Top Ten Reasons to Move your Latin American Headquarters to Panama
Dec 06, 2011 Top Ten Download PDF
By María Carolina Arroyo
By María Carolina Arroyo and Carin Stelp, Arias, Fabrega & Fabrega
Any company considering opening an office overseas has a lot to think about – and a lot of choices as to where they may go. With this in mind, Panama has recently made a concerted effort to make the country more appealing to global corporations and to take advantage of its geographic location, political stability, and historical status as the “crossroads” of the world. The result is a number of legal regimes that make doing business in Panama attractive for everyone, but particularly for foreign corporations by providing tax, labor and immigration benefits to them. In combination with an already business-friendly environment and an open and welcoming society, these regimes make Panama an ideal choice for your Latin American Headquarters. Here are ten reason we believe moving your Latin American headquarters to Panama is a solid business decision.
1. Special incentive laws. Panama has a number of laws that provide incentives to companies establishing themselves in the country, regardless of their line of business.
Regional Headquarters. Any kind of company can establish its global or regional headquarters in Panama to provide operational, administrative and other back office support to the company’s other offices around the world under the multinational headquarters license. To date, more than 60 international companies have established operations in Panama under this license, including Procter & Gamble, Caterpillar and Adidas.
Panama-Pacifico Special Economic Zone. Panama-Pacifico, a 1,400-hectare international business park, provides incentives to companies that carry out a wide range of activities such as back office operations, offshore services and logistics services, among others. Companies operating out of Panama-Pacifico include 3M, BASF and Dell Computers.
Colon Free Trade Zone. Companies that engage in the tracking and distribution of goods can establish operations in the Colon Free Trade Zone, which is located at the Caribbean entrance of the Panama Canal and is the largest free trade zone in the Americas. The Colon Free Trade Zone allows for the tax free importation and exportation of goods.
Manufacturing and Export Zones. For companies whose activities are targeted overseas but that don’t necessarily engage purely in the import/export business, or that don’t wish to set up operations in Colon, a newly implemented law allows for the establishment of a “free trade zone” anywhere in the country. Companies that establish operations in one of these free trade zones may engage in a wide range of activities, from manufacturing to the provision of services; however, only activities targeted outside the country or to other companies located within the free trade zone qualify for tax incentives.
Call Centers. Companies operating call centers can also operate in Panama under legislation that provides tax exemptions on income earned from international calls.
Technological Zone. The City of Knowledge is an international center for education, research, and technological innovation, which includes a business incubator that provides benefits to companies working in the areas of communications and IT, biosciences, environmental management, human development and business management.
Petroleum Storage and Refinement Zone. Companies that engage in the import, export, storage, refinement and selling of oil and petroleum derivatives can operate within one of the Petroleum Free Zones in the country, which are enclosed areas that are designated for petroleum-related activities and provide tax benefits on the importation, exportation and sale of oil.
2. Establishing a legal entity in Panama is easy. The three most common vehicles for doing business in Panama are local corporations, local limited liability companies, and branches of foreign corporations, all of which are quick and easy to set up.
Corporations are by far the most common vehicle. There is no required minimum number of shareholders, and corporations may be wholly-owned by a single shareholder, who may be an individual or a legal entity.
In recent years, limited liability companies have gained popularity as vehicles for doing business in Panama, especially for U.S. tax payers as they, unlike corporations, are considered pass through entities for U.S. tax purposes.
A third option is to open a branch of a foreign corporation in Panama. There are very few significant differences between operating in Panama through a local subsidiary and through a branch of a foreign corporation. The primary difference between the two the vehicles is in their dividend tax treatment.
Any of these three business vehicles can be set up quickly and easily by executing articles of incorporation and filing them at the registry of companies. The process takes about one week.
3. Significant corporate tax benefits. Panama’s taxation system is mainly territorial inasmuch as, generally speaking, only income earned from Panama sources or with respect to assets located in Panama is taxed. This territorial principle partially accounts for the successful development of Panama as a base for international operations. Corporate income tax for most companies is paid at a rate of 25%, while dividend payments are taxed at a rate of 10% if the earnings arose from Panama-source income and 5% if the earnings arose out of foreign-source income.
Companies operating under one of the special incentive regimes described in item 1 above receive significant tax benefits
Multinational headquarters are exempt from the following taxes:
- Income tax as long as services are provided to subsidiaries or affiliates located outside of Panama.
- Sales tax for services provided to persons outside of Panama.
- Income tax
- Dividend tax
- Import duties (unless goods are sold within Panama)
- Export duties
- Sales tax exemption for specific business activities
- Taxes on the movement or storage of fuel or other hydrocarbons
- Real estate property tax
- Capital gains tax on company share transfers
- Stamp taxes
- Exemptions on income tax on income earned on export and re-export operations
- Reduced 5% dividend tax
- Exemptions on import duties
Call centers are exempt from all direct and indirect taxes, fees, contributions and charges with respect to international calls, except for fees charged by the National Public Services Authority and employment and social security contributions.
Companies operating within the City of Knowledge benefit from the following tax incentives:
- Exemption from import taxes on all machinery, equipment, furniture, vehicles, devices and other materials necessary for the project’s development
- Exemption from sales tax on machinery, equipment, vehicles, devices and consumables necessary for the project’s development
- Exemption from property taxes
- Exemption from any taxes, fees, duties, or levies imposed on the remittance of money abroad when the transfer of such funds is related to the purpose of the project or operation
- Zero taxes, including income tax exemptions, on all operations or activities of companies producing, assembling or processing high-tech goods within the Technological Park
4. Significant employee tax benefits. Personal income tax is between 15% and 25% depending on the income level. However, employees operating under the multinational headquarters license, and employees with exclusive overseas responsibilities are exempt from the payment of personal income tax.
5. Immigration visas are easily obtained. There are a number of visa options available for foreign personnel, which makes it easy for foreign companies to bring to Panama their foreign executives and their families. Most company sponsored immigration visas are granted for one-year terms, renewable for up to six years. Employees must also obtain a work permit from the Ministry of Labor. However, visas for employees in companies operating under the multinational headquarters law are granted for five-year renewable terms. These employees are not required to obtain a work permit. The multinational headquarters law also grants temporary three-month visas for employees that will only be in the country for a short period of time. Panama-Pacifico also offers five-year visas. In addition there are visas available for shareholders or officers of a company that invest a minimum corporate capital of US$160,000.00 with the purpose of establishing commercial, financial or industrial activities in Panama.
6. Special incentive laws provide flexible labor laws and work visas. As a general rule, the Labor Code establishes that no more than 10% of employees in a given company may be foreign personnel. The compensation paid to foreign personnel may also not be more than 10% of the total payroll. However, under many of the special incentive laws mentioned above, this quota is increased to 15%. Furthermore, under the multinational headquarters law, foreign executives whose income is paid from outside the country are exempt from these quotas. Executives in Panama with exclusive overseas responsibilities are also exempt from the quotas.
Special incentive laws also provide additional labor benefits, such as flexible work schedules, fixed surcharges for overtime, and negotiable weekly rest and vacation periods.
7. Foreign investment. Panama boasts one of the most open and welcoming economies to foreign investment in Latin America. There is no requirement that foreign investment into the country be registered in, or obtain any prior approvals from, any governmental office or agency in Panama. As a result, Panama is now Latin America’s largest recipient of foreign direct investment as a percentage of its GDP.
Panama affords equal, fair and equitable treatment to national and foreign investors under its laws. In addition to these principles contemplated by local laws, the country has signed a number of bilateral investment agreements and free trade agreements, which include provisions granting national treatment, most-favorable-nation treatment, and fair-and-equitable treatment to foreign investors. For example, Panama has signed Foreign Investment and Protection Agreements with the United States, France, Great Britain, Switzerland, Germany, China, and Canada, among others.
Foreign investors, as well as nationals, can benefit from stability with respect to labor, tax and customs duties under the 1998 investment stability law. Under this law, investors can register investments in excess of US$ 2 million in certain qualifying businesses with the National Investment Registry of the Ministry of Commerce and Industry, and obtain a guarantee from the government that these investments will not be affected by adverse changes in laws in the areas of employment relations, taxation and customs duties for a period of up to 10 years.
8. Lack of exchange controls. Although the official currency of Panama is the “Balboa”, the Balboa has the same value as the U.S. dollar. The Balboa only exists in the form of coins, which are minted in the same size and denominations as U.S. coins, and the U.S. dollar is the legal tender and has circulated freely along with Panamanian coins since 1904. As a result, there are no exchange controls and capital can be moved freely in and out of the country. With its fully dollarized economy, Panama offers monetary stability.
9. Panama offers a good business environment. Panama connects Central and South America, and, as a place of transit, serves as an international commercial and financial centre. In addition to the Panama Canal, which brings shipping to the country from all over the world, the international airport in Panama serves as a regional hub for many major airlines, facilitating travel within Latin America, as well as to North America and Europe.
Panama is a politically stable country, with regular, free and open elections. The country has also not experienced the insecurity that other Latin American countries have seen in recent years, and the need for private security among professionals and executives is non-existent.
Panama also provides an open, market economy with very little government intervention.
Furthermore, although the official language of Panama is Spanish, English is widely spoken as a second and commercial language, particularly in the main cities of Panama and Colon.
10. Free trade agreements. Panama has signed and ratified free trade agreements with Nicaragua, Guatemala, Honduras, Costa Rica, El Salvador, Taiwan, Singapore, and Chile. A free trade agreement with Canada was signed in 2009 but has not yet been ratified. A trade promotion agreement with the United States was signed on June 28, 2007, and just recently ratified by the U.S. Congress. In addition, Panama has more limited trade agreements, or so called partial scope agreements, with the Dominican Republic, Mexico, Colombia and Cuba. These free trade agreements provide the signatory countries with investment protections, reduced import/export tariffs and strong intellectual property protections.
The above described benefits are all excellent reasons to consider moving your Latin American operations to Panama. The open and business-friendly environment is unparalleled in the region, and the various special inventive laws can provide a range of additional benefits to almost any corporation, in any area of business.
Our global Wall Street pols at city, state, and national level have to pretend to be playing a corporate tax rate game because it has been ILLEGAL AND UNCONSTITUTIONAL to install US cities as Foreign Economic Zone policies with all the exemptions from taxation, US Rule of Law, and US Constitutional rights-----that includes our taxation system that requires UNIFORMITY IN TAXATION ----so global corporations have never been allowed regardless of some international treaty to pay a different tax rate than our small businesses across the nation. This is why Congress and CLINTON/BUSH/OBAMA PLAY GAMES with Republicans over these issues.
The MASTER PLAN of US cities deemed Foreign Economic Zones like Baltimore was to move OUT all economic activity tied to corporations to overseas Foreign Economic Zones ---allow local economies to collapse while MOVING FORWARD FOREIGN ECONOMIC ZONE development for the return of global corporate campuses. This is why today our US cities especially Baltimore are tied only to global corporate campus development and that is why these global corporate campuses PAY NO TAXATION AND INDEED ARE GIVEN SUBSIDY CALLED INCENTIVES.
Today more than one hundred thirty-five countries including
the United States operate tax-free trade zones (FTZs).
US cities don't need global corporate campus development--in fact 99% of citizens do not want these global corporate campuses----this is why Baltimore's government coffers are bare.
Uniformity Clause Law and Legal Definition
Uniformity Clause refers to the clause in the U.S. constitution, requiring the uniform collection of federal taxes. Article I, Clause 1 of the U.S. constitution gives the federal government of the U.S. its power of taxation. The uniformity clause was intended to prevent the legislature and local officials from granting preferential tax treatment to influential property owners and to protect the citizen against unequal and consequently unjust taxation.
The U.S. legal system includes uniformity clauses found in individual state Constitutions as well as the federal Constitution.
In Executive Life Ins. Co. v. Commonwealth, 147 Pa. Commw. 105 (Pa. Commw. Ct. 1992), the court held that “the Uniformity Clause means that the classification by the legislative body must be reasonable and the tax must be applied with uniformity upon similar kinds of business or property and with substantial equality of the tax burden to all members of the same class.”
Is Ireland a one-trick pony by enticing corporations with low taxes?
Cillian Doyle says Ireland is a tax haven and we should change our ways before the decisions are taken out of our hands.
Jan 21st 2016, 8:00 AM
Cillian Doyle ‘WE’RE NOT A tax haven, we have never been involved in any kind of tax malpractice’ said Michael Noonan last October.
If your top political figures need to constantly state that you are not a tax haven, then the chances are you probably are a tax haven. And as the UN’s Philip Aston says, ‘when lists of tax havens are drawn up, Ireland is always prominently among them’.
The US Senate similarly found that by any ‘common sense definition of a tax haven’ Ireland easily met the criteria. I mean when Forbes regularly ranks you in their list of ‘Top ten tax havens’, there’s not really much of a debate to be had.
In Ireland there’s no debate to be had, but that has more to do with it being a taboo subject amongst our mainstream media. Take pharmaceutical giant Pfizer’s recent announcement that it was relocating its HQ here, solely for tax purposes.
This drew international condemnation with the Financial Times calling us a financial ‘black hole’, The Guardian arguing that we should be ‘subject to economic sanction’, and US presidential hopefuls Trump, Clinton and Sanders all issuing criticism.
For the most part our media skirted around the issue, stating obvious facts like our tax regime was ‘back in the international spotlight’, but failing to offer any serious analysis of why this was. Then there was the customary denial by a top political figure, this time Simon Conveney, who declared ‘nobody is using Ireland as a tax haven’.
Someone should tell poor Simon to take a stroll down to five Harbour Master Place in the IFSC.
There he’ll find a small building which houses around 250 companies controlling almost €2 billion worth of assets, but he won’t find any employees – because there are none. Not even a fella to clean the brass plates on the doors!
The OECD has launched its new Base Erosion and Profit Shifting project (BEPS) designed to clamp down on the kind of tax dodging measures Ireland supports, whilst there has been talk of standardised corporation tax rates at the European level.
This is a clear indication of the way the wind is blowing, meaning Ireland urgently needs to change course. The first step is facing up to the fact that we are a tax haven, so let’s review the historical and contemporary evidence.
A taxing history
The dominant narrative here in Ireland is that we were the economically ‘sick man’ of Europe up until the 1990s, after which time we slashed corporation tax, multinationals flocked and the Celtic Tiger was born. It’s the old low corporation tax = high growth rates line, yes that old canard!
In reality our tax haven strategy was born in the 1950s after a range of tax exemptions on corporate income and profits, as well as offshore tax exemptions were introduced. But it was the 1970s before things really got going, when Ireland was marketed abroad as a ‘no tax’ regime and the idea of establishing an Irish Financial Services Centre was hatched.
Back in 2000, Padraic White, former head of the IDA and one of the IFSC’s chief architects, co-authored the book The Making of the Celtic Tiger. The book describes how White recruited a Wall Street expert on offshore banking, who ‘examined the success of Bermuda in creating jobs in financial services, and he was satisfied that Ireland could emulate its achievement.’
Yes, Ireland planned to create its own Bermuda triangle, but the only thing disappearing would be the taxes of multinationals. Although the Central Bank initially rejected the plan because it ‘smacked of a banana republic’, the election of Charlie Haughey, saw the plan quickly revived.
Today the IFSC administers almost 50% of global alternative investment funds (hedge funds, venture capital, derivative contracts, mortgage back securities, etc) and has disparagingly been referred to as the ‘Lichtenstein on the Liffey’.
But as the graph from the Tax Justice Network demonstrates below, the Celtic Tiger didn’t take off because large multinationals flocked here after we slashed corporation tax in the 1990s. Ireland had long been trying to market itself as a tax haven, it just wasn’t working, not until we gained access to the European Single Market in 1993.
If it walks like a duck…
The two defining characteristics of a tax haven are; (1) a jurisdiction there is little/no tax liabilities for foreign individuals/businesses and (2) where key financial information is suppressed.
Our 12.5% corporation tax rate is often referred to as the ‘cornerstone’ of our economy, but even the dogs on the street know that the amount that’s actually paid is as little as 2%, and sometimes it’s nothing at all.
Between 2007 and 2012, the likes of Google, Microsoft, and pharmaceutical giant Abbott Laboratories, all managed to pay less than 1% tax on their profits.
Bermuda is top of the charts not because of genuine economic activity.
Source: Central Bank of Ireland
2. Tax deals under investigation
Last year a report by 19 European nongovernmental organisations found that the lack of “financial and company transparency” is one of the reasons Ireland is so attractive a location to corporate subsidiaries.
This shouldn’t be surprising, just take the example of Apple, which is now being investigated by the European Commission to see if our government gave them a number of tax deals. Our strict law surrounding taxpayer confidentiality has meant that these deals have been beyond the scrutiny of the public and the Oireachtas, even though they are of huge significance to the exchequer.
Our government doesn’t seem to like transparency, especially not in the area offshore trusts. The users of trusts enjoy relative anonymity which makes it difficult to ascertain who owns them, what assets they control and how to tax them. That’s why the establishment of a public register of all the beneficial owners of companies and trusts is being pursued at the European level, but unsurprisingly, our government along with the likes of Luxembourg are lobbying hard against this.
What’s the fuss?
Our tax haven strategy isn’t just screwing our own citizens; we’re screwing the citizens of other countries too. Our legal framework undermines the tax laws of other nations by inducing economic activity to relocate here purely to dodge tax. And it’s not just developed countries who are losing out, Christian Aid estimates that the loss to developing countries from the kind of transfer pricing operations is somewhere in the region of $160 billion annually.
For that reason the international community is now taking steps to clamp down on tax havens and the transfer pricing they facilitate. With the net beginning to close Ireland needs to change direction before the decision is taken out of our hands. Attracting investment solely by way of low taxes is the policy equivalent of a one trick pony.
It’s high time we put this pony out to pasture.
All of the national media hype over Ireland and the Celtic Tiger was just what this article states------Ireland was simply a tax haven with global corporations opening pretend corporate offices as exist in Delaware's shell game-----did that bring jobs? BARELY. It brought Ireland to being central in GLOBAL BANKING FRAUD AND COLLAPSE in 2008.
'The end of the Shannon Free Zone 2016
May 11th, 2015 by Ennis Chamber
As part of the modernized Union Customs Code, the Shannon Free Zone will cease to exist for customs purposes from May 2016. This will have a huge impact on traders unless action is taken in advance to implement new procedures.
Revenue has written to all traders advising them of the change in status from 2016. Businesses inside the Free Zone will no longer be able to import into Ireland from outside Europe without lodging a formal customs declarations. Traders wishing to maintain their duty suspension benefits they need to start considering applying for alternative customs suspension procedures.
For more information on how this may impact your company, please contact Revenue. Should your members have any queries regarding the implications of the end of the Free Zone, please contact email@example.com'.
As we watch our native citizens fighting over XL Pipeline and fighting for fresh water this is the problem. Below we see that during Clinton era native tribes signed onto FOREIGN ECONOMIC ZONE status. When we shout WHY DON'T NATIVE TRIBES FIGHT FOREIGN ECONOMIC ZONE status----as these FTZs are what open tribal lands to allowing global corporations to do anything they want -----this is why NATIVE RESERVATIONS are not fighting a policy that basically ends its status as a sovereign entity. We can be sure a 1% of native citizens were made extremely wealthy in these deals but this is why since the 1990s native treaty has not been enforced. It is also why that XL Pipeline could never have been stopped no matter how long natives and protestors came to fight that pipeline----it is that status as FTZ killing tribal treaties and rights of corporate eminent domain to take tribal lands.
We are talking taxation policies this week and here we see in 1934 under FDR the FTZ Act was passed with limited attacks on COMMERCE CLAUSE AND TAX UNIFORMITY LAWS. The Federal government has the right to taxation but it does not have the right to forbid taxation beyond the custom duties and INVENTORY TAXES. WE THE PEOPLE must be aware of the overreach in expanding across all state counties like Maryland this status of FTZ as they seek to claim massive real estate as tax exempt to global corporate campuses. Congress does not have that power----and it has already been determined the use of tax credits directed at individual corporations is illegal----
'In the United States, the Foreign Trade Zones Act of 1934 provides Customs-related advantages as well as exemptions from state and local inventory taxes'.
Native American Foreign Trade
John Cataldi 02 July 2015 Export/Import/Industry
Investing in Native American Free Trade Zones
Perhaps one of the most interesting advantages is that Indian tribes are eligible to petition and create foreign-trade zones (FTZs).
In the United States, the Foreign Trade Zones Act of 1934 provides Customs-related advantages as well as exemptions from state and local inventory taxes. In other countries, they are called “special economic zones” or “free zones” and were previously called “free ports” or “export processing zones”. Free zones range from specific-purpose manufacturing facilities to areas where legal systems and economic regulation vary from the normal provisions of the country concerned. Depended upon the country, items and method of shipment, FTZs may reduce taxes, Customs duties, and regulatory requirements for registration of business. Zones around the world often provide special exemptions from normal immigration procedures and foreign investment restrictions as well as other features.
With the passing of the Native American Business Development, Trade Promotion and Tourism Act of 1999, Native American tribes and their associated tribal corporations are eligible to apply for status as a Foreign-Trade Zone (“FTZ”). This would allow them ability to defer the payment of duties on imported merchandise until the imported merchandise leaves the foreign trade zone and enters the commerce of the United States. These lower duty rates could entail significant cost savings for manufacturers or assemblers of products in which the component part has a higher duty rate than that of the completed product (i.e., inverted tariffs). The establishment of FTZs, could also attract business to tribal lands, given the economic tax breaks given to employers by setting up in a rural FTZ, which all American tribal lands are considered rural development zones.
A natural progression of the establishment of FTZs is the establishment of Special Economic Zones (SEZ) is commonly used as a generic term to refer to any modern economic zone within sovereign boarders. In these zones business and trades laws differ from the rest of the country. The goal of the zones include increased trade, increased investment, job creation and to increase overall economic development.
For Native American Tribes these SEZs
To revitalize economically and physically distressed Native American economies by— (A) encouraging the formation of new businesses by eligible entities, and the expansion of existing businesses; and (B) facilitating the movement of goods to and from Indian lands and the provision of services by Indians. (2) To promote private investment in the economies of Indian tribes and to encourage the sustainable development of resources of Indian tribes and Indian-owned businesses. (3) To promote the long-range sustained growth of the economies of Indian tribes. (4) To raise incomes of Indians in order to reduce the number of Indians at poverty levels and provide the means for achieving a higher standard of living on Indian reservations. (5) To encourage inter-tribal, regional, and international trade and business development in order to assist in increasing productivity and the standard of living of members of Indian tribes and improving the economic self-sufficiency of the governing bodies of Indian tribes. (6) To promote economic self-sufficiency and political self-determination for Indian tribes and members of Indian tribes, as expressed in the US Constitution.
The establishment and use of multiple Native American FTZs and SEZs would allow the facilitation of commerce across states lines, as an inter tribal transaction. The Native American Tribes would then act as distribution hubs that may not be specifically allowed by the state. The NET value of this type of Native American Venture Fund – Tribal partnership in both tax credits, economic incentives and logistic savings could be valued in excess of $10 Billion dollars within 5 years.
Here we see the 2005 version similar and tied to each state going wild over selective state tax credits to global corporations while our state tax revenue is said to be in a deficit. Our localities and their community small businesses are relegated to corporate patronage grants and startup ANGEL funding----
In Baltimore it is our small business Chamber of Commerce often the ones pushing for these kinds of deregulated corporate tax breaks often because of PAY-TO-PLAY gains.
Developing nations having Foreign Economic Zones of course do not have Constitutions or Citizens with a Bill of Rights to protect against cronyism in TAX UNIFORMITY. It is the OPPOSITE OF FREE MARKET.
'NFIB President and CEO Dan Danner said the new study "confirms small businesses currently pay a higher effective tax rate than many large corporations. This study delivers a strong counter argument to the president's announcement last week that corporate-only tax reform is the best path."
SHOULD CONGRESS AUTHORIZE STATES TO CONTINUE
GIVING TAX BREAKS TO BUSINESSES?
By Michael Mazerov
Last year, the federal Sixth Circuit Court of Appeals ruled
that the investment tax credit granted against Ohio’s
corporate income tax violates the Commerce Clause of the U.S. Constitution.
was the latest in a
long line of court decisions holding that state tax laws that
provide tax advantages to in-state business activity
sometimes illegally discriminate against interstate commerce.
The Court agreed that the credit unfairly “coerce[s]
businesses already subject to the Ohio [income] tax to
expand locally rather than out-of-state.” The decision was
explicitly based on a comprehensive legal theory of
discriminatory state aid to businesses set forth in a law
review article co-authored by the leading expert on the
impact of the Constitution on state taxation, Professor
Walter Hellerstein of the University of Georgia.
Cuno is now on appeal to the U.S. Supreme Court.
However, identical bills have been introduced in the Senate
and House to short-circuit the appeals process, reverse
Cuno, and affirmatively authorize state and local
governments to continue granting a wide array of economic
development-oriented tax incentives to businesses. The
legislation is the “Economic Development Act of 2005” (S.
1066/H.R. 2471), sponsored by Ohio Senator George
Voinovich and Ohio Representative Patrick Tiberi.
The Cuno decision declared unconstitutional many of the most costly, ineffective, and unaccountable business tax breaks granted by states and localities.
Such tax breaks chiefly shift jobs among states while impairing the states’ ability to fund education and transportation services that do enhance job growth and national
The proposed “Economic Development Act” would reverse
Cuno, thereby preserving such unproductive incentives.
Enacting the “Economic Development Act” also could
open a “Pandora’s Box” of new forms of state tax discrimination against interstate commerce.
The US Constitutional TAX UNIFORMITY laws have been deregulated over and over largely because of US FOREIGN ECONOMIC ZONE designation----using thus free trade zone status to basically ignore all Federal and state tax uniformity laws. We have spoken often of discriminatory tax credits in housing and small business vs corporation----below we see from where these attacks are coming and how even our Supreme Court as corporate as it is becoming has ruled as unconstitutional all kinds of special corporate tax incentives directed at corporations-----the current concern regarding these tax policies is now being pushed these few years under a new name BATSA------we already have huge tax inequity between business industries-----between our local small business and national and global corporations coming into the area-----what Congress is doing is bypassing Supreme Court ruling to implement these discriminatory corporate tax credit practices. Baltimore suffers from a total disregard to these unconstitutional corporate tax credit awards ----the problem for Maryland and Baltimore citizens is this---we have no public justice structure in our Baltimore City Attorney or Maryland Attorney and states attorneys being the ones holding our Maryland Assembly and Baltimore City Hall accountable to US CONSTITUTIONALITY.
THESE KINDS OF COMMERCE CLAUSE AND TAX UNIFORMITY LAWS ARE VITAL FOLKS----MAKING WINNERS AND LOSERS TO TAXATION IS A BIG DARK AGES BUSINESS!
'Many business organizations supporting BATSA also sought the enactment of the “Economic Development Act of 2005” (S. 1066/H.R. 2471). The goal of this bill was to preserve existing state economic development tax incentives. The EDA was aimed at stopping challenges to tax incentives based on the argument that they discriminate against out-of-state businesses in violation of the Constitution’s Commerce Clause. In other words, the many BATSA proponents that also supported the EDA tried to preserve the right of states to discriminate in favor of in-state businesses by providing them with tax breaks'.
This is a long article but please glance through----it is the current pro-global corporate tax break policy that will leave our states with no tax revenue.
Proponents' Case for a Federally-Imposed Business Activity Tax Nexus Threshold Has Little Merit
July 7, 2015
A bill under consideration in the U.S. House of Representatives would strip states of their current authority to tax a fair share of the profits of many corporations that are based out of state but do business within their borders. The House Judiciary Committee approved the “Business Activity Tax Simplification Act of 2015,” (“BATSA”, H.R. 2584) on June 17. As this report explains, the sometimes reasonable-sounding arguments offered in support of the legislation have little merit and serve primarily to obscure the corporations’ straightforward goal of cutting their state taxes.
BATSA would impose what is usually referred to as a federally mandated “nexus” threshold for state (and local) “business activity taxes” (BATs). State taxes on corporate profits are the most widely levied state business activity taxes. The term also encompasses such broad-based business taxes as the New Hampshire Business Enterprise Tax (a form of value-added tax), the Texas Franchise Tax (a tax on businesses’ “gross margins”), and the Washington Business and Occupation Tax and the Ohio Commercial Activities Tax (both are taxes on businesses’ gross sales). The “nexus” threshold is the minimum amount of activity a business must conduct in a particular state to become subject to taxation in that state.
Nexus thresholds are defined in the first instance by state law. State business tax laws set forth the types of activities conducted by a business within the state that obligate the business to pay the tax. If a business engages in any of those activities within the state, it is said to have “created” or “established” nexus with the state, and it therefore must file a tax return and pay any tax that is owed. Federal statutes can override state nexus laws, however, and BATSA proposes to do just that. BATSA would create a number of new nexus “safe harbors” — categories and quantities of activities conducted by corporations in states that would be deemed no longer sufficient to establish BAT nexus for the corporation.
A companion CBPP report provides an overview and analysis of the proposed legislation. (See: “Proposed ‘Business Activity Tax Nexus’ Legislation Would Seriously Undermine State Taxes on Corporate Profits and Harm the Economy,” updated June 18, 2015, http://www.cbpp.org/sites/default/files/atoms/files/6-24-08sfp.pdf; hereafter referred to as “CBPP’s analysis of BATSA.”) That report focuses on the adverse impact of BATSA on the revenue-raising capacity and fairness of state corporate income taxes. This report has a different objective: to rebut the key claims made by the proponents of BATSA as to why it is necessary.
General Claims About Why the Bill Is NeededClaim:
BATSA establishes a “physical presence” nexus threshold for state BATs. Such a threshold is fair, because businesses don’t benefit from public services to any meaningful extent in states in which they don’t have employees or facilities. They therefore shouldn’t be obligated to pay any BAT to such a state.
- BATSA does not establish a “physical presence” nexus threshold. A true “physical presence” nexus standard would provide that a corporation that has employees or property in a state is taxable there and a corporation that is not physically present is not taxable. In actuality, BATSA would allow corporations to have unlimited amounts of several categories of employees, agents, and property in a state without establishing nexus for business activity taxes. For example, the bill would allow a corporation to have an unlimited number of salespeople in a state using company-owned computers and driving company-owned cars without creating BAT nexus, as long as the salespeople worked out of their homes or visited from out of state.
- Such employees and property clearly benefit from state-provided services like roads and police protection, negating the fundamental rationale offered for BATSA.
- Out-of-state businesses often benefit substantially from public services provided by states in which they have no physical presence but do have customers, and can reasonably be expected to pay some amount of business activity tax to such a state. For example, when an out-of-state bank makes mortgage loans in a state, the value of the houses that serve as collateral on the loans depends critically on the quality of local schools where the houses are located, and the collateral itself is protected by local police and fire services. Moreover, banks use the local court system to foreclose on the loans if borrowers don’t repay. The provision of such services justifies the payment of some income tax by the bank to the states where its borrowers are located, notwithstanding its lack of a physical presence in such states.
- In most states the amount of income tax a corporation owes substantially depends on the amount of physical presence the corporation has in the state; the more employees and property, the higher the tax payment. That is appropriate under the “benefits received” principle of taxation, because businesses likely benefit more from public services when they have more workers and property in a state. But to suggest that a non-physically-present business should have no tax obligation to the state is unreasonable given the fact that it is earning income in the state and benefiting from services provided by the state.
- In its 1992 Quill decision, the U.S. Supreme Court said explicitly that a non-physically-present mail-order company that purposefully availed itself of a consumer market in North Dakota was benefiting sufficiently from public services provided by that state to be fairly required to collect and remit sales taxes to that state. The fact that the decision nonetheless upheld a “physical presence” nexus threshold for sales taxes was based on the court’s desire to protect interstate commerce generally from excessive sales tax compliance burdens, not on the grounds of unfairness to the Quill Corporation itself.
BATSA is needed to “codify” federal and state court decisions strongly implying that “physical presence” is the nexus threshold for BATs under the U.S. Constitution, because a small number of recalcitrant, aggressive states refuse to accept the clear message being sent by the courts.
- Two U.S. Supreme Court cases, Whitney v. Graves (1937) and International Harvester (1944), make clear that a person or business receiving income with a source in a particular state need not be physically present in that state for the state to tax the income. Perhaps with these cases in mind, the U.S. Supreme Court stated in its 1992 Quill decision: “[W]e have not, in our review of other types of taxes, articulated the same physical-presence [nexus] requirement . . . established for sales and use taxes.”
- State courts are split on whether a state can impose a BAT on a non-physically-present business, but 12 state courts have held that they can, while only two have held that they can’t. Moreover, five recent cases that sided with the states’ position that physical presence is not required for BAT nexus were appealed to the U.S. Supreme Court, and in each case the Court declined to review the decision. If, as BATSA proponents claim, state laws asserting that physical presence is not required for BAT nexus are “constitutionally questionable,” the U.S. Supreme Court has had ample opportunity to strike them down.
BATSA is needed to reverse those state court decisions that have held that physical presence is not required for BAT nexus because they likely were wrongly decided. In the 1992 Quill decision, the U.S. Supreme Court held that an out-of-state business must be physically present in a state before it can be required to collect and remit sales tax to that state. Logic demands that the nexus threshold for BATs be at least “physical presence,” because a BAT is imposed directly on the business and comes out of the business’ pocket, while a sales tax is merely collected from the customer by the business.
- As explained above, the “physical presence” nexus threshold established in Quill was based on the Court’s desire to protect interstate commerce from excessive sales tax compliance burdens, not on any concerns about the economic burden on the company itself. Sales taxes have a much greater potential to interfere with a business’ engaging in interstate commerce than corporate income taxes and other BATs do, because a company that is obligated to collect sales taxes from customers on behalf of a state must engage in numerous activities before it makes a single sale. For example, it must register as a sales tax collector, identify every one of its products and its customers as taxable or tax-exempt, and program its accounting system to charge taxable customers the proper tax. (Then, of course, it must actually collect the tax and maintain records to demonstrate to an auditor that it has done so.) In contrast, the only thing a company must do to comply with a BAT is properly fill out its tax return based on its general books and records at the end of its tax year. Given the greater burdens of sales tax compliance as compared to BAT compliance, one could reasonably argue that it is appropriate to have a higher nexus threshold for a sales tax than for an income tax or other BAT.
- It could also be argued that the sales tax nexus threshold should be higher than the BAT threshold because in the case of the sales tax, a business is being “drafted” to collect a tax that the purchaser owes and the state could, in theory, collect directly from the purchaser (albeit with fairly intrusive auditing). In contrast, a BAT is the legal liability of the business asked to pay it; there is no other party from whom the tax could be collected. (One could not reasonably ask the in-state purchaser to estimate the profit earned on her purchase and send the tax due on it to the home-state tax agency rather than to the seller.) Thus, since states have the right to tax income earned within their borders by individuals and businesses alike (and not even BATSA proponents propose that they be stripped of this long-established right), and since businesses can earn such income without being physically present, it is illogical to bar states from taxing that income merely because the business is not physically present within the state.
The principles of federalism embodied in the U.S. Constitution, which vests in Congress the authority to regulate interstate commerce, demand that Congress enact legislation to establish a uniform national BAT nexus standard.
- No one questions the authority of Congress to enact BATSA; the debate is over the wisdom of its doing so.
- “Federalism” does not merely concern the mechanical division of authority between the federal government and the states. It also encompasses notions of deference and comity toward states on the part of the federal government. State and local governments are partners with the federal government in providing essential government services like education, health care, and transportation, which they cannot provide if their powers of taxation are unduly and unnecessarily interfered with. Congress has enacted several laws limiting state taxing powers that have spawned substantial, costly litigation and led to adverse, unanticipated consequences for states because Congress did not take adequate care in drafting them. BATSA has the potential for many such problems. Congress should therefore give great deference to state tax policies absent a compelling showing that they are contrary to the national interest.
- Federalism is often justified as a means of keeping government “close to the people” so that elected officials can be held accountable to citizens. Federal preemption of state taxing powers violates this goal, because it enables Congress to provide tax cuts to business interests at state expense with no accountability for any adverse consequences. State officials, not members of Congress, will be blamed if public services are reduced or household taxes are increased to compensate for tax cuts provided to businesses by BATSA. Thus, the enactment of BATSA would undermine a key objective of federalism.
BATSA is needed to stop states from asserting that they have the right to tax corporations that do not produce goods or services within their borders but merely have customers there. Such a position is illegitimate because corporations earn income only where they produce goods and services, not where they sell them.
- The corporate income tax laws of virtually all states incorporate provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA was promulgated in 1957 as a model state law for dividing corporate profits among the states for tax purposes. UDITPA was developed in a joint business-state task force, and it explicitly recognized making sales as an activity that contributes to the generation of business profit. Thus, in making the above claim, BATSA proponents are seeking to undo a more than half-century-old consensus between the business community and state tax officials concerning where profits are earned.
- Much more recently, in the early 1990s, the Multistate Tax Commission (MTC, a joint agency of state tax departments) developed model rules aimed at clarifying where profits from such services as banking, publishing, and radio and TV broadcasting should be deemed to be earned. The traditional rules had assigned such income to the states in which the production of those services occurred. The new rules developed by the MTC assign that income to a much greater extent to the states in which the customers of those businesses are located. Several corporations playing a prominent role in lobbying for BATSA supported the adoption of the new MTC rules covering their industries. Thus, the claim that “corporations only earn income where they produce, not where they sell” is inconsistent with the explicit position taken by many of the bill’s proponents as recently as 20 years ago.
- Many corporations supporting BATSA have actively worked to enact legislation at the state level that is based on the premise that corporations earn profits only in the states in which they sell, and not at all in the states in which they produce (see: www.cbpp.org/sites/default/files/atoms/files/1-26-05sfp.pdf).
Under international tax treaties that apply to national corporate income taxes, the nexus threshold for multinational corporations being taxable in another country is a “permanent establishment” (PE), that is, a brick-and-mortar facility. This further demonstrates that the “physical presence” standard that BATSA would implement is an international norm for corporate income tax nexus.
- The PE threshold is part of a U.S. international tax structure that is completely different from the structure of state corporate income taxes and therefore is irrelevant to the nexus rules that should apply to multistate corporations. For example, since U.S.-based corporations are subject to tax on their worldwide incomes, PE rules affect only where a U.S. corporation’s profits are taxed, not if they are taxed. In contrast, if a federal nexus law blocks a state in which a corporation has customers but no direct physical presence from taxing that corporation, a significant share of that corporation’s profit is likely to be completely untaxed by any state. (See: www.cbpp.org/sites/default/files/atoms/files/1-26-05sfp.pdf .)
- Moreover, a significant number of policymakers question the continued appropriateness of the current PE standard for national-level corporate income taxes. As part of its effort to stem widespread corporate income tax “base erosion and profit shifting” (BEPS), for example, the Organisation for Economic Co-operation and Development (OECD) is considering major changes in PE rules. As a recent OECD BEPS task force report noted:
Nowadays it is possible to be heavily involved in the economic life of another country, e.g. by doing business with customers located in that country via the internet, without having a taxable presence therein (such as substantial physical presence or a dependent agent). In an era where non-resident taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere.
Accordingly, the OECD has determined that:
The definition of permanent establishment (PE) must be updated to prevent abuses. In many countries, the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor. In many cases, this has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor by “commissionnaire arrangements” with a resulting shift of profits out of the country where the sales take place without a substantive change in the functions performed in that country. Similarly, MNEs [multinational enterprises] may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and ancillary activities.
It is ironic that even as the OECD is close to approving rule changes restricting corporations’ ability to use “independent” agents and corporate subsidiaries to avoid establishing nexus in countries where they earn profits, BATSA proponents are citing PE rules to justify legislation that would vastly expand corporations’ ability to adopt the same kinds of tax-avoidance practices at the state level.
BATSA contains reasonable “safe harbors” that allow a corporation to have a “de minimis” amount of physical presence in a state before establishing nexus. The provision of BATSA that allows a corporation to have employees or property in the state for up to 14 days in a tax year without creating nexus is such a reasonable “de minimis” threshold.
- The 14-day safe harbor is inconsistent with the underlying rationale for BATSA, which is that a corporation’s tax obligations to a state should be balanced with the benefits it receives from public services provided by the state. For example, BATSA immunizes a corporation with 100 employees in a state for 14 days from all BATs, while a corporation with just one employee in the state for 15 days could be required by a state to pay the BAT. Clearly, the first corporation benefits more than the second corporation from police, fire, transportation, and other services provided to its employees, yet BATSA exempts only the former from taxation.
- The other safe harbors in BATSA are just as illogical and inconsistent with the fundamental rationale offered for the bill. For example, having a million dollar’s worth of inventory in a state that is being stored at an order-fulfillment warehouse run by a business like UPS or Federal Express does not create nexus under BATSA, but owning a building in the state that is worth a million dollars does create nexus. There is no reason to believe that the value of police and fire protection provided to both types of property is any different, yet one type of property creates nexus under BATSA and the other doesn’t.
Public Law 86-272, enacted by Congress in 1959, decrees that a state may not impose a corporate income tax on an out-of-state business whose only activity within the state is soliciting sales of tangible goods (including through the use of a traveling salesforce) if the orders are fulfilled from an out-of-state shipment point. BATSA is needed to “modernize” P.L. 86-272 by extending it to all BATs and to sales of services in addition to sales of goods.
- P.L. 86-272 was intended as a temporary measure to hold a 1959 Supreme Court decision in abeyance. That decision signaled the end of a now completely discarded Supreme Court doctrine holding that states couldn’t tax interstate commerce at all. P.L. 86-272 is an obsolete nexus law that violates the core rationale offered for BATSA: that only physically present businesses should be subject to a BAT because only such businesses benefit from public services. P.L. 86-272 violates this principle because it allows a corporation to have an unlimited number of salespeople in a state and an unlimited amount of goods en route to customers in an unlimited number of company-owned trucks — all of which receive police and fire protection — yet still not create corporate income tax nexus. P.L. 86-272 should be repealed, not broadened, even under a true “physical presence” nexus standard. Its extension to sales of services and other BATs would be the opposite of “modernization.”
- Extending P.L. 86-272 to the sale of services would be problematic and likely to spawn considerable litigation. In the case of a sale of goods, it is possible to draw the line between in-state solicitation of an order and fulfillment of the order from an out-of-state origination point with reasonable objectivity. That will not be true with the sale of services in many instances. For example, if a credit card holder uses her card to borrow cash from an out-of-state bank at an in-state ATM machine, is the service “fulfilled” in-state where the cash is delivered (which the state is likely to assert) or out-of-state at the credit card company’s computer server that electronically “authorizes” the loan (which the bank is likely to assert)? Costly litigation will have to resolve many such questions if BATSA extends P.L. 86-272 to sellers of services.
Many states take the position that if a corporation engages in solicitation or other market-enhancing activity within its borders on behalf of an out-of-state corporation, that creates nexus for the out-of-state corporation. BATSA is needed to stop states from aggressively and unfairly seeking to “attribute” nexus from one corporation to another in this manner. “Attributional nexus” is unfair and unreasonable because the state can tax the income of the in-state corporation and shouldn’t be allowed to tax the income of the out-of-state corporation as well. Therefore, BATSA appropriately provides that the “market-creating” and “market-maintaining” activities of an in-state agent never establish nexus for the out-of-state company on whose behalf the agent is working if the agent represents at least two different clients.
- The U.S. Supreme Court upheld the fairness of “attributional nexus” for BATs more than 25 years ago. In an even earlier sales tax nexus case, the Court observed that allowing a corporation to avoid nexus in a state by having “independent contractors” act on its behalf rather than using its own employees “would open the gates to a stampede of tax avoidance.”
- The provision of BATSA blocking “attributional nexus” seeks to undermine the fundamental and longstanding operation of state corporate income taxes. Such taxes do not seek to divide marketing activities conducted in one state from production activities conducted in another. Rather, once a manufacturer (for example) establishes nexus in a state, that state taxes an apportioned share of the nationwide activities of the business, from the purchase of raw materials up to and including the final sale of the product to the ultimate customer. Under such a system, it makes no sense to bar a state from taxing a share of the profit earned from the manufacturing activities merely because the in-state marketing activities were conducted by a third party rather than the manufacturer’s own employees. Even worse, under BATSA the “market-creating” activities could be conducted by a wholly owned and controlled subsidiary of the manufacturer and not create nexus for the latter, if the goods were produced by two nominally separate subsidiary corporations. (See http://www.cbpp.org/sites/default/files/atoms/files/6-24-08sfp-appendix.pdf, pp. 5-6.)
By establishing a clear, nationally applicable, physical-presence nexus standard, BATSA will substantially reduce nexus-related litigation.
- BATSA contains numerous undefined terms that will generate considerable litigation, just as P.L. 86-272 has generated — and continues to generate — substantial litigation. For example, BATSA declares that nexus is not created by the in-state “conduct [of] limited or transient business activity” but does not define “limited” or “transient.” Because Congress failed to define the key “safe harbor” provision in P.L. 86-272 — “solicitation” — constant litigation occurred for more than 30 years until the U.S. Supreme Court accepted a case that offered some (minimal) guidance. BATSA will generate even more litigation than P.L. 86-272 did, because it is much more far-reaching and complex.
- A comprehensive law review article documented 57 reported court cases involving disputes over the application of P.L. 86-272 as of 2003, and occasional cases have occurred since. BATSA proponents can cite approximately 20 BAT nexus cases that do not involve P.L. 86-272. Thus, the claim of BATSA proponents that “Public Law 86-272 has generated relatively few cases, perhaps a score or two . . . [while] areas outside its coverage have been litigated extensively” is false.
- As documented in CBPP’s analysis of BATSA, enactment of the bill will open up enormous opportunities for corporations to shelter their profits from taxation in many of the states in which they are earned. As a result, states will have no alternative but to use every legal means at their disposal to protect their tax bases. BATSA therefore will not reduce litigation between states and taxpayers, but — at best — merely displace it from nexus cases to cases challenging the use of these “fallback” approaches. For example, many states have discretionary authority to treat in-state and out-of-state subsidiaries as one corporation for tax purposes but rarely use it because doing so entails a heavy burden of proof that usually invites litigation. Because of the damage that BATSA would do to their revenues, states are more likely to use this discretionary “combined reporting” authority, with additional litigation resulting.
- The enactment of BATSA will not bring nationwide uniformity to nexus law. BATSA’s provisions will be interpreted by state courts and, just as occurred under P.L. 86-272, state courts will reach different conclusions about what the provisions mean. Only a U.S. Supreme Court decision interpreting BATSA can provide a measure of national nexus law uniformity, and in the more than 50-year history of P.L. 86-272, the Court has accepted a single appeal from a state P.L. 86-272 case of general applicability.
BATSA is needed to prevent “double taxation” of corporate income, which is burdening corporations and stifling commerce.
- Proponents of BATSA have not provided any concrete examples of corporations subject to double taxation of their income. And, as another CBPP report explains, BATSA is likely to vastly increase the share of U.S. corporate profit that is “nowhere income” not subject to tax by any state. (See: http://www.cbpp.org/sites/default/files/atoms/files/1-26-05sfp.pdf)
- Restricting state taxing jurisdiction is an unnecessary and excessive mechanism for preventing double taxation of corporate income in any case. States can substantially eliminate the potential for such double taxation by adopting uniform “apportionment” rules governing the division among the states of the profits of multistate corporations. Yet as documented in the report cited in the previous paragraph, many BATSA proponents have pushed states toward non-uniformity in their apportionment rules. In short, offering “double taxation” as a justification for BATSA is both unsupported by facts and hypocritical.
BATSA is needed to prevent “taxation without representation.” Businesses have no political representation or influence in states in which they have no physical presence and will face unfair tax burdens if they are subject to taxation in such states.
- This argument has been forcefully rebutted by leading state tax experts Walter Hellerstein of the University of Georgia Law School and Charles McLure of Stanford University’s Hoover Institution. They note that corporations don’t have the right to vote. In addition, states have an unquestioned right to tax the income earned within their borders and property owned there by non-resident individuals, who also don’t have the right to vote in states in which they are subject to taxation. In short, “no taxation without representation” as an argument for BATSA is a red herring.
- Hellerstein and McLure also observe that because the courts have made clear that states may not discriminate in their tax policies against out-of-state businesses, lobbying by in-state businesses (which clearly do have significant political influence in a state) against onerous tax policies also protects the interests of out-of-state businesses.
There is a disturbing trend of states raising revenues through aggressive assertion of nexus over out-of-state companies with little or no presence within their borders, which the states then use to finance economic development tax breaks to corporations with substantial property or employees within the state. BATSA is needed to stop such discrimination in favor of in-state firms at the expense of out-of-state firms.
This is an ironic argument for BATSA proponents to make:
- A number of corporations supporting BATSA have worked actively for an increasingly common change in state tax policy that, in the name of economic development, is explicitly aimed at shifting the corporate income tax burden off of corporations with a substantial physical presence in a state and on to out-of-state corporations with little physical presence in a state. (See: http://www.cbpp.org/sites/default/files/atoms/files/1-26-05sfp.pdf.) For example, Bayer Corporation, Dick’s Sporting Goods, General Electric, The Walt Disney Company, and Johnson & Johnson are members of coalitions that have actively lobbied for this policy (a “single sales factor apportionment formula”) in Pennsylvania and California.
- Many business organizations supporting BATSA also sought the enactment of the “Economic Development Act of 2005” (S. 1066/H.R. 2471). The goal of this bill was to preserve existing state economic development tax incentives. The EDA was aimed at stopping challenges to tax incentives based on the argument that they discriminate against out-of-state businesses in violation of the Constitution’s Commerce Clause. In other words, the many BATSA proponents that also supported the EDA tried to preserve the right of states to discriminate in favor of in-state businesses by providing them with tax breaks.
- BATSA itself has one provision that intentionally discriminates against certain out-of-state businesses in the name of state economic development. In order to help states drum up business for in-state corporations from out-of-state corporations, BATSA declares that physical presence in a state in connection with purchasing from an in-state business is not nexus-creating. This provision discriminates against out-of-state businesses that may have an equivalent number of employees or an equivalent amount of property in a state but will not be exempted from state taxation by BATSA because that physical presence is involved in selling to an in-state business.
The aggressive efforts of state tax administrators to assert nexus over corporations that merely have customers within their borders are creating enormous uncertainty for these businesses about their BAT payment obligations. This uncertainty impedes interstate economic activity, encouraging U.S. corporations to invest abroad rather than here and discouraging foreign corporations from investing in the United States.
- BATSA proponents substantially exaggerate both the nexus enforcement efforts of state tax officials and the uncertainty surrounding the state of BAT nexus law. There is no uncertainty about the nexus rules that apply to businesses that conduct the vast majority of transactions in the U.S. economy. P.L. 86-272 governs the application of state corporate income taxes to sellers of physical goods, and state tax officials can’t get around it no matter how “aggressive” they might like to be. And, where P.L. 86-272 doesn’t apply, there is little ambiguity in practice because the majority of transactions are made with some in-state physical presence of the selling corporation (which clearly creates nexus). The majority of court cases and enforcement actions initiated by states to compel income tax payments by allegedly non-physically-present corporations have been aimed at nullifying a single, abusive tax shelter that, in fact, relies on the physical presence within the state of the out-of-state corporation’s trademark.
- For the entire 15-year period that BATSA has been under consideration in Congress, its proponents have claimed that its rapid enactment is urgent because the allegedly aggressive assertion of nexus by state tax officials is chilling interstate commerce. Yet with millions of businesses operating in the United States, BATSA proponents have cited only a single concrete example of a company that allegedly decided not to make cross-border sales into a (single) state because of the state’s assertion of nexus over it despite its lack of physical presence within the state. It is highly unlikely that large, national businesses are constraining their own growth by not doing business in particular states because of BAT nexus issues. Are national fast-food chains refusing to license franchisees in particular states because of fears of assertion of nexus over the franchisor? Are national banks refusing to issue credit cards to residents of particular states because of nexus concerns? Until such examples are provided and documented, claims that interstate commerce — and therefore job growth — is being significantly stifled by concerns about creating BAT nexus in additional states lack credibility.
- If anything, the enactment of BATSA is likely to harm the economy by providing a disincentive for optimal business location decisions. As the former director of the Oregon Department of Revenue has argued:
[I]n an era when companies can make substantial quantities of sales and earn substantial income within a state from outside that state, the concept of “physical activity” as a standard for state taxing authority [nexus] is inappropriate. . . . If a company is subject to state and local taxes only when it creates jobs and facilities in a state, then many companies will choose not to create additional jobs and invest in additional facilities in other states. Instead, many companies will choose to make sales into and earn income from the states without investing in them. If Congress ties states to physical activity concepts of taxing jurisdiction, Congress will be choosing to freeze investment in some areas and prevent the flow of new technology and economic prosperity in a balanced way across the nation.
BATSA proponents argue that the bill is needed to prevent “aggressive” state assertion of nexus from stifling interstate commerce, which they suggest is synonymous with interstate sales. They fail to acknowledge that interstate commerce also encompasses interstate investment and job creation, and that BATSA has the potential to discourage this by creating an artificial, tax-based incentive for corporations to tap into the consumer market in a state without placing facilities and jobs within the state’s borders.
- This same logic undermines the (unsubstantiated) claims that nexus uncertainty is encouraging U.S. businesses to produce abroad and discouraging foreign direct investment in the United States. If anything, it is much more likely that the enactment of BATSA would have these effects. BATSA would allow both foreign subsidiaries of U.S.-based corporations and foreign-based corporations to conduct more activities in the United States to establish and maintain their markets here without creating BAT nexus. This could encourage them to fulfill U.S. demand for their goods and services through export from foreign factories and other facilities rather than produce those goods and services here with American workers. Moreover, the data on foreign direct investment do not substantiate the claim that BAT nexus uncertainty is discouraging foreign direct investment here. While such investment fluctuates enormously over the business cycle and remains below the peak year of 2000, it rose fairly steadily from 2002 through 2008, when the Great Recession took hold. Since then it has remained well above the level of the early 1990s, when a few states began to enforce the allegedly aggressive, “economic presence” approach to defining nexus.[19
Remember, most of these corporate tax deregulation and corporate subsidy cronyism started to soar under CLINTON/BUSH/OBAMA----it won't be Trump's fault as he moves all this forward.
'Enter the publicani, equestrians with tax collecting contracts'.
ONE WORLD ONE GOVERNANCE ONE GREAT BIG PUBLICANI CORPORATION!
Publicani, the Ancient Roman Tax Collectors
latintutorial YOU TUBE
Published on Feb 15, 2016Ancient Rome didn't have a part of its government devoted to collecting taxes. In fact, Rome didn't have much of a government at all under the Caesars. So how could the public be exploited through taxes? Enter the publicani, equestrians with tax collecting contracts.