PA+House+leadership+bill+falls+short+of+closing+Delaware+loophole

= Pennsylvania Budget and Policy Center: PA House leadership bill falls short of closing Delaware loophole. = =Published by the PBPC= =3/12/12= = = = = = New PBPC report examines proposed expense “addback” rule. = = =

=HARRISBURG, PA — A bipartisan state House bill aimed at closing corporate tax loopholes will not get the job done, but will enact large tax cuts undermining investments in schools and assets that strengthen our economy, according to a Pennsylvania Budget and Policy Center analysis.= = = =The bill has the support of House Republican Leadership and reflects a recognition from elected officials that tax loopholes are a serious problem in Pennsylvania, said Sharon Ward, Director of the Center.= = = =“The legislation has the right idea, but it is the wrong approach,” Ward said. “We need to get this right the first time. Voters are weary of tax loopholes and they are wary of excuses that are made for not closing them.”= = = =Corporate tax loopholes are growing problem in Pennsylvania. They allow multi-state corporations to shift income earned here to other low- or no-tax states to avoid paying state taxes. One way corporations achieve this is by conducting transactions between their subsidiaries.= = = =Perhaps the best-known example of this is Geoffrey Giraffe, the Toys “R” Us mascot. A Delaware-based subsidiary owns the trademark for the Geoffrey Giraffe logo and charges Toys “R” Us retail stores across the country a royalty to use the trademark. Delaware law does not tax royalty income, so the Geoffrey holding company (owned by Toys “R” Us) gets to keep the money tax free.= = = =Across the nation, 35 of the 45 states with corporate taxes have taken steps to close corporate tax loopholes by either enacting combined reporting or adopting expense addback laws.= = = =House Bill 2150, sponsored by Representatives Dave Reed (R-Indiana) and Eugene DePasquale (D-York), would enact an addback law in Pennsylvania along with a new round of business tax cuts. Fees, royalties and other transactions between related companies, done primarily to avoid taxes, would be added back to the companies’ income and taxed. However, the PBPC report found several flaws with the bill:= = = =• It would offer overly broad deduction allowances for royalty and other intangible expenses, allowing any expense related to a valid purpose, even if the primary purpose is tax avoidance.= = = =• The bill presumes that any transaction equal to market prices is for a valid business purpose, making it very easy to secure an exemption to the rule.= = = =• It creates a new loophole allowing some companies to get double tax benefits. A company would be able to get a credit for taxes paid by an affiliate on income even when it is allowed to take the deduction of the royalty expense in= = = =• The bill permits companies to deduct interest payments made on loans from a related company – something that few of the dozen or so states that have adopted addback laws allow.= = = =Lawmakers should also drop the corporate tax rate cut and other breaks for business in the bill because the state can ill afford them at this time, the PBPC report recommends.= = = =The report recommends that lawmakers adopt a model bill drafted by the Multistate Tax Commission, a group of state tax agency officials. It would require both intangible expenses (like royalties) and interest payments to be added back to a company’s income and set clear standards for allowing legitimate interest and intangible expense deductions by a corporation. The model bill also ensures a company isn’t taxed twice, but doesn’t allow it to double dip on deductions.= = = =“Using a bill that has been vetted by other tax experts, including state tax officials, would give us a much stronger law,” Ward said.= = = =The PBPC report noted that a better overall approach would be for Pennsylvania to enact combined reporting, which offers fewer opportunities for companies to game the tax system. Under combined reporting, companies pay taxes based on the combined activities of all their subsidiaries.= = = =“Pennsylvania companies and individuals who play by the rules shouldn’t have to pick up more of the tab,” Ward said. “But without changes, this bill will hamper our ability to invest in education, transportation and other assets that make Pennsylvania a good place to do business.”= = = =Read the Full Report: @http://pennbpc.org/addback-rule.= = = =The Pennsylvania Budget and Policy Center is a non-partisan policy research project that provides independent, credible analysis on state tax, budget and related policy matters, with attention to the impact of current or proposed policies on working families. Learn more: http://pennbpc.org.= = = = = = = = = =News= =home=