject to U.S. tax. Although the law contains no
exceptions or limits on the loans covered, the IRS has issued
regulations that create exceptions for certain types of short term
loans. The IRS regulations provide, for example, that offshore loans
may be excluded from taxation if they are repaid within 30 days, as are
all loans made over the course of a year if they are outstanding for
less than 60 days in total. In addition, the IRS permits a controlled
foreign corporation--a CFC--to loan offshore funds to a related U.S.
entity to escape U.S. taxation, if the loan is initiated and concluded
before the end of the CFC's calendar quarter. Those loans are not
subject to the 30 day limit, and don't count against the aggregate 60
day limit for the fiscal year. The IRS has also declared that the
limitations on the length of loans apply separately to each CFC of a
U.S. corporation. So when aggregated, all loans for all CFCs could be
outstanding for more than 60 days in total.
An investigation conducted by my Subcommittee found that U.S.
multinationals have used the IRS' convoluted short term loan provisions
to orchestrate a constant stream of offshore loans from their foreign
subsidiaries without ever exceeding the 30 or 60 day limits or
extending over the end of a CFC's quarter. Instead of ensuring that
taxes are paid on offshore funds returned to the United States, Section
956 has been converted by the IRS regulations into a mechanism used to
get billions of dollars back into the United States tax free.
This offshore tax scheme was illustrated in a 2012 Subcommittee
hearing that showed how Hewlett-Packard has, for years, used a short
term loan program to avoid paying U.S. taxes on billions of dollars in
offshore income used to run its U.S. operations. Hewlett-Packard
obtained the offshore cash by directing two of its controlled foreign
corporations in Belgium and the Cayman Islands to provide serial,
alternating loans to its U.S. operations. For a four year period, from
March 2008 to September 2012, Hewlett-Packard used those intercompany
loans to seamlessly provide an average of about $3.6 billion per day
for use in its U.S. operations, claiming the funds were tax-free, short
term loans of less than 30 days duration under Section 956.
Section 305 would put an end to this repatriation sleight of hand by
eliminating the provision allowing offshore funds returned to the
United States under the guise of short term loans to escape U.S.
taxation. Instead, it would reaffirm the general principle that
offshore funds returned to the United States are subject to U.S. taxes.
Conclusion. Offshore tax abuses eat at the fabric of society, not
only by widening deficits and robbing health care, education, and other
needed government services of resources, but also by undermining public
trust--making law-abiding taxpayers feel like they are being taken
advantage of when they pay their fair share. Tax law is complicated,
and where most Americans see an inscrutable maze, too many profitable
companies and wealthy individuals see an opportunity to avoid paying
taxes. Our commitment to crack down on their tax-avoidance schemes must
be as strong as their determination to get away with ripping off Uncle
Sam and moving their tax burden onto the backs of the rest of American
taxpayers.
Our nation is suffering greatly from the effects of sequestration,
which were brought on by our failure to reach an agreement on a
balanced mix of spending cuts and revenue increases. If we are serious
about finding a solution to mindless sequestration cuts and our
nation's repeated budget battles, we must look at the offshore tax
avoidance abuses that rob our Treasury of the funds needed to pay our
soldiers, help the sick, research cures for diseases, educate students,
and invest in our future. Putting the burden of funding our government
on the backs of hardworking American families and domestic businesses,
while letting a sophisticated minority of multinational corporations
get away with these types of offshore gimmicks, is grossly unfair.
We can fight back against offshore tax abuses if we summon the
political will. The Stop Tax Haven Abuse Act, which is the product of
years of work, including hearings and reports of the Permanent
Subcommittee on Investigations, offers the tools needed to close the
tax haven loopholes and use the hundreds of billions of dollars which
will come to our Treasury as part of a sensible balanced deficit
reduction substitute for the damaging irrationality of sequestration.
Mr. President, I ask unanimous consent that a summary of the bill be
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record as follows:
Summary of the Stop Tax Haven Abuse Act, September 19, 2013
The Levin-Whitehouse-Begich-Shaheen Stop Tax Haven Abuse
Act would:
Title I--Deterring the Use of Tax Havens for Tax Evasion
Authorize special measures to stop offshore tax abuse
(Sec. 101) by allowing Treasury to take specified steps
against foreign jurisdictions or financial institutions that
impede U.S. tax enforcement, including prohibiting U.S. banks
from doing business with a designated foreign bank.
Strengthen FATCA (Sec. 102) by clarifying when, under the
Foreign Account Tax Compliance Act, foreign financial
institutions and U.S. persons must report foreign financial
accounts to the IRS.
Establish rebuttable presumptions to combat offshore
secrecy (Sec. 102) in U.S. tax and securities law enforcement
proceedings by
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shifting to the U.S. taxpayer, who takes advantage of the
related loopholes, the burden of proving: who controls an
offshore entity; when money sent to or received from offshore
is taxable income; and when offshore accounts have sufficient
funds to trigger a reporting obligation.
Stop companies incorporated offshore but managed and
controlled from the United States from claiming foreign
status (Sec. 103) and avoiding U.S. taxes on their foreign
income by treating them as U.S. domestic corporations for tax
purposes.
Strengthen detection of offshore activities (Sec. 104) by
requiring U.S. financial institutions that open accounts for
foreign entities controlled by U.S. clients or open foreign
accounts in non-FATCA institutions for U.S. clients to report
the accounts to the IRS.
Close the offshore swap payments loophole (Sec. 105) by
treating swap payments that originate in the United States as
taxable U.S. source income.
Title II-Other Measures to Combat Tax Haven Abuses
(Require annual country-by-country reporting (Sec. 201) by
SEC-registered corporations to disclose their 7, employees,
gross revenues, and tax payments on a per country basis.
Establish a penalty on corporate insiders who hide offshore
holdings (Sec. 202) with a securities law fine of up to $1
million per violation.
Require anti-money laundering programs (Sec. Sec. 203 and
Sec. 204) for private funds and formation agents to ensure
they screen high risk clients and offshore funds.
Strengthen John Doe summons (Sec. 205) by streamlining
court procedures used by the IRS to obtain these summons,
while also strengthening court oversight.
Combat hidden foreign financial accounts (Sec. 206) by
facilitating IRS use of Foreign Bank Account Reports and
Suspicious Activity Reports, and simplifying penalties for
unreported foreign accounts.
Title III--Ending Corporate Offshore Tax Avoidance
Eliminate incentives for offshoring jobs and operations
(Sec. 301) by deferring corporate tax deductions for expenses
related to deferred income so that, for example, a U.S.
corporation could not take a tax deduction for building a
plant offshore until it also declared and paid taxes on
income produced by that plant.
Stop foreign tax credit manipulation (Sec. 301) by
requiring foreign tax credits to be considered on a pooled
basis.
Limit incentives to move intellectual property and related
marketing rights offshore (Sec. Sec. 302 and 303) by taxing
excess income earned from transferring that property offshore
to a related foreign entity, and by allowing the IRS to use
common sense methods to value the transferred property.
Repeal check-the-box rule for foreign entities and CFC
look-through rule (Sec. 304) to stop U.S. multinationals from
disregarding their offshore subsidiaries to avoid U.S. taxes
on passive income.
Stop offshore loan abuse (Sec. 305) by preventing
multinationals from artificially repatriating offshore funds
tax-free by treating them as short-term loans from their
offshore subsidiaries to their U.S. operations.
The PRESIDING OFFICER. The Senator from Vermont.
Mr. LEAHY. Mr. President, I applaud the senior Senator from Michigan
for his persistence on this matter. He has brought the attention of the
Senate to it time and time again, as well as that of the American
public. Let us hope he is listened to. He should be.
Mr. LEVIN. I thank my good friend from Vermont.
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