robert-nowellWhat Congress does in the next few weeks has the potential to determine whether some of the largest multinational corporations will have to start actually paying the codified U.S. corporate tax rate. Because of low-tax, offshore “havens” and the use of tax loopholes, most currently don’t.

Here’s how it works: Corporations doing business in the U.S. have to pay taxes on their profits. The tax code contains loopholes that allow corporations to manipulate where their revenue and expenses appear (on paper) to have been generated and where they pay taxes. This is where tax havens come into play.

Hypothetical company Tax Haven Inc. generates $10 million of profit selling widgets in the U.S. To avoid taxes, the owners look to the Cayman Islands with a zero corporate tax rate. One strategy is to set up a subsidiary in the Caymans called Tax Haven Cayman and give it the intellectual property. To manipulate profits, Tax Haven Cayman charges Tax Haven Inc. $9 million in licensing and royalties, creating $9 million of tax-free profit for Tax Haven Cayman and reducing Tax Haven Inc.’s taxable income from $10 million to $1 million.

It’s important to recognize the tax haven issue and its relevance to investors, CSBJ readers and most importantly Colorado businesses. How corporations structure their profits to avoid U.S. taxes creates an artificial competitive disadvantage for small businesses and large domestic firms.

With 83 of the top 100 publicly traded companies taking advantage of the loopholes, tax haven abuse is common among multinationals. Each year, corporations holding money in tax havens leave U.S. coffers short $90 billion.

The cost of multinational tax dodging via tax havens is estimated to cost individual small business owners more than $3,244 each year. This hurts small businesses by stacking the deck against them. When big companies don’t pay taxes that small businesses pay, entrepreneurship is undermined.

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It’s an unfair state of affairs for U.S. taxpayers, and some legislators have started paying attention.

Several loopholes are set to expire Jan. 1, presenting a great chance to re-instill fairness into the U.S. economic system. It remains an open question whether legislators will take heed of this opportunity by making certain these loopholes are not renewed.

Unfortunately, some decision makers are taking steps in the opposite direction. Instead of working to close these loopholes in the fall, they propose actions that would reward the companies exploiting tax havens through what is known as a tax holiday.

This scheme would allow corporations to bring their offshore profits back to the U.S. at a tax rate of about 6.5 percent, less than one-fifth of the legislated corporate tax rate. President Obama’s similar plan allow corporations to repatriate these profits at a one-time special low rate of about 14 percent.

In the end, a tax holiday would do the opposite of solving the tax haven problem. Unless a tax holiday coincided with closing the underlying loopholes that allow tax haven abuse, the holiday creates an expectation that, next time Congress is in need of some quick cash, they will offer another one.

Our elected officials need to close loopholes that benefit a handful of companies, leaving the rest of us with the tab.

They should do it soon, and they should not make things worse by skewing incentives through a tax holiday.

Robert Nowell is campaign manager for the Colorado Public Interest Group.