This week the Conference Committee on the Combined Corporate Tax Reform issued it's report and the Legislature has sent the bill to the Governor's desk. It is a pretty good bill that will raise revenues for the Commonwealth, create a tax system that will tax in a fairer manner, and give corporations some long term relief from rates in out years.
Much has been written about the so-called Bosley Amendment to the bill. Most of this was kept in the final version of the bill. Water edge election, Fas 109 changes, as well as taking discretion from the Department of Revenue that make tax policy more transparent and predictable are all in the bill. The only major piece of the amendment missing was the 80-20 provision. That was a disappointment, but as a whole, the conference committee did a good job at separating fact from fiction and did a very good job.
Since the Boston Globe wrote an editorial this week concerning the 80-20 provision that contained a great deal of information that was either not true or misconstrued, I wrote the following letter to members of the House. For further info concerning the corporate tax reform, there are previous posts here discussing the bill.
Dear Colleagues,
In response to today’s Boston Globe editorial regarding the corporate tax reform bill,
currently in conference committee, I would like to offer some further observations
regarding the bill.
Leaders in the Senate, House, and Administration agreed upon the water’s edge provision
in the bill – whereby the taxable income of a unitary group is computed based on their
business within the continental United States. Also agreed upon was an 80/20 provision
– something that numerous other states practice – that simply clarifies that a unitary
group that has 80% or more of its payroll, sales, and property outside of the United States
is not subject to state taxes.
The language in the House version of the bill was drafted to accomplish two goals. The
first is to try to avoid any negative interference that our state tax policy may have on
international trade agreements or tax treatises. If, for example, we did not institute a
water’s edge provision and began to identify taxable income of a unitary group that a
European government also identified as taxable income, it would be difficult for both
parties to avoid reactionary public policy that may negatively affect trade agreements or
diplomatic relations. This would inevitably lead to lengthy and costly lawsuits,
effectively negating any increase in revenues that the state may be able to collect by
including foreign profits as taxable income. This would also not be a positive
development in a time when the Commonwealth is trying to compete on a global scale
with significant investments in the life sciences and clean energy.
The second goal of the house language regarding the water’s edge provision is to ensure
that there is no discrimination solely based on where a company is incorporated by
adopting language that only includes water’s edge income without regard to where the
taxpayer is incorporated. The House language simply abides by the agreed upon water’s
edge principle by making sure that income earned overseas will not be taxed in
Massachusetts simply because the corporation is incorporated somewhere in the United
States. For example, a company incorporated in France with 80% of its payroll, property,
and sales there would be exempt, yet a company incorporated in any state with the same
80% of its payroll, property, and sales in France would be taxed in Massachusetts. The
House language levels the playing field by removing the incentive to incorporate abroad
by assessing taxation based on the agreed 80/20 provision and apportionment formula,
not the location of incorporation.
Today’s Globe article, using figures presented by the Department of Revenue, asserts that
by including the House water’s edge language, the state could be losing a significant
amount of potential tax revenue due to a perceived tendency by corporations to establish
foreign subsidiaries to represent 80% of their payroll, sales, and property so as to avoid
state taxes. DOR uses the state of Minnesota as an example and extrapolates their
revenue loss estimates due to the use of 80/20 in that state by simply multiplying the
recorded revenue effect in Minnesota by how much larger the Massachusetts economy is
in comparison (DOR estimates one third larger). They come up with a potential loss for
Massachusetts state revenues of $140-$170 million. Aside from the significantly
anecdotal nature of this analysis, the state of Minnesota also did not share the same
apportionment provision in their combined reporting, using only property and payroll to
calculate taxable income rather than property, payroll, and sales as is proposed in the
House language. DOR compared apples to oranges. Minnesota has since changed their
apportionment formula to include all three factors and have found that their revenue
projections for the next three fiscal years do not record a loss, but rather a significant gain
in state tax revenues from their new water’s edge provision using the three pronged
apportionment - $95.9 million in FY09, $75.7 million in FY10, and $78.3 million in
FY11.
In addition, the example of Illinois’ experience with Wal-Mart where the company made
an attempt to consolidate its taxable income on foreign soil and thus keep the state of
Illinois from collecting over $25 million in state taxes is misleading. Wal-Mart paid the
state of Illinois the $26.4 million in taxes/fees that it owed, subsequently appealed the
state’s decision, and lost. Essentially, they were caught with their hand in the cookie jar
and paid up. Their ability to regulate their state tax laws is the same that would exist for
the Massachusetts Department of Revenue. Were a similar situation to arise in the
Commonwealth, DOR already has the ability to pursue corporate tax evasion should it
arise. In fact, the House language strengthens this ability because it establishes
transparent and predictable tax law for companies, so that there is no misunderstanding as
to how companies are supposed to interact with and pay the state.
The Globe’s editorial says, “Closing the loopholes carved out by big corporations’ tax
attorneys can offset the revenue loss from a lower rate and generate additional funds to
cover the rising cost of healthcare, education, and infrastructure maintenance. Plus it is
the fair thing to do.” The truth is that eliminating the water’s edge provision, as it is
written in the House, and providing DOR with the overarching discretion that the
Administration has called for, is a way for the state to raise money by going after the
business community. The Administration’s version of this bill does not address the
question of fairness, but rather the question of how much money the state can squeeze out
of the business community. The Administration’s version of the bill gives DOR overly
broad discretion to reach back and interpret the regulations for combined reporting on a
case-by-case basis. This makes the state an unattractive place to do business, because a
lack of predictable tax regulation makes it very difficult to project long-term costs,
profits, employment, and sales. The House combined reporting language provides
taxpayers with long term clarity, removes DOR from policy decisions, and strengthens
their ability to regulate our state’s tax policy.
I look forward to working with you on this important matter. Please do not hesitate to
contact my office with any questions or concerns that you may have.
Sincerely yours,
currently in conference committee, I would like to offer some further observations
regarding the bill.
Leaders in the Senate, House, and Administration agreed upon the water’s edge provision
in the bill – whereby the taxable income of a unitary group is computed based on their
business within the continental United States. Also agreed upon was an 80/20 provision
– something that numerous other states practice – that simply clarifies that a unitary
group that has 80% or more of its payroll, sales, and property outside of the United States
is not subject to state taxes.
The language in the House version of the bill was drafted to accomplish two goals. The
first is to try to avoid any negative interference that our state tax policy may have on
international trade agreements or tax treatises. If, for example, we did not institute a
water’s edge provision and began to identify taxable income of a unitary group that a
European government also identified as taxable income, it would be difficult for both
parties to avoid reactionary public policy that may negatively affect trade agreements or
diplomatic relations. This would inevitably lead to lengthy and costly lawsuits,
effectively negating any increase in revenues that the state may be able to collect by
including foreign profits as taxable income. This would also not be a positive
development in a time when the Commonwealth is trying to compete on a global scale
with significant investments in the life sciences and clean energy.
The second goal of the house language regarding the water’s edge provision is to ensure
that there is no discrimination solely based on where a company is incorporated by
adopting language that only includes water’s edge income without regard to where the
taxpayer is incorporated. The House language simply abides by the agreed upon water’s
edge principle by making sure that income earned overseas will not be taxed in
Massachusetts simply because the corporation is incorporated somewhere in the United
States. For example, a company incorporated in France with 80% of its payroll, property,
and sales there would be exempt, yet a company incorporated in any state with the same
80% of its payroll, property, and sales in France would be taxed in Massachusetts. The
House language levels the playing field by removing the incentive to incorporate abroad
by assessing taxation based on the agreed 80/20 provision and apportionment formula,
not the location of incorporation.
Today’s Globe article, using figures presented by the Department of Revenue, asserts that
by including the House water’s edge language, the state could be losing a significant
amount of potential tax revenue due to a perceived tendency by corporations to establish
foreign subsidiaries to represent 80% of their payroll, sales, and property so as to avoid
state taxes. DOR uses the state of Minnesota as an example and extrapolates their
revenue loss estimates due to the use of 80/20 in that state by simply multiplying the
recorded revenue effect in Minnesota by how much larger the Massachusetts economy is
in comparison (DOR estimates one third larger). They come up with a potential loss for
Massachusetts state revenues of $140-$170 million. Aside from the significantly
anecdotal nature of this analysis, the state of Minnesota also did not share the same
apportionment provision in their combined reporting, using only property and payroll to
calculate taxable income rather than property, payroll, and sales as is proposed in the
House language. DOR compared apples to oranges. Minnesota has since changed their
apportionment formula to include all three factors and have found that their revenue
projections for the next three fiscal years do not record a loss, but rather a significant gain
in state tax revenues from their new water’s edge provision using the three pronged
apportionment - $95.9 million in FY09, $75.7 million in FY10, and $78.3 million in
FY11.
In addition, the example of Illinois’ experience with Wal-Mart where the company made
an attempt to consolidate its taxable income on foreign soil and thus keep the state of
Illinois from collecting over $25 million in state taxes is misleading. Wal-Mart paid the
state of Illinois the $26.4 million in taxes/fees that it owed, subsequently appealed the
state’s decision, and lost. Essentially, they were caught with their hand in the cookie jar
and paid up. Their ability to regulate their state tax laws is the same that would exist for
the Massachusetts Department of Revenue. Were a similar situation to arise in the
Commonwealth, DOR already has the ability to pursue corporate tax evasion should it
arise. In fact, the House language strengthens this ability because it establishes
transparent and predictable tax law for companies, so that there is no misunderstanding as
to how companies are supposed to interact with and pay the state.
The Globe’s editorial says, “Closing the loopholes carved out by big corporations’ tax
attorneys can offset the revenue loss from a lower rate and generate additional funds to
cover the rising cost of healthcare, education, and infrastructure maintenance. Plus it is
the fair thing to do.” The truth is that eliminating the water’s edge provision, as it is
written in the House, and providing DOR with the overarching discretion that the
Administration has called for, is a way for the state to raise money by going after the
business community. The Administration’s version of this bill does not address the
question of fairness, but rather the question of how much money the state can squeeze out
of the business community. The Administration’s version of the bill gives DOR overly
broad discretion to reach back and interpret the regulations for combined reporting on a
case-by-case basis. This makes the state an unattractive place to do business, because a
lack of predictable tax regulation makes it very difficult to project long-term costs,
profits, employment, and sales. The House combined reporting language provides
taxpayers with long term clarity, removes DOR from policy decisions, and strengthens
their ability to regulate our state’s tax policy.
I look forward to working with you on this important matter. Please do not hesitate to
contact my office with any questions or concerns that you may have.
Sincerely yours,
Daniel E. Bosley
Chairman
Joint Committee on Economic Development and Emerging Technologies
1 comment:
Dan...I have to agree with the Globe on this one. If I am understanding you correctly you would have politicians and corporations making the tax laws and taking the DOR out of the loop altogether, in the guise of fairness? Closing loopholes and making business pay their fair share of taxes is the right way to go. Allowing corporations a tax friendly haven, so MAYBE it will create jobs, will only switch the tax burden on to the people. DAN...Have you ever given thought that just maybe the tax system in Massachusetts needs to be scrapped and a fairer one written? You make a dollar, you pay a dime...everyone!
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