State tax haven laws—Expanding the water’s-edge group
This edition of Inside Deloitte looks at laws that seven US jurisdictions have enacted to impose their state corporate income tax on income allegedly shielded by taxpayer use of "tax havens." The article provides an overview of each jurisdiction’s tax haven law and offers insights into the relative strengths and weaknesses of the respective measures.
State tax haven laws
The term "tax haven"1 may lack a precise, universal definition, but one can recognize the general characteristics: tax rates that range from low to nonexistent, a lack of transparency, no effective exchange of relevant information, and no requirement that the taxpayer have substantial business activity in the jurisdiction.2 Similarly, the annual US income tax benefit gained by multinational taxpayers through use of foreign tax havens (or, depending on your perspective, the amount of tax revenue allegedly "lost") is also difficult to quantify. However, by any measure, the total annual dollar amount of tax benefit or lost tax revenue may be roughly estimated in the billions of dollars.3
Many state governments are also paying close attention to the issue because they perceive a corresponding loss of state tax revenue. Most states impose corporate income taxes and generally use federal taxable income as the starting point for calculating state taxable income. Accordingly, if a dollar of income is not in federal taxable income, that dollar will also generally escape taxation in many states. Given the amount of alleged revenue loss at the federal level, it should be no surprise that some of the estimates for the state tax revenue loss are also substantial.4
With significant tax revenue at stake, the absence of a uniform approach from Congress, and the near-universal requirement of state governments to operate under balanced budgets, many state governments have considered or have already adopted their own measures to tax income allegedly shielded by taxpayer use of tax havens.
Seven jurisdictions—Montana, Oregon, Alaska, West Virginia, Rhode Island, Connecticut, and the District of Columbia—have enacted their own laws to tax this income. This article briefly examines each jurisdiction’s tax haven laws and offers insights into the relative strengths and weaknesses of the respective measures.5
For a complete list of references, download the PDF