State could collect more from profit shifters under bills

Seeing as Minnesota has a lot of lakes and abuts a big one in Lake Superior, you may not be surprised to learn that we’re a “water’s edge” state. But what that means in tax terms is we don’t subject to state corporate taxes any income produced beyond U.S. borders.

That would change under a pair of bills laid over by the House Taxes Committee Wednesday for possible omnibus bill inclusion.

HF2114, sponsored by the committee’s chair, Rep. Paul Marquart (DFL-Dilworth), would make all income of a controlled foreign corporation subject to the state’s tax apportionment formula.

Similarly, HF2228, sponsored by Rep. Michael Howard (DFL-Richfield), would require a unitary group of related corporations with a domestic charter of incorporation to report its worldwide income, which would be subject to state taxes.

Neither bill has a Senate companion, so it’s possible this could be a sticking point in conference committee.

Especially since it was presented to the committee in February as part of tax proposals put forth by Gov. Tim Walz. Repatriated foreign income was suggested as a useful element in potentially pulling the state out of a projected budget deficit. An updated forecast now projects a surplus for the upcoming biennium.

Sure enough, the Revenue Department estimates that the provisions in HF2114 would increase General Fund revenue by $250.4 million in fiscal year 2022, while those in HF2228 would do so by $292.7 million.

Actually, the bills interact in that HF2114 would allow corporations to choose whether to declare worldwide income as provided for in HF2228 or to include their global intangible low-tax income on their Minnesota tax returns.

“This bill is about taking corporate profits that are earned in Minnesota and should be apportioned in Minnesota that are shifted to multinational subsidiaries, and bringing them back to Minnesota,” Marquart said. “It’s about competitive fairness for small business. It puts our Main Street businesses at a disadvantage because they can’t ship their profits to other countries.”

Marquart offered a brief tutorial.

“Profit shifting is when a domestic U.S. corporation shifts profits earned in the U.S., by using various methods, to low-tax nations,” he said. “They need to do this through controlled foreign corporations. This is eroding the U.S. tax base and ultimately Minnesota’s. ... In 2014, U.S. corporations had to report their foreign profits. This showed that there were $96 billion in profits in Bermuda, a country with a gross domestic product of $6 billion. Similarly, companies showed profits in the Cayman Islands of $40 billion, in a country with a $3 billion GDP.

“How is this occurring? The most prevalent example is when a domestic corporation transfers intellectual property like patents or internet domain names to one of their CFC’s in a low-tax nation. Then they will lease those back, increase their expenses and their deductions, and lower their income.

“Is this legal? Absolutely. But it creates huge competitive disadvantages.”

When the federal government spots a red flag in a corporation’s taxes – for example, the company saying it earned many times a country’s GDP – it identifies it as global intangible low-taxed income, which is subject to special treatment under the U.S. tax code. HF2114 would require that income to be included in the calculations when apportioning income to Minnesota.

“No other state has worldwide reporting,” said Jill Larson, deputy executive director of the Minnesota Business Partnership, in testifying against the bill. “This would make Minnesota an extreme outlier.”

But Melissa Hysing, legislative director for the Minnesota AFL-CIO, sees it differently.

“We want to remind committee members that the 2017 federal tax bill gave large corporations massive permanent tax cuts, and many have been thriving during this crisis,” she said. “A recent analysis by the Washington Post of the 50 most valuable publicly traded U.S. companies found that during the first six months of the pandemic, 45 of the 50 turned a profit. Combined, these companies laid off a total of 100,000 workers, while distributing more than $240 billion to shareholders.”

“We’ve gotta do something,” Marquart said. “This is part of our tax policy that is broken. We can’t allow corporations to arbitrarily choose how much they’ll pay.”