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«2015 Oregon Department of Revenue Recommendations on Tax Haven Jurisdictions HB 2460 (2013 Regular Session) Executive Summary January 1, 2015 ...»

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Oregon Department of Revenue

Recommendations on

Tax Haven Jurisdictions

HB 2460 (2013 Regular Session)

Executive Summary

January 1, 2015


150-800-558 (Rev. 12-14)

150-800-558 (Rev. 12-14) ii

Executive summary

Section (4) of HB 2460 from the 2013 regular legislative session provides:

“On or before January 1 of each odd-numbered year, the Department of Revenue shall

submit a report to the Legislative Assembly in the manner provided by ORS 192.245.

The report shall include recommendations for legislation related to jurisdictions listed in ORS 317.715 (2)(b), including recommendations for additions to or subtractions from the list of jurisdictions in ORS 317.715(2)(b).” This Executive Summary provides the Department of Revenue’s recommendations for additions to and subtractions from the jurisdictions listed in ORS 317.715(2)(b). The full report is available online at www.oregon.gov/dor.

The purpose of the report is to explain the ORS 317.715(2)(b) recommendations. The report examines the history of the list and identifies the criteria that the department uses to determine recommendations. It also provides analysis of the foreign jurisdictions proposed for addition, retention, or subtraction using the established criteria.

The department used the tax haven criteria in the 2011 Multistate Tax Commission (MTC) model statute to make its recommendations. The model statute begins by making clear that only political jurisdictions can be tax havens. The MTC determines whether a jurisdiction is a tax haven by a applying a two-step definition of tax haven.

The first step is determining whether the jurisdiction imposes “no or nominal tax on the relevant income.” The relevant income, for the purposes of this report, is corporate income.

The second step is determining whether the jurisdiction that imposes no or nominal tax on

corporate income also meets at least one of the following five criteria:

• The jurisdiction does not disclose which corporate entities benefit from the jurisdiction’s tax system.

• The administrative and legal operation of the jurisdiction’s corporate tax system is not available to other parties.

• The jurisdiction allows the establishment of foreign-owned corporations with little or no economic presence in the jurisdiction.

• The benefits of the jurisdiction’s corporate tax system are unavailable to residents of the jurisdiction.

• The relevant facts indicate that the jurisdiction’s tax system favors tax avoidance.

For tax years beginning on or after January 1, 2015, the department recommends* adding the following countries to the list of jurisdictions in ORS 317.715(2)(b) based on the accompanying

MTC criteria:

• The Netherlands

• Bonaire

• Curacao

• Saba 150-800-558 (Rev. 12-14) iii

• Sint Eustatius

• Sint Maarten

• Switzerland

• Guatemala

• Hong Kong

• Trinidad and Tobago For tax years beginning on or after January 1, 2015, the department recommends* subtracting

the following countries from the list of jurisdictions in ORS 317.715(2)(b):

• The Netherlands Antilles**

• Monaco *These recommendations are based on information available to staff through November 19, 2014.

**The Netherlands Antilles was dissolved on October 10, 2010. Curacao and Sint Maarten (the Dutch two-fifths of the island of Saint Martin) became autonomous territories of the Kingdom of the Netherlands. Bonaire, Saba, and Sint Eustatius now fall under the direct administration of the Netherlands.

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150-800-558 (Rev. 12-14) 150-800-558 (Rev. 12-14) 2 Table of Contents Executive summary

Report begins on

Appendix 1 - Jurisdictions listed in ORS 317.715(2)(b)

Appendix 2 - Liechtenstein and Luxembourg letters of concern

150-800-558 (Rev. 12-14) 3 Recommendations for tax haven jurisdictions Introduction The Oregon Legislature enacted HB 2460 during the 2013 Legislative Session. The law requires the Department of Revenue to submit a report during odd-numbered years to the Legislative Assembly and include recommendations for legislation related to jurisdictions listed in ORS 317.715 (2)(b). This includes recommendations for additions to or subtractions from the list of jurisdictions provided in ORS 317.715(2)(b).

ORS 317.715(2)(a) provides that corporations filing an Oregon corporate excise tax return shall compute their Oregon taxable income by including net income or loss from subsidiaries incorporated in the foreign jurisdictions listed in ORS 317.715(2)(b) to determine their starting point for computing Oregon taxable income.

Under Oregon law, a corporation’s excise or income tax liability largely corresponds to federally reported taxable income. Therefore, when a corporate group shifts income offshore from the United States to a corporation in a foreign tax jurisdiction, that income will generally not be subject to tax in Oregon. A Congressional Research Service report in January 2013 estimated that federal corporate tax reductions resulting from shifting profits offshore range from about $10 billion to $90 billion annually.

The Oregon Legislative Revenue Office estimated the following revenue impact as a result of

the implementation of HB 2460:

2013 – 2015: +$18 million 2015 – 2017: +$42 million 2017 – 2019: +$49 million There is no standard definition of a “tax haven.” Initially, the Organization for Economic Cooperation and Development (OECD) provided guidelines for evaluating foreign tax jurisdictions.

The OECD is an international organization composed of 34 countries that studies economic problems and attempts to coordinate the policy responses of its members to those economic problems.

In 1998, OECD defined both tax havens and harmful preferential tax regimes as “jurisdictions that tax relevant income at a zero or nominal effective tax rate.” Criteria for evaluating whether specific foreign jurisdictions qualify as tax havens or preferential tax regimes have been further developed by the Multistate Tax Commission (MTC).

The MTC, created as part of the Multistate Tax Compact, promotes uniformity in state tax laws. Oregon is a member of the MTC. Accordingly, for purposes of this report, the department uses the 2011 MTC criteria to identify recommended additions to or subtractions from the list in ORS 317.715(2)(b).

Definitions Captive insurance company: Some corporate groups will form a separate subsidiary that is responsible for insuring the rest of the corporate group. The subsidiary that is responsible for 150-800-558 (Rev. 12-14) 4 insuring the rest of the corporate group is referred to as the captive insurance company. The other subsidiaries in the corporate group will pay insurance premiums to the captive insurance company.

Earnings stripping: At the most basic level, earnings stripping is the practice of using transactions between a corporate subsidiary in a high tax country and a corporate subsidiary in a low tax country to reduce the tax base in the high tax country and increase the tax base in the low tax country. Earnings stripping can be accomplished through hybrid financing instruments, licensing agreements, intra-corporate loans, and other methods.

Effective tax rate: Statutory tax rates are quoted in terms of marginal tax rates. For example, the U.S. corporate tax rate is 35 percent, which means that each additional dollar of taxable income is taxed at 35 percent. An effective tax rate, on the other hand, is the actual rate of tax paid by a company on all of its net income. Effective tax rates are usually lower than statutory tax rates because credits, deductions, and exemptions reduce taxable net income.

Gross domestic product (GDP): GDP is the monetary value of all goods and services produced within a particular jurisdiction.

Group financing: A corporate group will often set up a subsidiary that takes on the role of financing other subsidiaries within the corporate group. This usually involves the financing subsidiary loaning money to other subsidiaries in return for interest. Group financing is the term that describes this arrangement.

Group licensing: A corporate group will often set up a subsidiary that holds the intellectual property, such as copyrights or patents, for the entire corporate group. The subsidiary that holds the intellectual property will levy licensing fees on the other subsidiaries for the use of the intellectual property. Group licensing is the term that describes this arrangement.

Holding company: A holding company is a corporation that owns income-producing assets, but does not carry on any other business.

Hybrid financing instrument: Corporations raise money by issuing debt or issuing equity (stock). A hybrid financing instrument combines debt-like and equity-like characteristics into the same security. Hybrid financing instruments are sometimes created by conflicts between legal systems. For example, Country A may legally classify a financing instrument as debt, and Country B may legally classify the same financing instrument as equity. Accordingly, payments in Country A may be deductible, and payments received in Country B may be a non-taxable return of capital.

IP box: Some countries have adopted the practice of partially exempting income derived from intellectual property such as copyrights, patents or trademarks from taxation. For example, Andorra exempts 80 percent of the income derived from intellectual property from taxation.

Accordingly, the IP box are the kinds of intellectual property activities that qualify for partial exemption from taxation.

Notional interest deduction: Typically, a corporate taxpayer is allowed to deduct interest paid on corporate indebtedness. It has been pointed out this creates an incentive for a corporate taxpayer to raise capital using debt rather than equity. A notional interest deduction attempts to remove the incentive favoring debt financing over equity financing by allowing a company to deduct a certain portion of their equity each year. Notional interest is sometimes referred to as “fictional interest” because the expense claimed does not represent a real financial cost.

150-800-558 (Rev. 12-14) 5 Resident company: A corporation that is incorporated in or managed and controlled from a particular jurisdiction may be considered a resident of that jurisdiction. Rules for determining the residency of a corporation vary markedly between jurisdictions. Residency rules are typically used to determine what income of the corporation may be taxed by the jurisdiction of corporate residency.

Tax avoidance: Tax avoidance is the practice of minimizing tax bills through legal means. Tax evasion, on the other hand, refers to the practice of minimizing tax bills through illegal means.

Territorial tax: It has been noted that the purest system of territorial taxation is when a corporation’s active business income is taxed only in the jurisdiction that is the source of the income in question. Not all territorial tax systems work the same way because the rules for sourcing income vary between jurisdictions. By way of contrast, U.S. corporations are taxed on their worldwide income although tax on foreign income is deferred until the income is repatriated to the U.S.

History of listed jurisdictions There is no precise definition of “tax haven” that applies to the foreign jurisdictions included under the provisions of ORS 317.715(2). All of the listed foreign jurisdictions impose no or

nominal taxation on relevant corporation income. In addition, all of the listed foreign jurisdictions share one or more of the following characteristics:

• Laws that prevent sharing of information with other governments.

• A lack of transparency, exclusion of resident taxpayers from the tax regime’s benefits.

• Laws that allow foreign-owned entities to be established without a substantive presence in the jurisdiction.

• Laws that disallow resident taxpayers of the jurisdiction from taking advantage of tax benefits available to foreign-owned entities.

• The creation of a regime which is favorable to tax avoidance.

Oregon’s list of foreign jurisdictions is modeled after Montana’s foreign tax haven list under the Montana Code Annotated (MCA 15-31-322). Montana’s foreign tax haven list was originally written in 2003 and revised in 2009. A 2012 Montana Department of Revenue legislative report indicates Montana’s list of tax havens is primarily based on the list of tax havens and harmful preferential tax regimes produced by the OECD.

In 1998, the OECD published Harmful Tax Competition: An Emerging Global Issue which defined tax havens and harmful preferential tax regimes. According to the report, both tax havens and potentially harmful tax regimes are jurisdictions that tax relevant income at a zero or nominal effective tax rate.

Additionally, tax havens engage in one or more of the following omissions:

• Lacking an effective exchange of information mechanism with tax authorities in other jurisdictions.

• Failing to provide a transparent operation of legislative, legal or administrative machinery of the jurisdiction.

150-800-558 (Rev. 12-14) 6

• Failing to require that a person engage in some kind of substantial economic activity within the jurisdiction to take advantage of the favorable income tax regime.

Harmful preferential tax regimes engage in at least one of the following acts or omissions:

• Lacking an effective exchange of information mechanism with tax authorities in other jurisdictions.

• Failing to provide a transparent operation of legislative, legal, or administrative machinery of the jurisdiction.

• Insulating the tax preferred sector from the domestic market in the tax preferential jurisdiction.

• Allowing or otherwise establishing the presence of secondary criteria indicative of a tax

haven. These may include:

• A negotiable tax rate, exemption of foreign source income from tax in the jurisdiction.

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