States Can Fight Corporate Tax Avoidance by Requiring Worldwide Combined Reporting
End Notes
[1] U.S. General Accounting Office, “Key Issues Affecting State Taxation of Multijurisdictional Corporate Income Need Resolving,” July 1, 1982, https://www.gao.gov/assets/ggd-82-38.pdf. Page 31 of the report lists 13 states as “employing” WWCR: Alaska, California, Colorado, Idaho, Illinois, Indiana, Massachusetts, Montana, New Hampshire, New York, North Dakota, Oregon, and Utah. However, in 1984 a Massachusetts court held (in Polaroid Corp. v. Commissioner of Revenue) that the state lacked authority to require combined reporting, and the Indiana governor issued a letter forswearing it. Subtracting those two states from the 13 and adding Florida, which enacted worldwide combined reporting in 1983 but repealed it in 1984, produces a count of 12 states that required combined reporting at some point in the early 1980s.
[2] Alaska Statutes, Section 43.20.144, https://law.justia.com/codes/alaska/2022/title-43/chapter-20/article-2/section-43-20-144/; and Alaska Administrative Code, Section 15.20.300, (https://tax.alaska.gov/programs/documentviewer/viewer.aspx?251s.
[3] A review of state corporate tax statutes indicates that California, Idaho, Montana, New Mexico, and North Dakota default to WWCR but allow taxpayers to file on a “water’s edge” (domestic-only) basis. Connecticut, the District of Columbia, Massachusetts, New Jersey, Utah, and West Virginia default to water’s edge combined reporting but allow taxpayers to file using WWCR.
[4] Annette Alstadsæter et al., “Global Tax Evasion Report 2024,” EU Tax Observatory, October 2023, Table 2.2, p. 47, https://www.taxobservatory.eu/www-site/uploads/2023/10/global_tax_evasion_report_24.pdf.
[5] Kimberly A. Clausing, “Profit Shifting Before and After the Tax Cuts and Jobs Act,” National Tax Journal, December 2020.
[6] U.S. Department of the Treasury, “The Made in American Tax Plan,” April 2021, p. 9, https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf.
[7] These studies are summarized in Reuven S. Avi-Yonah et al., “Commensurate with Income: IRS Nonenforcement Has Cost $1 Trillion,” Tax Notes Federal, May 22, 2023.
[8] Microsoft Form 8-K filed with the U.S. Securities and Exchange Commission, October 11, 2023.
[9] Richard Phillips et al., “Offshore Shell Games 2017: The Use of Offshore Tax Havens by Fortune 500 Companies,” U.S. Public Research Interest Group Education Fund and Institute on Taxation and Economic Policy, October 2017, https://itep.sfo2.digitaloceanspaces.com/offshoreshellgames2017.pdf.
[10] Walmart 10-K annual report filed with the Securities and Exchange Commission for the fiscal year ending January 31, 2024, at https://www.sec.gov/Archives/edgar/data/104169/000010416924000056/wmtexhibit21fy24.htm. It’s worth noting that Walmart’s 10-K for the previous year indicated that the Luxembourg subsidiary had been incorporated in the Cayman Islands (https://www.sec.gov/Archives/edgar/data/104169/000010416923000020/wmtexhibit21fy23.htm); this is indicative of the ease with which MNCs can manipulate their corporate structures to minimize their taxes. Considerable research shows that compliance with SEC subsidiary reporting requirements is poor; a 2015 study found that Walmart, for example, had dozens of subsidiaries incorporated in tax havens. See Frank Clemente and Marc Auerbach, “The Walmart Web: How the World’s Biggest Corporation Secretly Uses Tax Havens to Dodge Taxes,” Americans for Tax Fairness, June 2015, https://americansfortaxfairness.org/files/TheWalmartWeb-June-2015-FINAL1.pdf.
[11] “Properties” section of Walmart 10-K for the fiscal year ending January 31, 2023, at https://www.sec.gov/Archives/edgar/data/104169/000010416923000020/wmt-20230131.htm#ic0762e37664541589e0e296d7f31d4ab_46.
[12] See https://www.sec.gov/Archives/edgar/data/1393818/000119312524044485/d734131dex211.htm.
[13] The ITEP estimate was based on CBO estimates that MNCs artificially shifted $300 billion in profits out of the United States annually and that the international tax provisions of TCJA would reduce that by $65 billion — for a net shift of $235 billion. See CBO, “The Budget and Economic Outlook: 2018 to 2028,” April 2018, pp. 124 and 127, https://www.cbo.gov/system/files/2019-04/53651-outlook-2.pdf.
[14] Richard Phillips and Nathan Proctor, “A Simple Fix for a $17 Billion Loophole,” Institute on Taxation and Economic Policy, U.S. PIRG Education Fund, SalesFactor.org, and American Sustainable Business Council, 2019, https://itep.sfo2.digitaloceanspaces.com/A_Simple_Fix_for_a_17_Billion_Loophole_USPIRGEF_ITEP.pdf. The ITEP study was written before it was known how many states ultimately would conform with TCJA provisions aimed at recouping some of the revenue lost to international profit shifting and how much federal revenue those provisions would generate. Thus, ITEP’s $14 billion figure would have to be adjusted downward to reflect the effect this conformity has already had on state revenue, though the adjustment would be small since no large state has conformed. It should also be adjusted downward to reflect the fact that some states include in their tax base the dividends that foreign subsidiaries of MNCs pay to their U.S. parents. On the other hand, more recent estimates of post-TCJA profit shifting are considerably larger than the $235 billion CBO estimate on which the ITEP study relied. For example, the 2023 Zucman et al. study cited earlier in this paper estimates that U.S.-headquartered MNCs alone shifted $369 billion in profits to tax havens in 2022.
[15] See https://www.sec.gov/Archives/edgar/data/829224/000082922423000058/sbux-1012023xexhibit21.htm.
[16] Suppliers of new equity capital to a corporation will do so based on their expected after-tax rate of return. Therefore, if a corporation can reduce its federal and state tax liability through profit shifting, it has more profit available with which to pay dividends — enabling it to obtain more capital per dollar of dividends or obtain a fixed amount of capital with a lower dividend pay-out.
[17] In Container Corporation v. California Franchise Tax Board (1983), the Court ruled that worldwide combined reporting applied to MNCs with a U.S. parent is constitutional. In Barclays Bank v. California Franchise Tax Board (1994), the Court ruled that worldwide combined reporting applied to MNCs with a foreign parent is constitutional.
[18] Less than three months after GILTI’s December 2017 enactment, the Council on State Taxation (COST) — the trade association that represents the largest multistate corporations on state tax policy and legal matters — sent a letter to the Georgia legislature suggesting that state conformity with GILTI was unconstitutional. See https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-comments-and-testimony/03062018-ga-letter-to-gen-assembly-re.-foreign-income-taxation.pdf. And in October 2018, COST published a detailed article making the case. See Joseph X. Donovan et al., “State Taxation of GILTI: Policy and Constitutional Ramifications,” Tax Notes State, October 22, 2018.
[19] A tax haven blacklist was repealed in Montana and Oregon. It remains in effect in Colorado.
[20] If a state requires combined reporting, the formula is applied to the combined profit of the parent and subsidiaries; if it doesn’t, the formula is applied separately to each member of the group — assuming the state can tax them.
[21] See https://www.cbpp.org/28-states-plus-dc-require-combined-reporting-for-the-state-corporate-income-tax. Texas does not have a traditional corporate income tax but is counted as a combined reporting state here because it requires combined reporting for its “margins tax” to prevent potential interstate profit shifting.