The Stop Tax Haven Abuse Act was introduced in the Senate on March 2, 2009, sponsored by Senators Levin, Whitehouse, McCaskill, and Nelson, and on the next day in the House of Representatives, sponsored by Representatives Doggett, DeLauro, and others. A significant provision of this legislation concerning corporate residence would treat certain offshore corporations as U.S. corporations, thereby subjecting those corporations to U.S. taxation on their worldwide income. In an extraordinary extension of U.S. taxing jurisdiction, the provision would thus eliminate deferral for some offshore corporations, while subjecting the income of other offshore corporations to U.S. taxing jurisdiction for the first time. In view of the fact that the President’s 2010 Budget Proposal includes a line item to reform deferral and implement international enforcement scored at $210 billion, this provision would presumably contribute to that $210 billion of additional revenue. Significantly, because of the broad language of the proposal, it potentially could apply to offshore insurance and reinsurance companies and other less-obvious targets.
The proposal would apply to foreign corporations that either are publicly traded or have gross assets of $50 million or more, if their management and control occur primarily within the United States, i.e., substantially all of the executive officers and senior management who exercise day-to-day responsibility for making decisions involving strategic, financial and operational policies of the corporation are located primarily in the United States. Any individual exercising such day-to-day responsibilities would be treated as an executive officer. The measure would not apply, however, to a controlled foreign corporation that is part of a group whose parent is a U.S. corporation that holds “substantial assets,” other than cash and stock in foreign subsidiaries, for use in the active conduct of a U.S. trade or business.
A foreign corporation that would satisfy the threshold gross asset test and whose assets consist primarily of assets managed on behalf of “investors” would also be treated as a U.S. corporation if investment decisions were made in the United States, regardless of whether it satisfied the general management and control test. Although this provision presumably is aimed at offshore hedge funds and similar entities, it could apply in other cases as well, potentially including offshore insurance and reinsurance companies.
Similar measures have been proposed several times in the past few years. In January 2005, the Joint Committee on Taxation endorsed such a rule, as did the President’s Advisory Panel on Federal Tax Reform later that year. Senator John Kerry included a nearly identical provision in the Export Products Not Jobs Act, which he introduced in August 2006, and reintroduced in January 2007. That bill was never brought to a vote in the Senate Finance Committee, nor was an earlier version of the Stop Tax Haven Abuse Act, introduced in February 2007. As Senator Baucus has announced that he will provide his own tax haven abuse legislation, it is not clear what ultimately will be enacted. Given that international enforcement and abusive tax haven use are uppermost in legislators’ minds, however, there is an increased likelihood that this corporate residence provision or one similar to it will be enacted by this Congress.