The U.S. Congressional Research Services (CRS) has published a new report dated 6 January 2022, Tax Havens: International Tax Avoidance and Evasion.
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Tax Havens: International Tax Avoidance and Evasion
Addressing tax evasion and avoidance through use of tax havens has been the subject of a number of proposals in Congress and by the President. Actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations also have addressed this issue.
Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as adjusting prices of related company transactions and shifting debt to high-tax jurisdictions. Because income of foreign subsidiaries (except for certain passive income) is taxed at lower rates through the global intangible low-taxed income (GILTI) regime, this income avoids full U.S. taxes. The taxation of passive income (called Subpart F income) has been reduced using hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income often can be shielded from U.S. tax by foreign tax credits on other income. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also indicates a significant increase in corporate profit shifting over the past years. While most evidence predates the major changes in the international tax regime in 2017, one recent estimate suggests losses that may approach $80 billion per year.
Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions. There is no general third-party reporting of income as is the case for ordinary passive income earned domestically; the Internal Revenue Service (IRS) relies on qualified intermediaries (QIs). In the past, these institutions certified nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion. The Foreign Account Tax Compliance Act (FATCA; included in the HIRE Act, P.L. 111-147) required information reporting by foreign financial intermediaries and withholding of tax if information is not provided. One recent estimate indicates a cost of $40 billion for tax evasion.
Most provisions to address profit shifting by multinational firms would involve changing the tax law: strengthening GILTI, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Biden's proposals and several congressional proposals, including the Build Back Better Act, have a number of provisions that address profit shifting. Provisions to address individual evasion include strengthening FATCA, provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, and increased resources for enforcement. Individual tax evasion is an important target of the proposed Stop Tax Haven Abuse Act.