News & Events

FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals


March 31, 2014


FACT Urges Chairman Wyden:

Don’t Let First Major Action Favor Multinationals

Urges Committee to Reject Two Provisions That Boost Offshore Tax Avoidance

WASHINGTON, DC – With Senate Finance Committee Chairman Ron Wyden (OR) to begin consideration of renewing the set of expired tax breaks, or “tax extenders,” this week and embarking on the first major action of his chairmanship, the FACT (Financial Accountability and Corporate Transparency) Coalition is urging him to take a stand against multinational corporations that have used some of these extenders to avoid paying taxes and reject these egregious provisions.

“Congress won’t renew unemployment insurance for millions of jobless Americans, but it’s happy to renew expensive corporate tax breaks – and to do it without paying for them,” said Rebecca Wilkins, Senior Counsel for Federal Tax Policy, Citizens for Tax Justice. “It’s completely outrageous and ordinary Americans should be storming the Capitol.”

Two of the “extenders” are rules in the tax code that allow U.S. multinational corporations to park their earnings offshore and avoid paying tax on them expired at the end of 2013. These rules are known as the “active financing exception” and the “controlled foreign corporation (CFC) look-through rule.”  If Congress refuses to extend these expired provisions, some U.S. companies will have less incentive and fewer methods to send their profits and jobs offshore.  Allowing these two measures to expire would save taxpayers more than $80 billion over the next decade.

“The Senate’s actions on extenders will reveal a great deal about their priorities for tax reform going forward,” said Dan Smith, tax and budget advocate for U.S. Public Interest Research Group, one of the FACT Coalition’s members.  “Senator Wyden and the Senate Finance Committee members have a unique opportunity to stand up to big multinational corporations and stand with regular taxpayers who can’t marshal armies of lawyers and lobbyists to bend the tax code to their whim.”

The “active financing exception” is an exception to the general rule that passive income earned by a foreign subsidiary must be recognized for tax purposes when earned. The “active financing exception” was repealed in the 1986 Tax Reform Act but reinstated in 1997 as a “temporary” measure after fierce lobbying by corporations. In 1998 it was expanded to include foreign captive insurance subsidiaries. These provisions have been extended every year since 1998, usually for only one or two years at a time. The active finance exception is one of the primary reasons General Electric and huge financial institutions pay very little income tax.

The exception creates two harmful incentives. First it encourages American corporations to lend, invest and create jobs in foreign countries rather than in the U.S., because it provides a break from U.S. taxes on financial income generated offshore. Second, it encourages American corporations to engage in “financial engineering” to make their U.S. profits appear to be generated by a “captive” foreign financing subsidiary or other type of offshore subsidiaries, in order to avoid U.S. taxes.

Another exception to the general rule requiring taxation of passive income, the CFC look-through rule, allows a U.S. multinational corporation to defer tax on passive income, such as royalties, earned by a foreign subsidiary (a “controlled foreign corporation” or “CFC”) if it is paid to that subsidiary by a related CFC and can be traced to the active income of the payer CFC. (The check-the-box regulations allow similar tax planning with non-corporate entities.)

The CFC look-through rule allows multinationals to create transactions purely for “earnings stripping” – to create dividends, interest, rents, and royalties to strip active income out of high-tax countries and move it into low-tax or no-tax countries without incurring any U.S. tax liability (or any tax liability anywhere). Companies with valuable intangible assets like Apple, Google, Microsoft and big pharmaceuticals like Pfizer use the CFC look-through rule to shift profits to offshore tax haven countries.