Anti-Tax-Shelter and Other Revenue-Raising Tax Proposals Considered in the 108th Congress

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Several bills introduced in the 108th Congress have included revenue-raising provisions, particularly those aimed at tax shelters that are generally used by corporations. Anti-sheltering provisions were included in bills introduced by Representative Lloyd Doggett (whose current bill is H.R. 1555), in the Senate version of the 2003 tax cut (H.R. 2), in the Senate version of the Care Act (S. 476), and most recently in both the House (H.R. 2896) and Senate (S. 1637) reported versions of bills which eliminate the extraterritorial income provision (ETI)?which has been found to contravene World Trade Organization (WTO) restrictions on export subsidies?and provide other tax cuts and have been reported from their respective committees. The number and size of the revenue-raising provisions are much greater in S. 1637 ($56 billion over a 10-year period) than in the H.R. 2896 ($26 billion). The Senate bill is revenue neutral overall, while the House bill loses revenue over the period FY2004-FY2013.

Several types of revenue increases in S. 1637 and H.R. 2896 include (1) generic anti-shelter provisions (including increased penalties and, in the case of the Senate bill, changes in the economic substance doctrine), (2) provisions related to corporate inversions and expatriations, and the associated earnings stripping, (3) other provisions targeted at specific tax abuses, (4) provisions that involve explicit changes in tax policy, and (5) fees. Fees (basically customs fees), are actually the single largest revenue producers and account for about 30% of the gain in the Senate bill and 60% of the gain in the House bill.

The Senate bill's largest revenue raiser outside of customs fees is a codification and strengthening of the economic substance doctrine which is used to determine when an activity's tax benefits are denied because they are aimed solely at tax sheltering. This provision is one that has attracted relative controversy, with proponents arguing that is a crucial tool in the battle against corporate tax shelters and opponents suggesting it will not be effective and will adversely affect ordinary transactions.

Inversions occur when U.S. firms move the parent corporation abroad to reduce taxes, often accomplished by earnings stripping methods where domestic income is shifted abroad. The Senate bill has more stringent provisions directed to U.S. inverted firms; the House bill has generic earnings stripping provisions that apply to all U.S. subsidiaries of foreign parents.

A number of specific anti-shelter provisions are included in the bills, some of them arising from the investigation of the Enron failure or from other issues raised by failed firms. There are also some explicit tax policy changes which relate primarily to deferred compensation in the House bill, but touch on a variety of other areas in the Senate bill.