Recently I found an interesting article about Corporate Tax Avoidance in the State of California, and although it's commentary from a Southern California newspaper, and a little biased towards offshore banking being evasion, rather than avoidance, there are aspects of this article worth reading.
Drop anchor on offshoring
WE agree with Assemblywoman Judy Chu, D-Monterey Park, and Treasurer Phil Angelides that American industries that incorporate offshore in name only are little more than tax evaders.
This legal sham, usually just a mailbox or meager office space also "moves' most income offshore and out of the United States.
California has been hit doubly hard because its corporate-tax structure allows companies with worldwide sales to pay state taxes in one of two ways. First, these companies can pay California tax, like most individuals, based on their entire income. Or, they may elect to pay tax based on the ratio of California income to their global revenue.
California has been left with bare coffers by those companies that have significantly reduced income by restructuring as foreign corporations and have opted for the alternate tax method, called "water's edge.'
Chu's Assembly Bill 441, would eliminate this shelter that's estimated to cost California $132 million or more over the next decade from the 18 corporate expatriations (out of 8,000 publicly traded U.S. corporations) that have already occurred.
According to Angelides, the legislation would also close the loophole for those that have already expatriated.
The existing water's-edge election faces renewal every seven years. Under Chu's bill, renewal would be eliminated, estimated to net the state $60 million for fiscal years 2011-2012 through 2014-2015 (as the seven-year option ends), with $32.4 million going to K-14 school funding under (current) Proposition 98 guidelines. That may be a drop in the revenue ocean, but it's badly needed in California despite recent revenue increases from an uptick in the economy.
Chu and Angelides worked on a similar bill last year that gained some bipartisan support. This year, California lawmakers should follow the good example set by Congress that effectively stopped off-shoring of income derived in the United States as part of the American Jobs Creation Act that offered a number of tax advantages to U.S. companies. However, those 18 expatriate corporations were grandfathered into what amounts to federal income-tax avoidance.
Angelides and Chu think that's just not fair and want these giants treated as the domestic businesses they are, with operations based in the United States. We agree with their assessment that this sensible and fair law won't drive these corporations from California. As pointed out by Angelides, Ingersoll Rand, for example, parent company of the well-known line of Schlage hardware, isn't going to stop selling locks in California.
Further, eliminating the loophole will eliminate the unfair competition that now exists where California companies especially small businesses producing similar products lack these tax advantages.
As treasurer, Angelides in 2002 stopped the state from investing in these expatriate corporations and in 2003 backed legislation that prohibited the state from contracting with these same types of firms unless they provide shareholder protections and pay their fair share of taxes. That's now the law.
AB 441 is a natural progression and ought to gain Gov. Schwarzenegger's support. There's a difference between "business friendly' and giving away the store. These firms need to pay their fair share just like every Californian and other U.S. corporations.
Chu has once again provided the brakes necessary to stop these runaway corporations. Now it's up to the Legislature and the governor to apply them.
Source: Whittier Daily News
