www.bna.com May 13, 2016 By: Karl Frieden and Ferdinand Hogroian
“With the release of the Organization of Economic Cooperation & Development (OECD) Base Erosion and Profit Shifting (BEPS) project reports in October 2015, global attention has been focused on international income tax rules as applied to multinational businesses. In particular, the OECD reports focus on gaps and mismatches between individual country rules and propose new international tax rules to address the problems of base erosion and profit shifting. At the state level, the debate over foreign source income has primarily centered on the adoption or consideration of tax haven legislation. For the first time since the 1980s, when states pulled back from mandatory worldwide combination, many states are showing serious interest in expanding unitary taxation beyond the U.S. border (known as water’s edge). In this selective version of worldwide combined reporting, income inclusion only extends to foreign affiliates either incorporated in or doing business in tax haven nations. Ironically, the proposed state solution constitutes a go-it-alone approach largely inconsistent with the legislative and regulatory solutions being considered and adopted elsewhere in the world.
The drawbacks of state tax haven legislation are detailed in our recently released State Tax Research Institute (STRI) report State Tax Haven Legislation: A Misguided Approach to a Global Issue: 1) there is no clear evidence that profit shifting to tax havens is eroding the state corporate tax base; 2) state tax haven blacklists are arbitrary and unmanageable; and 3) states adopting tax haven legislation risk losing investments and jobs and face constitutional challenges.1 The STRI report provides detailed information about state tax haven legislation and explains why many state legislatures appear to be approaching the issue with initial enthusiasm, followed by growing trepidation…”
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