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Tax Havens: International Tax Avoidance and Evasion

Tax Havens: International Tax Avoidance and Evasion published on

Authored by Congressional Research Service
Edition: R40623

Addressing tax evasion and avoidance through use of tax havens has been the subject of a number of proposals in Congress and by the President. Actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations also have addressed this issue. In the 111th Congress, the HIRE Act (P.L. 111-147) included several anti-evasion provisions, and P.L. 111-226 included foreign tax credit provisions directed at perceived abuses by U.S. multinationals. Numerous legislative proposals to address both individual tax evasion and corporate tax avoidance have been advanced.

Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries (except for certain passive income) is deferred until income is repatriated
(paid to the U.S. parent as a dividend), this income can avoid current U.S. taxes, perhaps indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also indicates a significant increase in corporate profit shifting over the past several years. Recent estimates suggest losses that may approach, or even exceed, $100 billion per year.

Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions. There is no general third-party reporting of income as is the case for ordinary passive income earned domestically; the Internal Revenue Service (IRS) relies on qualified intermediaries (QIs). In the past, these institutions certified nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion. The Foreign Account Tax Compliance Act (FATCA; included in the HIRE Act, P.L. 111-147) introduced required information reporting by foreign financial intermediaries and withholding of tax if information is not provided. These provisions became effective only recently, and their consequences are not yet known.

Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama’s proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income, along with a number of other restrictions. Changes in the law or anti-abuse provisions have also been introduced in broader tax reform proposals. Provisions to address individual evasion include increased information reporting and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the HIRE Act, the proposed Stop Tax Haven Abuse Act, and some other proposals.

Publication Date:
Jan 15 2015
ISBN/EAN13:
1507734484 / 9781507734483
Page Count:
60
Binding Type:
US Trade Paper
Trim Size:
8.5″ x 11″
Language:
English
Color:
Black and White
Related Categories:
Business & Economics / Taxation / General

19.95

Oil and Gas Tax Issues in the Tax Reform Act of 2014 and the President’s FY2015 Budget Proposal – IF00040

Oil and Gas Tax Issues in the Tax Reform Act of 2014 and the President’s FY2015 Budget Proposal – IF00040 published on

Energy-Specific Tax Expenditures. The Joint Committee on Taxation (JCT) and the Department of the Treasury have identified a number of “tax expenditure” provisions that benefit the oil and gas sector.

Date of Report: July 17, 2014
Number of Pages: 2
Order Number: IF00040
Price: $5.95

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The Tax Reform Act of 2014 – IF00011

The Tax Reform Act of 2014 – IF00011 published on

Context. On February 26, 2014, House Committee on Ways and Means Chairman Dave Camp introduced the Tax Reform Act of 2014 as a discussion draft. This comprehensive draft builds on earlier discussion drafts released by Chairman Camp, which had addressed international tax, financial products, and small business.  

Individual Income Tax. Under the proposal, there would be two regular income tax brackets, with rates of 10% and 25%. A third bracket would apply to an alternative definition of income, making for a top statutory rate of 35%. The 35% bracket results from a 10% tax on modified adjusted gross income (MAGI) above certain income thresholds ($400,000 for single filers; $450,000 for joint filers). The 10% bracket is phased-out for certain higher-income taxpayers. Brackets would be adjusted for inflation using chained-CPI. Dividends and capital gains would be taxed as ordinary income, but 40% of net capital gains and qualified dividends would be excluded from taxable income. The proposal would also repeal the Alternative Minimum Tax (AMT).

Date of Report: March 5, 2014
Number of Pages: 2
Order Number: IF00011
Price: $5.95

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The Tax Reform Act of 2014 – IF00011

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