Senate approves bill potentially opening abusive corporate tax shelters
HB 619 would curtail NC’s ability to shut down tax dodgers, could cost the state tens to
hundreds of millions each year
RALEIGH (June 17, 2011) -- The Senate gave final approval yesterday to a bill that state tax policy analysts believe will leave the state more vulnerable to tax shelter abuse by multi-state corporations. This abuse could cost North Carolina tens to even hundreds of millions each year in revenue at a time when resources for vital public investments are scarce.
Under current laws, if there is evidence of multi-state corporations shifting income to avoid paying state taxes, North Carolina’s Revenue Secretary has the authority to require in-state and out-of-state subsidiaries to file a joint tax return. This has the effect of canceling any income-shifting between corporate subsidiaries that are part of the same company.
The authority helps ensure that big out-of-state companies pay their fair share, thereby not placing locally-owned North Carolina businesses at a disadvantage.
The bill approved by the Senate last night, House Bill 619, would rewrite these rules. If this bill were to become law, the Revenue Secretary would only have the authority to require corporate subsidiaries to file a joint return if transactions between subsidiaries have no “reasonable business purposes” other than reducing the corporation’s tax liability.
The likely impact of the new rules is that corporate tax accountants will simply restructure tax shelters to give them the appearance of reasonable business purposes despite the primary purpose being to reduce corporate taxes. The state of New York attempted for years to enforce similar rules against corporate tax avoidance, only to abandon the practice in 2007 in favor of comprehensive measures to close corporate tax shelters.
“Corporate tax dodgers cost North Carolina’s vital public investments millions of dollars that could be invested in our state’s future,” said Edwin McLenaghan, a public policy analyst with the non-partisan NC Budget & Tax Center. “This bill would stack the deck against local businesses and starve the critical public structures we depend on.”
According to testimony by the Department of Revenue before the House Finance committee today, a Senate-passed amendment to the bill would likely reduce revenues by more than $30 million per year. Neither the Department of Revenue nor the General Assembly’s Fiscal Research Division have yet been able to estimate the likely costs of the bill’s other provisions.
Even supporters of the bill seem to recognize that these new rules may have unintended consequences likely to increase corporate tax avoidance: bill sponsors in the Senate passed an amendment to delay implementation until next year while giving the Revenue Laws Study Committee additional time to analyze the impact of the legislation and recommend changes to reduce the likelihood of re-opening corporate tax shelters.
Rep. Deborah Ross (D-Wake) asserted in today’s House Finance committee hearing, however, that the people of the state would be better served by studying the impact of the new rules before passing the bill into law.
After passing the House Finance committee on a party-line vote, the bill is now set to go to the floor of the House, which must vote twice on the bill before sending it to the Governor’s desk.
FOR MORE INFORMATION, CONTACT: Edwin McLenaghan, NC Budget & Tax Center,Edwin@ncjustice.org, (919) 856-3192; Alexandra Forter Sirota, Director, NC Budget & Tax Center, email@example.com, (919) 861-1468; or (919) 801-0465; Jeff Shaw, Director of Communications, NC Justice Center, firstname.lastname@example.org, (919) 863-2402 (office) (503) 551.3615 (mobile).