July 23, 2020

Businesses that operate across international borders sometimes take advantage of differences in tax laws between countries to minimize their tax liabilities. Certain jurisdictions have gained a reputation for favorable tax laws. These jurisdictions are often known as “tax havens.” Provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 encourage U.S. businesses to repatriate money currently held in tax havens by setting much lower tax rates for repatriated profits. A bill current pending in the U.S. Congress, the Disclosure of Tax Havens and Offshoring Act (DTHOA), would require certain businesses to disclose overseas profits, assets, and other information on a country-by-country basis. This would effectively require them to identify jurisdictions they are using as tax havens.

What Is a Tax Haven?

No single definition exists to identify a “tax haven.” The term commonly refers to countries or territories with low tax rates for foreign investors, which may provide incentives for foreign businesses. Some definitions of the term involve both low tax rates and strong financial secrecy laws, while other definitions focus on low rates. Jurisdictions with reputations as tax havens include Bermuda, the Cayman Islands, Hong Kong, and Luxembourg.

What Is the Impact of the Use of Tax Havens?

Businesses can use a variety of rather complicated methods to take advantage of lower tax rates in certain locations. One method is known as base erosion and profit shifting (BEPS). The Organization for Economic Cooperation and Development (OECD) describes BEPS as “tax planning strategies…that exploit gaps and mismatches in tax rules to avoid paying tax.” It involves transferring funds to subsidiary businesses organized in a tax haven jurisdiction.

The OECD estimates that countries lose $100-240 billion in tax revenues each year because of BEPS. Ninety-four countries, not including the United States, have signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Multinational corporations based in the U.S. have an estimated $3 trillion held by subsidiaries in tax haven jurisdictions.

The TCJA lowers the tax rate for profits held in tax havens to eight percent, or 15.5 percent in some situations. Either rate is considerably lower than even the new corporate tax rate of twenty-one percent.

What Would the DTHOA Do?

Notably, the DTHOA does not make any changes to the Internal Revenue Code. In that sense, it does not close any “loopholes” in U.S. tax law. The bill would amend the Securities Exchange Act (SE Act) of 1934. This is the law that created the Securities and Exchange Commission (SEC) and requires publicly-traded companies to make various public disclosures.

The DTHOA would apply to “issuers,” which here generally refers to companies with publicly-traded stock, that are part of “multinational enterprise groups” and that meet minimum criteria to be set by the SEC regarding annual profits. Both the issuers themselves and any subsidiaries would be covered by the law.

Covered companies would have to file an annual report with the SEC disclosing every “tax jurisdiction” in which the company or its subsidiaries do business. Other required disclosures would include:
– Revenues generated from transactions with subsidiaries;
– Revenues generated from other transactions;
– Pre-tax profits and losses;
– Total income taxes paid in all jurisdictions;
– Total assets and accumulated earnings; and
– Number of full-time employees.

If you have tax-related questions, the tax advisors at the Enterprise Consultants Group are available to answer your questions and discuss your rights and options. Please contact us today online or at (800) 575-9284 to schedule a consultation to see how we can help you.