Corporate Inversion Spurs State Tax Haven Legislation
American companies in droves are moving their operations to countries with more competitive rates.
The United States has the highest corporate tax rate in the developed world at a 39.1% combined rate (federal 35% and average state and local 4.1%). As a result, American companies in droves are moving their operations to countries with more competitive rates. The result is that $2.1 trillion in American company profits are sitting offshore.
This dilemma is exactly what is spurring so called “tax haven” legislation at the state level. A “tax haven” is a country that levies a very low tax rate or no tax at all. The impact of companies moving their businesses offshore to benefit from lower tax rates is causing an erosion of the state tax base. A closer look shows that state tax revenues are also eroding, causing a corporate inversion trickle-down effect on state tax revenue. As a result, some states are introducing or adopting tax haven laws aimed at collecting revenue on income generated outside their state borders.
Over half of the states have proposed some type of tax haven legislation. Of those, six states plus Washington D.C. have already enacted tax laws, and 15 states have active legislation efforts underway. Mounting frustration over tax evasion, along with budget cuts, and an eye toward increasing tax revenues for state-wide programs are fueling a tax haven fire. States see tax haven legislation as a positive step, one that enables them to tax income outside their state borders – broadening their tax base as they continue to climb out of the economic slump.
States that Introduced Tax Haven Legislation in 2015 and 2016
For corporations, widespread state adoption of tax haven legislation adds even more complexity to an already cumbersome state income tax process. As such laws come to fruition, corporations will need to track the various state-specific laws, analyze their potential impact on tax liability, and then plan for the uncertainty new legislation brings.
Today advancements in technology make calculating and analyzing the impact of tax haven rules and regulations a more transparent, manageable process. As an example, State Tax™ Analyzer from Bloomberg Tax allows tax professionals to quickly include entities in “tax haven” locations in their group filings, plus analyze the potential impact on tax liability, and net operating losses (NOLs).
The bottom line is that state corporate income tax is a timely and cumbersome legal obligation that corporations must deal with. Each tax law change, or addition, such as proposed tax haven laws, makes the process even more complex and virtually impossible to effectively manage using manual processes. However, for companies that use automation technology, state income tax planning can be transformed into a nimble, dynamic process in which the tax team is able to easily and quickly track state-specific laws, assess liability, and confidently plan accordingly.