July 14, 2011 — -- The showdown over raising the debt ceiling has brought corporate tax havens into the spotlight, a time-honored practice for businesses but a costly drain on the U.S. Treasury.
This week, Sen. Carl Levin, D-Mich., introduced the Stop Tax Haven Abuse Act which proposes that companies pay U.S. taxes if operations are managed domestically, regardless of whether they are incorporated in other countries.
"Right now, wherever you are incorporated determines if you are a U.S. corporation," Levin said in a press conference. "If you are incorporated in the Caymans you are treated like a Cayman corporation. That's going to end."
The 61-page bill includes a number of measures to stem offshore and tax shelter abuse. One provision stops corporations whose management and control are located primarily in the U.S. from claiming status as foreign corporations for tax purposes. Another section authorizes the Treasury secretary to take special measures against foreign institutions and jurisdictions that impede U.S. tax enforcement.
"If there is an offshore bank that does not cooperate with our tax people, at that point, our banks will be told they cannot do business with that offshore bank," Levin said. "That means for instance, an offshore bank will not have access to American credit cards through that bank."
Levin said that he and the Permanent Subcommittee on Investigations, a subcommittee of the Homeland Security and Governmental Affairs Committee, have examined tax avoidance schemes for 10 years and found that offshore tax abuses have cost the U.S. Treasury $100 billion in lost revenue yearly.
"There's a lot of disagreement about how to reduce the deficit but I think most people agree that clamping down on offshore tax abusers is one way to surely reduce the deficit," Levin said.
Another bill tries to tackle tax havens, but using a carrot instead of a stick. The Freedom to Invest Act, calls for a repatriation tax holiday, in which companies would receive a temporary tax break for bringing overseas profits back to the U.S.
Rep. Kevin Brady, R-Texas, and Rep. Jim Matheson, D-Utah, were among a handful of bipartisan members of Congress who introduced the bill in May to temporarily lower tax rates for American companies so they can invest in job creation in the U.S.
Tax Holiday Idea Floated
A lobbying group supporting the legislation, the Win America Campaign, claims that under a one-year repatriation tax holiday $1 trillion in global earnings would return to the U.S. The group, which includes support from corporations such as Apple, Cisco, Google and Microsoft, advocates that global profits would be taxed at about 5 percent for one year, as opposed to the current top corporate rate of 35 percent.
The Center on Budget and Policy Priorities published a report in June arguing that providing large corporations with a repatriation tax holiday is not likely to generate promised investments or jobs in the U.S. The report cited evidence that a similar tax holiday failed to do so in 2004.
U.S. non-financial corporations currently have $1.9 trillion in cash and other liquid assets, the highest level as a share of total corporate assets since 1959, according to the report.
"The claim that a tax holiday would increase domestic investment by freeing multinationals from cash restraints is extremely dubious," the report states.
Also, the expectation for future tax holidays will make firms more inclined to shift income into tax havens and less likely to reinvest earnings in the U.S., according to the report.
After Friday's disappointing jobs report, a post on the Win America Campaign blog said "with few options available that will immediately help the economy, elected officials should allow U.S. businesses the freedom to bring upwards of $1 trillion currently trapped overseas home to America to invest it here."
Data from the IRS shows that U.S. companies had $834 billion of income subject to U.S. taxes in 2007, with a tax liability of $293 billion, according to Seeking Alpha. Those companies claimed $86.5 billion in foreign tax credits, leading to a net liability of actually $192.8 billion after additional business credits.
Rep. Brady said in a statement that Congress must continue "to examine and pursue tax reform."
"But as we are working toward that goal, we should also look at measures that can provide a down payment and help grow our economy in the short-term," Brady said.
Caterpillar Whistleblower Lawsuit
Last week, Bloomberg reported about a whistleblower who said his employer was improperly stating its profits in Switzerland is suing Caterpillar Inc. for an alleged retaliatory demotion.
Dan Schlicksup, former global tax strategy manager for Caterpillar from 2005 to 2008, is an attorney and certified public accountant. But he said he was demoted to work in the IT Department of Caterpillar, the world's largest construction equipment manufacturer, after he told higher-ups the company may breaking U.S. rules in stating profits from its operations abroad.
Schlicksup, who still works for Caterpillar in its headquarters in Peoria, Ill., filed a civil suit against his employer in 2009 under a provision of the Sarbanes-Oxley Act of 2002 and the Illinois Whistleblower Act, which prohibit retaliation against corporate whistleblowers.
Catepillar filed a motion in November 2009 in response to the suit, saying the transfer was a lateral move and not a demotion. Caterpillar said that Schlicksup, 49, has had various positions since joining the company in 1992, including manager in the corporate human resources division and information services division. The company also wrote in the suit that Schlicksup had received a raise of $14,292 by October 2008.
A judge in the U.S. district court of Illinois denied Caterpillar's motion to dismiss the case in June 2010. A trial date is set for Jan. 16, 2012.
From Tax Lawyer to IT Guy?
Schlicksup was not available for comment. His attorney, Dan O'Day, said the move is a demotion because his client, who has a law degree as well as an advanced degree in taxation, is not trained in IT services and will not be able to advance in his career there.
"The court ruled when you move a lawyer from tax department to computer department where he doesn't know anything about corporate computers, that is an adverse action," O'Day told ABC News.
Schlicksup first brought the issue of the "tax dodge" to his employers in 1999, saying that a so-called "Swiss Structure" was "designed to shift at least $5.6 billion of profits to alleged offshore companies in order to claim avoidance of over [$2 billion] of U.S. federal income tax" from about 2000 to 2009, according to his suit.
In the suit, Schlicksup also disputed Caterpillar's "Bermuda Structure" designed to return profits to the U.S. via "alleged offshore companies without paying any U.S. tax on the funds."
Before filing a suit, Schlicksup filed a complaint with the Occupational Safety and Health Administration (OSHA) against Caterpillar in 2008, detailing his communication with company executives over concerns about various business practices.
In the OSHA complaint, Schlicksup said that on August 26, 2008, a vice president asked him to attend a meeting about an "opportunity." A human resources manager then told him that Caterpillar was terminating his current position in the finance division effective September 1, 2008 and that his current job duties were being reassigned, according to the suit. Schlicksup said the company offered him a lateral move to the information technology division and that if he did not take the offer, Caterpillar had the right to terminate his employment.
Jim Dugan, spokesman for Caterpillar, said the company could not comment on pending litigation, but that "Caterpillar complies with applicable tax laws and regulations in the countries where we have operations and conduct business."
"The company has a robust and well-defined process for examining questions and concerns raised by employees, and that process has been followed as it relates to the allegations made in this case," Dugan said.