Corporations depend on things like an educated workforce, consumers with enough income to pay for services and products, and infrastructure that facilitates commerce. As a state and a nation, we fund the investments that help businesses succeed and create a strong economy that allows them to profit.
In return, US-based corporations are supposed to pay taxes on the profits they generate from sales in the United States — just like Maine families pay taxes on the income they earn here.
But every year, large corporations such as Apple, Pfizer, Exxon Mobil, Google, and others use a complex system of international accounting loopholes to lower or even eliminate their tax liability by moving their domestic profits to foreign countries with lower tax rates.1 Instead of contributing what they should at home, these corporations exploit “offshore tax havens” to avoid paying what they should.
Use of tax havens by the largest companies is well documented. So, as part of the federal 2017 Tax Cuts and Jobs Act, Congress created the “foreign-derived intangible income deduction” — also known as “FDII” — to incentivize those profitable corporations to stop using tax havens to avoid paying taxes.
But evidence has shown FDII to be a costly failure.2
FDII was supposed to sway decisions about how companies account for intangible assets such as brands and patents, which are used as part of tax haven schemes. Instead, it has created a new opportunity for corporations to game the tax system by rewarding them for moving tangible assets, such as factories and equipment, overseas. 3
This is the exact opposite of what Congress intended.
While federal and state lawmakers should do more to close the door on offshore tax havens by large corporations doing business here, FDII is not the answer and should be eliminated.
Luckily, Maine lawmakers don’t have to wait for federal action to correct this costly mistake at the state level.
When federal tax laws change, Maine lawmakers get to decide which provisions they want to adopt and which they want to reject in the state tax code. These decisions are made through regular “tax conformity” legislation. The tax conformity bill approved by the Legislature in 2018 brought FDII to Maine.
A bill before the Legislature this year — LD 403, sponsored by Taxation Committee House Chairman Ryan Tipping — gives Maine a chance to correct this mistake by eliminating FDII from Maine’s tax code. MECEP urges the Legislature to enact this bill, given the ample evidence of FDII’s ineffectiveness and cost to the state of up to $9 million.
LD 403 was introduced as legislation to limit corporations’ ability to escape Maine taxes through offshore tax haven abuse. Through the committee process, it has been amended instead to eliminate FDII.
Clamping down on tax haven abuse should remain a priority for policymakers at the state and federal level. While that goal remains to be achieved, LD 403 provides an opportunity to at least ensure corporations aren’t rewarded with a tax cut when they move parts of their operations overseas.
1 Institute on Taxation and Economic Policy. “Fortune 500 Companies Hold a Record $2.6 Trillion Offshore: These Companies Are Avoiding $767 Billion in U.S. Taxes.” March 2017. https://itep.org/fortune-500-companies-hold-a-record26-trillion-offshore/
2 Some examples include: Kamin, David et al. “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the 2017 Tax Legislation.” December 28, 2017 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089423; Dharmapala, Dhammika. “The Consequences of the TCJA’s International Provisions: Lessons from Existing Research.” August 2018 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3212072; Shay, Stephen. “The US International Tax Reforms: Competitions and Convergence, Pay-offs and Policy Failures. 2018. Intertax, 46(11). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3297724; Avi-Yonah, Reuven S. “The International Provisions of the TCJA: Six Results After Six Months.” August 2018. Public Law and Legal Theory Research Paper Series. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3242008
3 Beyer, Brooke, et al. “The Effect of the Tax Cuts and Jobs Act of 2017 on Multinational Firms’ Capital Investment: Internal Capital Market Frictions and Tax Incentives.” May 1 2019. https://tax.unc.edu/index.php/publication/the-effect-of-the-tax-cuts-and-jobs-act-of-2017-on-multinational-firms-capital-investment-internal-capital-market-frictions-and-tax-incentives/