An Act closing a corporate tax haven loophole, HB 2477 and SB 1524 was filed by Representative Josh Cutler (Duxbury) and Senator Mark Montigny (New Bedford) and cosponsored by a bipartisan group of 57 lawmakers.  The bill, already a law in place in Oregon and Montana, also known as the “water’s edge” loophole would require that companies treat profits made in Massachusetts and funneled to known tax havens like the Cayman Islands as domestic taxable income. Making this change to the tax code would save Massachusetts taxpayers $79 million a year.

Many of America’s largest corporations use accounting tricks to shift profits made in America to offshore tax havens, where they pay little to no taxes. The U.S. corporate tax system allows companies to defer paying state and federal taxes on profits they earn abroad, until they declare the money has been brought back to the United States by paying dividends to shareholders, repurchasing stock, or making U.S. Investments. Many companies game this system using loopholes that let them disguise profits legitimately made in the U.S. as “foreign” profits earned by subsidiaries in offshore tax havens. The GAO found that at least 82 of the largest 100 publicly traded U.S. companies maintain subsidiaries in known tax havens.

By using offshore tax havens, multinationals avoid an estimated $90 billion in federal tax revenue each year. Because most state tax codes are so closely tethered to the federal one, states also lose billions in tax revenue from these loopholes annually. Based on an analysis of how much income is federally reported from each state, and on state tax rates, U.S. PIRG estimated that states cumulatively lost $26 billion in revenue last year as a result of multinational corporations abusing tax havens.

While much of the reform necessary to stop this tax haven abuse must happen at the federal level, states have begun to update their tax code to recapture some of the lost state revenue while making the tax code fairer and leveling the playing field for small businesses, which rarely use such loopholes.

Massachusetts can recapture some of the revenue lost to tax havens by treating income booked to corporate subsidiaries in known tax havens as domestic income for tax purposes. This option is readily available in Massachusetts because we have enacted combined reporting. Under combined reporting, passed in 2008, multistate companies report on their affiliates across the country.  Information about the relative size of a company’s property, sales and payroll located in Massachusetts is already used in a formula to apportion the share of each company’s total domestic income that is subject to Massachusetts taxes.
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