[Congressional Record Volume 159, Number 124 (Thursday, September 19, 2013)]
[Senate]
[Pages S6649-S6661]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      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

[[Page S6655]]

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.

[[Page S6656]]

  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

[[Page S6657]]

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

[[Page S6658]]

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

[[Page S6661]]

     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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