Blue Mass Group

Reality-based commentary on politics.

Oh, THAT loophole!

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Well, well, well, how that THAT get in here? Looks like there was an amendment in the House's loophole-closing tax bill that, well, blasts another enormous loophole open — for companies that keep their business overseas.

The provision would permit large corporations to avoid up to $200 million in state taxes a year if they maintain large portions of their business operations overseas, according to an estimate by the state Department of Revenue. The tax-shelter strategy has proved controversial in other states. 

And who was responsible for it? Rep. Dan Bosley (who coincidentally favors keeping Verizon's loopholes intact, because of all the benefit we get from them):

 Representative Daniel E. Bosley, who sponsored the amendment, disputed the state's estimates as inflated and suggested the Department of Revenue's criticism was motivated by other provisions in his amendment that remove some regulatory power from the department.

“I just don't trust their figures,” Bosley said of the department. “It's a ridiculous estimate. They're just bad at numbers.”

Well, this is a fine opportunity for Rep. Bosley to lay out the math, then. We can have a real public math-off; fun for the whole family. 

Or, we could just have the Senate kill the whole thing. How about that? 

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  3. Any idea from reading that Globe article what the “enormous loophole loophole open — for companies that keep their business overseas” is?

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    p>Bosley’s notoriously bad math (i.e. casino) notwithstanding, just a  guess, but probably the evil loophole du jour is the water’s edge election under (c)(3) of the Bill, whereby companies in combination can exclude affiliated companies not located in the US.

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    p>How unfair is that?!  Massachusetts can’t tax companies not located in Massachusetts.  

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    p>What’s next?  Going after retirees now living on their Mass Pension in Florida?  

    • Last time a remember hearing that phrase was during the collapse of Enron.  In their case I believe they were hiding losses.  Clearly, the converse could easily be used to hide profits from those usureous Massachusetts tax rates.

    • Here’s the ultra-liberal Wall Street Journal on how Wal-Mart used this exact strategy to stiff Illinois:

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      Wal-Mart set its affairs so that its Italian outpost is the only operating unit of a real-estate subsidiary that controls billions of dollars of the retailer’s property in Illinois and other states. Because technically its only employees are based in Italy, the real-estate unit claims its operations are foreign, exempt from Illinois corporate income taxes.

      Earlier this year, the Illinois Department of Revenue objected to the Italian tax maneuver, demanding $26.4 million in back taxes, interest and penalties….

      The dispute with Wal-Mart is part of a wider effort by some states to crack down on what they believe is abusive use of so-called 80/20 companies. These companies are domestic subsidiaries that conduct at least 80 percent of their business overseas. States typically don’t tax income from outside the U.S., and many companies have used 80/20 subsidiaries to legitimately shield foreign operations from state taxation.

      But authorities in several states have challenged a number of companies over the 80/20 units, claiming the structure was improperly used to shift income away from the purview of state taxing authorities.

      The misuse of 80/20 companies is “shocking to the conscience,” said Brian Hamer, director of the Illinois Department of Revenue.

      Why Wal-Mart set up shop in Italy
      Jesse Drucker, Wall Street Journal, November 14th, 2007

      • This is illustrative of the policy issues in play, and the “loophole” bullshit is provocative language that doesn’t advance the debate.

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        p>Beacon Hill (a conservative policy org, right?) advances the idea of taxation of World Wide income.  i.e no Waters edge election.  Also, importantly a relatively flat 5.0 – 5.3 % rate.

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        p>DiMasi, Bosley, et al says 7% rate on a Combined basis then brings in the Waters edge election, I’m guessing at the behest of a few of the multi-nationals and also the foreign companies doing business here but headquarted abroad.

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        p>Governor Patrick says something inspiring, but it’s not really important.  Something about an 8.2% rate, but few details.

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        p>California agressively taxes the multi-nationals, knowing that every company wants to do business in California.  Even California has a waters-edge election but charges a fee for allowing it.  

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        p>Who really knows if multi-nationals are so excited about doing business in Mass and would continue to do so if faced with an additional cost on their off shore profits?

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        p>Here’s the deal. Complicate the tax code, or simplify it.  Legislate against the off-shores, against the 80/20s or against the 936 companies.  So long as the tax rate is significant, you’ll have guys like me to figure out a legal way to minimize the bite.  Bring it on.

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        p>Broad Corporate low flat combined rate is the answer.  Any other policy than that just means more money for me.

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        p>

          • How much did YOU pay in use tax when you filed your Mass income tax return, on otherwise non-taxable internet purchases?

        • Here’s the deal. Complicate the tax code, or simplify it.  Legislate against the off-shores, against the 80/20s or against the 936 companies.  So long as the tax rate is significant, you’ll have guys like me to figure out a legal way to minimize the bite.  Bring it on.

          Broad Corporate low flat combined rate is the answer.  Any other policy than that just means more money for me.

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          p>And as long as the legislature continues to need their press releases about how much good they’re doing for the MA economy with their new credit packages or new favored classifications  there will be people like me (formerly an employee of the MA DOR) lamenting that the legislature continues to complicate the MA tax code and create these planning opportunities.  The new scheme created by Gary will come forward and everyone will realize that the great economic development package they passed is benefiting companies that they never thought it would.  But hey, it keeps my former co-workers employed on state dime playing that cat and mouse game with Gary.  All of because the legislature couldn’t abide by the simple motto, “Broad Base, Low Rates.”

    • I can’t tell what (c)(3) section you’re talking about, since your link is a pdf of the whole bill.  But since Bosley’s amendment was adopted on the floor of the House, it’s probably not in the version of the bill you linked to.

      • I can’t tell what (c)(3) section you’re talking about, since your link is a pdf of the whole bill.

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        p>Maybe start by looking at (c) then (3).  Just a hunch.

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        p>The 80/20 exclusion has been in the Bill for quite a while.  I remember seeing it several weeks if not a month ago.

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        p>Again, was it so friggin hard for the Globe reporter to ask for a few details of the change rather than proclaim it a loophole and proceed to lament the loss of money?  

        • The bill is numbered in the traditional fashion — that is, with numbers.  As in, “Section 1,” “Section 2,” etc., all the way up to “Section 109.”  So why don’t you do a little leg work and tell me (and the rest of BMG’s readers) which of those 109 sections contains the subsections (c) and (3) you’re talking about, instead of not answering the question.

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          p>And if Bosley’s 80/20 exclusion had been in the bill several weeks ago, there wouldn’t be a big flurry of excitement over Rep. Bosley adding it on the floor, now would there?  So I again suggest that you do your homework before mouthing off about something that you appear to be wrong about.

          • I guessed water’s edge.  You say “you’re wrong” it’s not that.

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            p>You say it must be related to the 80/20 structure.  Well, that’s probably covered by water’s edge, so I say, “you’re wrong” it’s not that.

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            p>Read my intital post:  it says ‘vague reporting’.  Vague means unclear.  What’s the loophole?  What’s a loophole anyway, because it sounds from the commentary, that a loophole is an amendment that reduces revenue.  That’s as clear as any reporting has been so far.

  4. have been helpfully supplied by the ever-excellent Mass. Budget and Policy Center.

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    The Legislation Creates New Loopholes and
    Tax Reduction Opportunities for Corporations

    The House adopted a floor amendment that opens new loopholes, creates special rules to allow certain types of companies to reduce their taxable income in Massachusetts, provides new tax deductions, and weakens the capacity of the Department of Revenue to enforce the corporate tax laws effectively. The Department of Revenue estimates that the provisions of this amendment will “reduce the additional revenue anticipated by the Governor’s combined reporting bill by at least $100 million to $200 million annually”1

    A New Loophole for Companies with U.S. Subsidiaries That Operate Overseas

    The floor amendment creates a new loophole that allows companies that have U.S. subsidiaries doing business overseas to shelter income from taxation by funneling it into those subsidiaries. The state Department of Revenue estimates that this new loophole could cost the Commonwealth more than $100 million annually.

    In the combined reporting legislation filed by the Governor, any U.S.-incorporated subsidiary that was part of a unitary business was required to be part of the combined group. Including in the combined group all subsidiaries that are part of the same unitary business protects against income-shifting strategies. This amendment identifies a particular type of subsidiary that the company can exclude from its combined group: subsidiaries with 80 percent of an average of their payroll, tangible property, and sales sourced outside the U.S. This loophole can allow multinational companies to develop tax avoidance strategies that shift substantial amounts of income into these subsidiaries and reduce their state taxes accordingly. A recent Wall Street Journal article explained how Wal-Mart used a similar loophole in Illinois.

    Wal-Mart set its affairs so that its Italian outpost is the only operating unit of a real-estate subsidiary that controls billions of dollars of the retailer’s property in Illinois and other states. Because technically its only employees are based in Italy, the real-estate unit claims its operations are foreign, exempt from Illinois corporate income taxes. Earlier this year, the Illinois Department of Revenue objected to the Italian tax maneuver, demanding $26.4 million in back taxes, interest and penalties….

    The dispute with Wal-Mart is part of a wider effort by some states to crack down on what they believe is abusive use of so-called 80/20 companies. These companies are domestic subsidiaries that conduct at least 80 percent of their business overseas. States typically don’t tax income from outside the U.S., and many companies have used 80/20 subsidiaries to legitimately shield foreign operations from state taxation. But authorities in several states have challenged a number of companies over the 80/20 units, claiming the structure was improperly used to shift income away from the purview of state taxing authorities. The misuse of 80/20 companies is “shocking to the conscience,” said Brian Hamer, director of the Illinois Department of Revenue.

    Why Wal-Mart set up shop in Italy
    Jesse Drucker, Wall Street Journal, November 14th, 2007

    A New Opportunity for Tax Avoidance for Corporate Groups that have Both Financial and Non-Financial Businesses

    The House amendment also introduces special rules about how Massachusetts should determine what share of a company’s income is earned in this state (“apportioned” to Massachusetts) if the company has both financial services operations and other operations. Many states, including Massachusetts, apply different rules to financial services companies than to other companies when determining how much of their income should be taxed in each state.

    The House amendment would create a system in which the apportionment factors are all added together and no adjustments are made for the differences between the apportionment rules for different sectors. As a result, a company that does a large amount of business in Massachusetts could pay taxes on a very small share of its income here if a member of its corporate group is a financial institution that has large amounts of intangible assets in other states.

    In describing the potential cost of this loophole, the Massachusetts Department of Revenue states, “as a majority of revenue from combined reporting would be attributable to a few dozen large corporations, potentially tens of millions of dollars could be lost if even a limited number of them dilute their Massachusetts apportionment percentages through the combination of financial and non-financial entities.”

    A New Tax Deduction for Companies If the Book Value of Tax Benefits Falls

    The House amendment includes a provision stating, in part, that if the changes related to the adoption of combined reporting “result in an increase to a net deferred tax liability or decrease to a net deferred tax asset for any taxpayer affected by this section, taxpayer shall be entitled to a deduction.” The Department of Revenue explains why this new deduction could be costly:

    The Department is concerned that deferred tax liabilities of a business may increase any time that its effective state tax rate increases. A taxpayer that has been shifting income out of Massachusetts and that will no longer be able to do so because of combined reporting will see an increase in its effective tax rate (even if the Commonwealth’s stated tax rate decreases). Under the House bill, such a taxpayer could claim a new Massachusetts deduction as an offset.

    While the Department of Revenue does not provide a specific estimate of the likely cost of this provision, it does state that the provision “would likely negate significant amounts of income that would otherwise be taxed under the combined reporting rules, thus significantly reducing the tax revenues that would otherwise be collected from adoption of combined reporting.”

    The Department of Revenue’s Regulatory Authority Reduced

    The amendment appears to take away from the Massachusetts Department of Revenue much of the standard authority that departments of revenue generally have to adopt regulations that implement the law. Reducing the regulatory authority of the department could strengthen the hand of companies with the capacity to design sophisticated tax avoidance strategies by weakening the capacity of the department of revenue to ensure that our tax laws are implemented in a fair, effective and efficient manner.

    1 Letter from Navjeet Bal, Massachusetts Commissioner of Revenue, to Senate President The Honorable Therese Murray, April 18, 2008. All quotations of the Department of Revenue in this MassBudget Brief are from this letter.

  5. which no doubt supplied the 2,300-word amendment to Rep. Bosley’s office:

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    “We don’t think this is a particularly good time to be jacking business taxes,” said John Regan, an executive vice president of the Associated Industries of Massachusetts.

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    p>ROFLMAO!  We look forward to Mr. Regan’s assessment of when it is a good time to “jack business taxes.”

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    p>link

  6. are common to combined reporting schemes.  Gary rightly points out that California, by far the most developed combined reporting system, has an 80-20 waters edge election.   The Supreme Court upheld California’s previous waters edge election in 1983 in the Container Corp case.  However, despite the Container Corp decision, any combined reporting system without a waters edge election would surely face an as applied constitutional challenge when a taxpayer with the right facts emerges or the state becomes too aggressive with an assessment.  There are two other major factors to consider.  1. After Contained Corp there was a suspicion that if CA continued without a waters edge election that Congress would exercise its commerce clause powers and restrict states from taxing those companies.  CA backed off and so did Congress.  2. There are concerns that an overly aggressive state without a waters edge election could interfere with international tax treaties.

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    p>But hey, if someone called it a loophole then it must be bad.  I guess the new standard for bad tax policy is anything that someone says is a loophole.  We don’t have to define what a loophole is or demonstrate a real understanding of the MA tax system.  We just call it a loophole and then case closed.  Thank you for the continued excellent MA tax analysis from the reality based individuals on this website.

    • My point is that many here just repeat the talking points of Gov. Patrick or the MA BPC or whatever other source they’ve been reading recently.  Why is it that Rep. Bosley’s specific policy decision to include a waters edge election in the new MA combined reporting scheme is a “loophole” but Gov. Patrick’s decisions to give tax credits to life science companies and film companies are not loopholes?  No one seems to know what a loophole is, other than the initiatives that they support (based on their often limited understanding of the issues involved) are not loopholes and the initiatives they don’t support are “loopholes.”

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      p>Perhaps you could raise the level of the tax policy discussion by getting rid of the talking points.  An argument that follows the basic plot of “Policy X has been proposed.  Here is an explanation of Policy X.  Here are the reasons I oppose Policy X.”  Or you can just call them loopholes, or scams, or evil incarnate, and simply rest on the laurels of your talking points without any actual reasoning to support your position.

      • Will do a good thing for this state, and further economic investment in this state, as well as enhance our public universities by helping them become leaders in life sciences research across the country.

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        p>How does creating a tax shelter for mega corporations, so they don’t have to pay Massachusetts taxes, help Massachusetts citizens? I think there’s your litmus.  

        • about single sales apportionment factor for Manufacturing.  Lets create good manufacturing jobs in MA and further our economy.  Sounds good right.  Then Papa Ginos won a case to get manufacturing classification for mixing its dough.  And Sherwin Williams stores won manufacturing classification because its machine combines paint to match the color its customers want.  And Noreast Fresh won manufacturing for bagging its lettuce here.  And then the trifecta last year when the ATB gave away the farm for manufacturing classification to First Years, Onex, and Duracell.  Now you’re a manufacturer in MA if you design a product here and manufacture it elsewhere or if you do any R&D in MA.  They tried to create manufacturing jobs, but they really only created a lot of litigation over the vague concept of what manufacturing is and a boondoggle to companies that do many things that the legislature likely had no idea would someday qualify as manufacturing when the bill was passed.

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          p>But I’m sure at the time the bill was being debated, someone supporting the bill had a nice press release about doing good things for the state and furthering economic development and someone like you carried their water by repeating their talking points.

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          p>But at least you attempted to answer my question.  The litmus for what qualifies as a “loophole” for purposes of this website is whatever policies you don’t like (based on your limited understanding gleamed from press releases from politicians or think tanks that you like).  The ones you do like are good and further economic development.

          • au Bon pain, kinkos, a lot of software companies, and the globe and herald are all official Manufacturers, as far as I remember. Things you wouldn’t think would pass muster.

          • I don’t nor wouldn’t think that a good idea; that’s a case where a law didn’t work as intended and would need to be fixed. Those things happen. Politicians are not infallible; we, as a society, only need to expect them to fix their mistakes when they happen, if they were accidental.

      • … the minutia of legal or financial particulars, But SOP as is doesn’t pass a common sense smell test when a company is asked how was business this year and it answers that great for shareholder value purposes, but lousy or worse for tax purposes…. that smells like a scam.   While legal, it doesn’t pass a smell test.

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        p>Joe… you know that $200 you owe me,… I noticed you bought a new car so I’m guessing I can get that money from you now.  What?… you say that the car is a 0% lease with that will pay for itself because of some funky tax reporting technique, so that while it looks like you have money you really don’t?  What about the down payment?  You figured the car was a better investment and you feel I shouldn’t hold that against you?  Thanks a lot Joe!

        • Maybe these examples go back to loophole v. policy, fair v. not:

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          p>1) Mass company owns a company in Zimbabwe, a country with blocked currency.  Even in the face of a miserable economy, the company is profitable, believe it or not.  As a matter of policy, should a Mass company pay taxes on the Zimbabwe subsidiary’s gains particularly since the Zimbabwe can’t ship the profits to the US.  There’s no Federal tax on the profits until remitted.  Mass tax?  Yes, unless there’s a Water’s Edge election. (i.e. tax only US affiliates).

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          p>2) Or this one.  Thermo Fisher Scientific, an ’06 merger with Waltham Based Thermo and Fisher Scientific of New Hamphire.  New company, Thermo Fisher, is based in Massachusetts.  Earned $881 million in ’07 and paid 11.5% tax.

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          p>11.5%! Zow!  Why so low?  Because earnings in the US were lousy; and earnings abroad were higher but subjected to lower tax rates (a recent trend–US is a high taxer of it Corporations relative to the EC).  You think they were legally moving profits offshore?  Wouldn’t surprise me a bit.

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          p>What to do?  Go Unitary and tax that evil corporation’s $881 million worldwide income?  How much would you care to wager that right now, some green-eyeshade types are calculating the cost of staying in Massachusetts and having its income taxed at 8 to 10%.  New Hampshire might just look very appealing again.

          • …

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            p>Phil:  Accountant Bob, is there any way we can manipulate things so that our Big Sale of Widgets to USCorp can happen in Greater Berzerkistan?
            Bob: the sale is to a U.S. company, so we’d have to figure some things out.  Lemme think a minute.  …  Ok, lets do it this way.  We should talk to UsCorp about getting a Berzerkistan subsidiary.  Since Berzerkistan is a developing country they are extremely business friendly at the moment and are sure to get a deal out of it (unless USCorp is owned by or too much in bed with the Kurdish Berzerkistan).  Hell, with Berzerkian laws they can run the whole subsidiary out of a hotel room if they want.  Then we can run the sale from our subsidiary to theirs.  Of course we don’t have a free trade agreement with Berzerkistan so when the widgets come on shore there will be a small tax, but this will be able to be offset by the credits they can claim for investment in the subsidiary in the first place.

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            p>Phil:  Gee Bob, that sounds a lot like a scam

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            p>Bob:  Nobody has convinced the FTC, the SEC or the legislature of that yet, and given our campaign contributions, it’s not likely to happen anytime soon (or ever really).

                • That was almost my idea.  

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                  p>I’ve always said make the Mass Corp excise tax a flat 2%-5% of the Federal taxable income and eliminate the corp property component.  

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                  p>That would eliminate the need for the Mass DOR auditors, make State income tax planning nearly immaterial for big corps and leave enforcement up to IRS.

                • is a presentation I did for a class on the idea of completely getting rid of state-collected corporate taxes. I think your idea would be better for the state. Feel free to poke fun, holes in, eyes out of, etc.

          • Why have taxes at all? I mean, really, if we DO tax businesses, they could up and leave.

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            p>It’s funny I never hear anything of the likes of that with people – why tax people at all, or as high as we are? If we do, they could up and leave!!

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            p>The funny thing is, plenty of people are leaving Massachusetts – but it’s not because of taxes. It’s because of our shitty priorities as a state that creates conditions anethema to young professionals, who can’t afford to stay here, or are sick of seeing their local communities continuing to go under.

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            p>And businesses are far more likely to grow elsewhere, when our extremely talented people leave for greener pastures. Our mega corporations are leaving as well, being bought up by even larger mega corporations in many cases. We can’t do anything about that – and it certainly has almost nothing to do with our tax rates. It has to do with the fact that we’re losing our cutting edge: we’re not growing newer, bigger and better companies here at home, while the ones we grew in yesteryears get bought up. Let’s create policy we can actually have more control over – which means that we can’t sell out to the Fortune 500s, because they’re going to do what they’re going to do, so let’s make sure we have a burgeoning economy of smaller companies and ever-more start ups that will fill the gap and create the next generation of a Massachusetts economy – which, if we do right, will almost certainly be a better generation.  

  8. The numbers? Who the hell gives a crap about the numbers? The point is that this is a new loophole in the end-the-freaking-loophole bill, and it completely betrays the fact that we’re giving a big, freaking, royal tax cut to the corporations in Massachusetts that the citizens of Massachusetts would never be so lucky to see in a million years (and nor could we afford it). It was a compromise that was agreed to by a wide range of parties, and Representative Bosley may have just ruined it. I’m glad he was there for the casino fight, but this is just so outrageous that if it does pass as is, I don’t think I’ll get over it. This will be one of those nasty bills (in this case, amendments) that stays with me for a long, long time – a la the Bankruptcy Bill in D.C. How petty of him…

    • tax cut where I pay almost $300 million more after the “tax cut” than I did before the tax cut, as the corporations subject to the MA Corporate Excise tax will if the House bill becomes law.  I guess your definition of “tax cut” is as well thought out as your definition of “loophole.”  But I guess if you “don’t give a crap about numbers” when you’re debating tax policy then you can call anything a “tax cut.”

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      p>Ideally MA could have a worldwide combined reporting system without a waters edge election and an even lower corporate tax rate.  However, the bill as introduced before the amendment would have been subject to constitutional challenges, would potentially interfere with US international tax treaties, and would invite federal legislation to scale back all state combined reporting systems.  Combined Reporting is a good thing, a step forward for MA corporate tax policy.  Don’t throw the baby out with the bath water.

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