States Pursue Offshore Tax-Free Income

States Pursue Offshore Tax-Free Income

While many reliable sources in Washington are saying that the odds of either President Obama’s corporate tax reform bill or Republican Camp’s bill getting passed this year are slim to none, some states aren’t waiting to conduct their own reform..

While many reliable sources in Washington are saying that the odds of either President Obama’s corporate tax reform bill or Republican Camp’s bill getting passed this year are slim to none, some states aren’t waiting to conduct their own reform. According to Pew Reports, a number of states are targeting offshore “tax havens” in new litigation that will allow them to recoup the more than $20 billion that they lose to the technique each year.

By shifting income to offshore subsidiaries in places like the Cayman Islands, Bermuda and a number of other tax havens, companies are able to avoid paying both state taxes and federal taxes in the U.S., where the marginal rate is significantly higher, according to the news source. While technically these companies are required to pay U.S. taxes when they repatriate the money, there is currently no limit on how long they can defer repatriation. This may serve as a disincentive for investing in U.S. labor, construction or goods, because the money can only be spent abroad.

Maine is now looking at litigation that will mirror tax law enacted in Montana in 2004, according to Pew Reports. The bill being considered would name 38 known tax havens and attempt to put a stop to incentives to move money to them.

Robert Pozen, a reporter with The Wall Street Journal, has a different plan for recovering the tax on the estimated $2 trillion held abroad. He suggests a transitional tax rate on foreign profits of 12 percent, which would lead into a foreign “competitiveness” tax of 17 percent, which would only come into effect after local international taxes. For example, if local taxes amounted to 15 percent, for example, the tax owed to the U.S. would be only 2 percent.

There are a number of ideas present in Washington, D.C., and in state governments as to what should be done about the corporate tax problem, but it is unlikely that the U.S. will see a change any time soon.