Last year, Congress failed to pass a proposal to limit corporations from avoiding income tax by reforming how corporate income taxes are determined. But the Maine legislature took steps to explore how to address this issue at the state level.1 Now Maine will have an opportunity to pick up where federal reforms fell short and pass legislation to enforce a solution called worldwide combined reporting and stop corporations from hiding their profits overseas to avoid paying taxes.
Currently, some corporations shift profits to subsidiaries in other countries, known as tax havens, that have low or no corporate income taxes to avoid reporting and paying taxes on their profits. In Maine, this has been a lucrative strategy for businesses. By reducing profits through sophisticated financial schemes, these corporations have avoided paying as much as $52 million in taxes in Maine each year according to a 2019 report.2 That’s money that could be used to fund schools and provide other tools and resources that Maine people and communities all rely on.
Worldwide combined reporting would help ensure corporations pay what they owe
Worldwide combined reporting, also called complete reporting, requires corporations and their subsidiaries to report global profits. If adopted in Maine, taxes would be based on the portion of their global business done in the state. Even if a corporation moved its profits to a tax haven, it would have to report those tax haven profits in Maine and pay taxes proportionally to the amount of their sales that are actually happening here.
Maine Revenue Services will provide a report to the legislature by February 1 on implementing worldwide combined reporting. Enacting this policy is not a huge shift from how Maine already calculates the share of profits that should be taxed in the state — currently, this is done by multiplying a corporation’s US profits by the percent of all US sales that occurred in Maine. This is called water’s edge reporting and requires corporations to file taxes in Maine regardless of where the corporation or subsidiary is located in the US.
Worldwide combined reporting would expand these rules beyond the United States to include profits earned in Maine by companies and subsidiaries located worldwide. The legality of water’s edge and worldwide combined reporting is upheld by Maine courts3 and the US Supreme Court.4
Definitions
Water’s edge reporting: Existing Maine tax policy requiring corporations to pay state income taxes based on profits made in Maine, regardless of the state where they operate. Only applies to corporations and subsidiaries within the US.
Complete/worldwide combined reporting: Proposed Maine tax policy requiring corporations to report global profits and pay state income tax based on profits made in Maine, regardless of the country where they operate. Would apply to corporations and subsidiaries worldwide.
Tax havens: Countries that have low or no corporate income taxes and financial secrecy laws that allow corporations to easily hide profits by transferring them to subsidiaries operating in these countries.
Profit shifting: When corporations use complex accounting schemes to move earnings off their US balance sheets and onto those of subsidiaries in countries with low taxes. MECEP analyst Sarah Austin breaks down how.
Tax havens hurt Maine people and communities
Corporations hiding their profits in tax havens exploit the state tax code to avoid paying their fair share, leaving Mainers and small businesses to pick up the tab. These corporations benefit from the public investments in services that make Maine a good place to do business. They need infrastructure —including roads, power, and ports — and a skilled, educated workforce to be successful. They profit by using public services. And they should be required to contribute toward funding these supports and services through taxes.
Corporate tax avoidance also harms small businesses. Corporations like Amazon can undercut small Maine businesses like corner bookstores by large margins, in part due to tax avoidance. When Maine towns and cities lose small businesses, they also lose jobs and vibrant downtowns that drive the local economy. Unlike many local businesses, corporations have deep pockets to afford lawyers to engage in sophisticated tax avoidance schemes.
Leveling the playing field
The Maine legislature has an opportunity to stop this unfair rigging of the tax code by eliminating the tax haven loophole. This will help level the playing field between corporations and small businesses and raise tax revenues to provide critically needed services in our state and protect local economies. Worldwide combined reporting is the foundation for a fairer system of international corporate taxation. It’s time for corporations doing business in Maine to stop hiding their profits and pay their fair share.
Notes:
[2] Richard Phillips and Nathan Proctor, “A simple fix for a $17 billion loophole.” Institute on Taxation and Economic Policy and U.S. PIRG Education Fund
[3] Somerset Telephone Company et al. v. State Tax Assessor
[4] Mitchell, Stacy, “Closing State Corporate Tax Loopholes: Combined Reporting.” Dec 2015. Institute for Local Self-Reliance.
