House Closes Offshore Tax Loophole

Posted on by Jesse Lee

Tonight, in passing the rule on the Farm Bill, Democrats abided by the new Congress’ Pay-Go rules by closing a tax loophole for companies headquartered overseas. Closing the loophole brought fierce opposition from Republicans, and Rep. Lloyd Doggett (TX-25) responded on the floor:

Rep. Doggett:
“I’ve listened to these Republicans identify one company after another that they cry big crocodile tears about. And I haven’t heard them identify a single company that will have an increase in taxes as a result of this proposal. There are others hiding in the shadows that know they have no justified case, and they have some of their friends out front… Well, today the Administration may be teaming up with them and may be willing to try to kill this Farm Bill as it defends these foreign tax evaders, but that’s not the tune they were singing five years ago when they said an appropriate immediate response, an ‘immediate’ response should address the US tax adavatnages that are available to foreign-based companies…’ ”

From the office of Rep. Lloyd Doggett:

Responding to False Claims about the International Tax Offset

In the past 24 hours, there has been significant misinformation spread about the international tax reform provision included in the 2007 Farm Bill. Whatever your views are about agriculture, our commitment to governing responsibly under “pay-as-you-go” rules requires us to raise revenue. The “pay” part will always result in complaints from those who are asked to pay, particularly when they have been accustomed to a free ride at the expense of other American taxpayers for so long.

The offset made self executing by the Rule on the Farm Bill does not apply to any company headquartered in the United States. 90% of the increased revenue will come from companies based in low or no tax jurisdictions overseas.

The United States has tax treaties with a number of foreign countries, mostly developed countries with similar tax systems. These bilateral treaties provide residents of the U.S. and the foreign country with reciprocal benefits. They provide corporate residents with reduced tax rates and/or tax exemptions for certain items of income received from sources within the treaty partners. These reduced rates and exemptions vary among countries and the specific type of income. Our reform contained in the offset stops the misuse of this tax treaty system by foreign corporations in tax haven hideaways. It is directed at the abuse and avoidance of these treaties and not at our treaty partners.

The Farm Bill Offset does NOT violate U.S. treaties: This bill will have little or no change in the tax liability of foreign multinationals based in countries with which we have a treaty — virtually all major developed countries. The United States enters into tax treaties with individual foreign countries to help prevent double taxation of the same income. The U.S. reduces its withholding taxes on payments to the country with which it has a treaty and that country reduces its withholding taxes on payments to the United States.

The Farm Bill Offset does NOT target our major trading partners: These multinationals avoid U.S. taxation on their actual earnings by siphoning off revenues by sending payments through U.S. tax treaty countries with low withholding rates before they are forwarded on to the parent corporations in the tax haven hideaways. Claims that this legislation would harm companies like Bayer, BASF and T-Mobile are just wrong. Each of these corporations will continue to enjoy the existing United States — Germany tax treaty.

The Farm Bill Offset will NOT discourage foreign investment: Overwhelmingly, foreign investment comes from tax-treaty countries with legitimate business structures that are not purposefully designed to avoid U.S. taxation. A June 18, 2002, New York Times article noted that if we close the loophole, “there would be no effect on legitimate multinational corporations…that have not used a haven to avoid American taxes.”

The Farm Bill Offset levels the playing field for U.S. corporations: This offset restores a level competitive field for American companies that play by the rules. In a May 2002 report, the Office of Tax Policy within President Bush's Treasury Department stated that inversions coupled with an increase in foreign acquisitions of U.S. multinationals, “are evidence that the competitive disadvantage caused by our international tax rules is a serious issue with significant consequences for U.S. businesses and the U.S. economy.”

The Farm Bill Offset closes a Treasury-identified tax loophole that costs billions: A 2002 Treasury report concluded that, “An appropriate immediate response should address the U.S. tax advantages that are available to foreign-based companies because of the ability to reduce the U.S. corporate-level tax on income from U.S. operations.” But five years later, Treasury has not acted, while billions in taxes continue to be lost. The offset also responds to President Bush's FY 2008 Budget proposal, call for reform: “Under current law, opportunities are available to reduce inappropriately the U.S. tax on income earned from U.S. operations through the use of foreign related-party debt.”

The Farm Bill Offset is NOT a new idea: Some of us have been working to stop international tax abuse for years. Language to address the tax loophole corrected by the offset has been considered in the Ways & Means Committee, by the Senate, and included in a Democratic Substitute, since 2002 when Mr. Doggett introduced an earlier version of the bill providing this offset.

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