August 19, 2022

Senate Bill Seeks to Raise Revenue by Closing Tax Havens

A bill introduced by Carl Levin of Michigan and Kent Conrad of North Dakota would tighten rules that allow hedge funds and corporations in the United States to skirt federal taxes by opening shell companies overseas.

The measure would also change the I.R.S. regulations that allow traders of credit-default swaps to avoid paying federal taxes on many transactions that begin in the United States. And to help tax collectors track down hidden assets overseas, the proposal would empower the Treasury Department to ban any foreign bank that refused to cooperate with the I.R.S.

By closing the loopholes, the plan could bring the Treasury as much as $100 billion a year, according to various estimates cited by Mr. Levin.

“The idea that we have all these companies that avoid paying taxes through all these gimmicks is disgraceful,” said Mr. Levin, the chairman of the Senate Permanent Subcommittee on Investigations. “And that we tolerate it is disgraceful.”

Mr. Conrad, who is chairman of the Senate Budget Committee, said that by cracking down on offshore abuses, Congress and the Obama administration could make a substantial reduction in the deficit without resorting to either tax increases or severe cuts to programs like Medicare or Social Security.

Mr. Conrad said the proposal might also break the logjam that has stalled the deficit negotiations. Mr. Obama has refused to approve a deal that does not include increased revenue, while Congressional Republicans have said they will oppose any measure that increases taxes.

The proposal got a cool reception from House Republicans, some of whom of consider ending any tax break a form of tax increase. Representative Eric Cantor, the Virginia Republican who is majority leader, has vowed to oppose any deficit reduction plan that includes tax increases and has said that loopholes can be addressed in some future debate on tax reform.

“As Eric has made clear, tax increases cannot pass the House,” said his spokeswoman, Laena Fallon. “While the president has been seemingly obsessed with certain special-interest loopholes in the debt-limit debate, Eric believes the broad discussion of tax policy belongs in the larger debate on fundamental tax reform.”

While Mr. Levin has sponsored an assortment of bills to limit offshore tax havens over the last decade, the plan introduced Tuesday included several sweeping new features.

One provision would change the way the tax code treats derivatives trades. Under current law, the I.R.S. defines the “source” of derivative income as the location where a trade is paid rather than where the money originates. That allows many traders to legally sidestep federal taxes by routing trades offshore.

Mr. Levin called that “absurd” and said his proposal would institute a common sense source rule for trades involving credit-default swap: sourcing — and taxing — it according to where the money originates.

Another proposal would try to discourage United States companies from using bookkeeping maneuvers to shift their profits to tax havens. In recent years many multinationals — including pharmaceutical giants like Pfizer and technology companies like I.B.M. — have cut their United States taxes by booking increasing amounts of their profits abroad. Mr. Levin’s proposal would require all United States multinationals to provide more information in their regulatory filings, including a country-by-country breakdown of their sales, employment, financing and tax payments.

The bill would also prevent companies and hedge funds from escaping American taxes by filing incorporation documents abroad and declaring themselves foreign companies. During public hearings in 2008, Mr. Levin’s subcommittee heard testimony from three hedge funds — Highbridge Capital, Angelo Gordon and Maverick Capital — which were incorporated in the Cayman Islands, but had no offices or employees there. Mr. Levin’s proposal would allow the I.R.S. to define a domestic company as one that is managed and controlled within the United States.

Mr. Levin said he was “hopeful” that President Obama, who supported two similar bills when he was a senator, would make the issue of offshore tax havens a part of the deficit negotiations. When asked if the president intended to do so, an administration official declined to comment.

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