Time to end offshore tax loophole

Let creativity flourish in the marketplace, not the tax code

IT COULD BUY a dozen new energy-efficient locomotives for the MBTA every year, put nearly 1,000 more police on our streets, or pay for more than 8,000 needy children to attend preschool. It’s a corporate tax loophole that allows a select few Massachusetts companies to stash US profits in offshore tax havens and avoid corporate taxes to the tune of about $79 million a year.

Closing what’s known as the “water’s edge” loophole would ensure that multinational corporations doing business in Massachusetts would no longer be able to dodge state taxes by funneling profits to shell companies located in places such as the Cayman Islands, Luxembourg, Bermuda, or Hong Kong, where they pay little or no tax.

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Eight Massachusetts-based Fortune 500 companies, including Staples, TJX, Raytheon, and EMC, have used tax havens and collectively stashed profits in more than 200 different offshore subsidiaries, according to a study by the Massachusetts Public Interest Research Group.

What these corporations are doing is completely legal and hardly unique. The Fortune 500 is filled with companies that earned billions in profit and paid little or no tax. General Electric, Boeing, Apple, and Duke Energy are just a few of the US corporations that paid little or no federal income taxes during a five-year period from 2008 through 2012, despite pocketing a combined profit in excess of $150 billion. Offshore tax havens are a primary culprit.

One common practice, identified by the Inter-national Consortium of Investigative Journalists in their award-winning research, is for a US corporation to establish a foreign shell company in a tax haven and set up its own internal lending program. Essentially, the corporation creates a foreign bank to lend itself money and then repays the loan back with interest. Presto, the money is shifted from the United States to a place such as Luxembourg where the effective tax rate is almost zero!

Another popular offshore tax avoidance technique is for corporations to sell branding rights to their own trademarks to foreign subsidiaries and then charge them back in the form of royalty payments. In Luxembourg, these earnings from royalties are up to 80 percent tax exempt.

Closing the “water’s edge” loophole would reduce the impact of these offshore tax avoidance schemes and allow the Commonwealth to calculate corporate tax liability based on the profits held in known tax havens.  A basic principle of taxation is fairness. If a US corporation earns a portion of its income here in Massachusetts, then it should pay its share of corporate tax on that portion, just like any other Bay State business.

We already apply the same logic to corporations with subsidiaries in other states. Massachusetts is one of 23 states to have adopted what is known as “combined reporting,” which essentially says that if the income was earned in Massachusetts the profits should be taxed under Massachusetts law even if the money is held elsewhere. Closing the “water’s edge” loophole for income booked to tax havens is a logical extension of that practice. The core principle should be the same whether the profits are held in Delaware or the Duchy of Luxembourg.

Allowing a few large corporations to skirt their responsibility and stash cash overseas leaves the rest of us to pick up the tab. That is an affront to all hard-working Massachusetts taxpayers, but especially all of the Commonwealth businesses that aren’t setting up foreign subsidiaries to skirt tax codes and are paying their fair share for the services we all benefit from.

The good news is that we can do something about this. Some tax avoidance loopholes need to be closed at the federal level, but this is one fix we don’t need to wait on from Washington, DC. A bill I have filed in the state House of Representatives would take a major step forward and close this “water’s edge” loophole in Massachusetts. Similar legislation has already passed into law in Oregon and Montana and the issue is gaining steam around the country with bills filed in Maine, Minnesota, and Rhode Island.

Our legislation, filed with the support of nonprofit organizations such as MASSPIRG and Mass. Fair Share, has attracted bipartisan support and more than 50 co-sponsors in both branches of the Legislature. A companion bill has also been filed in the state Senate by Sen. Mark Montigny of New Bedford.

Whatever differences Democrats and Republicans may have on tax policy, we can all agree that taxes should be fairly applied. Manipulating the tax code to protect special interest tax gimmicks—essentially a form of legalized money laundering—benefits only the select few at the expense of the rest of us who play by the rules and pay our fair share.

Small businesses already face plenty of challenges. We should not ask them to compete in a rigged marketplace favoring a few corporate giants that can afford to exploit our tax code in this manner.

And let’s be clear about one thing: No job was ever created by shifting profits to an offshore tax haven. If anything, this practice costs US jobs. In states that have already closed the “water’s edge” loophole, there’s no economic evidence that ending the practice has deterred growth or investment.

Meet the Author

Josh Cutler

Guest Contributor

About Josh Cutler

Josh Cutler is a Democratic state representative from Duxbury who represents the Sixth Plymouth District in the Massachusetts Legislature.

About Josh Cutler

Josh Cutler is a Democratic state representative from Duxbury who represents the Sixth Plymouth District in the Massachusetts Legislature.

It’s time to close this loophole and let our Bay State businesses compete on a level playing field. This legislation will help ensure that the burden of paying for our state’s roads, bridges, schools, and public services is shared equitably. Let’s promote innovation and creativity in the marketplace, not in our tax code.

Josh Cutler is a Democratic state representative from Duxbury who represents the Sixth Plymouth District in the Massachusetts Legislature. He can be reached at josh.cutler@mahouse.gov.