Democrats Propose Bill to Curb Companies' Tax Havens (Update1)

By Ryan J. Donmoyer and Alison Fitzgerald

July 25 (Bloomberg) -- House Democrats proposed legislation that would make it harder for overseas companies to use tax havens to avoid taxes on U.S. profits, drawing immediate opposition from the Bush administration.

The legislation, introduced by Texas Representative Lloyd Doggett, a Democrat who serves on the House Ways and Means Committee, may be added to unrelated farm legislation. It would raise $7.5 billion in new revenue over 10 years, according to estimates by the congressional Joint Committee on Taxation.

``This bill requires international tax dodgers to pay their fair share,'' said Doggett, a long-time critic of U.S. companies that establish nameplate offices in countries such as Bermuda to reduce their tax burden while continuing to operate in the U.S.

Doggett's proposal drags foreign companies with extensive operations in the U.S., such as Bermuda-based Accenture Ltd., Tyco International Ltd. and Transocean Inc. into a broader battle between the Democratic-controlled Congress and the Republican White House over a $300 billion farm bill that will be considered by the House of Representatives later this week.

His legislation aims to stop an accounting technique known as ``earnings stripping'' in which foreign companies make high- interest loans to their American subsidiaries, who are able to deduct interest. Debt service payments are routed to another unit of the corporation that is based in countries with no corporate tax rate, such as the Cayman Islands. A similar technique is used to route royalty payments for the use of intellectual property such as trademarks and copyrights.

Veto Threat

Agriculture Secretary Mike Johanns said today that President George W. Bush will veto the legislation in part because of the tax measure.

``I don't think that there is a farmer or rancher in America that says we ought to have higher taxes to help finance farm bills,'' he said.

The veto threat contrasts with concerns raised by the Treasury Department in 2002 about the practice targeted by Doggett's legislation. Kenneth Dam, then-deputy Treasury secretary, told an audience of tax professionals on Nov. 14, 2002, that ``opportunities for earnings stripping through artificial deductions and income shifting'' may ``exploit the network of tax treaties the United States maintains around the world.''

North Dakota Representative Earl Pomeroy, a Democrat, said the Treasury Department identified the technique as a tax abuse five years ago. ``This `tax abuse' for foreign corporations became a `tax increase' as they scurried for reasons to kill the House farm bill,'' Pomeroy said in a statement.

Treasury Comment

The Treasury Department said much of what Dam was concerned about has been dealt with.

``On this proposal in general, we think it will undermine our tax treaty network, which would discourage investment in the United States and threaten the important jobs those investments create,'' Treasury spokesman Andrew DeSouza said in an e-mailed statement.

Doggett's measure would require companies to pay U.S. withholding taxes when a transaction would produce a lower tax burden if made through a subsidiary based in a tax haven than through the parent company.

``This legislation will help stop foreign-owned businesses from abusing our tax treaties,'' Doggett said.

Nancy McLernon, senior vice president of the Organization for International Investment, a Washington trade association of overseas companies with U.S. subsidiaries, said the legislation would abrogate tax treaties.

`Thrown in Trash'

``Treaties that are negotiated by our Treasury and approved by the Senate would be thrown in the trash,'' she said.

Todd Malan, the organization's president and chief executive officer, said the legislation would affect more than just tax havens. For example, he said, a Japanese company operating in the U.S. that uses a London-based financing subsidiary would be forced to pay the withholding taxes, even though they currently pay no taxes under a U.S.-U.K. treaty.

``This is not an abuse or a loophole,'' Malan said. `People use the U.K. for financing given its liquid markets. The U.K. is not a low-tax jurisdiction.''

Doggett's measure also drew criticism from Louisiana Representative Jim McCrery, the top Republican on the House Ways and Means Committee.

Raise Taxes

``This proposal will raise taxes on many businesses operating in the United States,'' McCrery said today. ``It will hurt our competitiveness and our standing in the world by carelessly violating a host of treaties.''

Doggett responded that the legislation ``would have no effect on legitimate multinational corporations that are not employing a haven to dodge American taxes.''

Similar proposals have enjoyed Republican backing in the past. Former Ways and Means Committee Chairman Bill Thomas, a California Republican, in 2003 supported legislation to stop companies from stripping earnings from their U.S. subsidiaries.

To contact the reporter on this story: Ryan Donmoyer at rdonmoyer@bloomberg.net

Last Updated: July 25, 2007 18:48 EDT

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