[Senate Hearing 118-293]
[From the U.S. Government Publishing Office]
S. Hrg. 118-293
SUNNY PLACES FOR SHADY PEOPLE:
OFFSHORE TAX EVASION BY THE
WEALTHY AND CORPORATIONS
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
April 10, 2024
__________
Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-697 PDF WASHINGTON : 2024
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COMMITTEE ON THE BUDGET
SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia MITT ROMNEY, Utah
JEFF MERKLEY, Oregon ROGER MARSHALL, Kansas
TIM KAINE, Virginia MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico RICK SCOTT, Florida
ALEX PADILLA, California MIKE LEE, Utah
Dan Dudis, Majority Staff Director
Kolan Davis, Republican Staff Director and Chief Counsel
Mallory B. Nersesian, Chief Clerk
Alexander C. Scioscia, Hearing Clerk
C O N T E N T S
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WEDNESDAY, APRIL 10, 2024
OPENING STATEMENTS BY COMMITTEE MEMBERS
Page
Senator Sheldon Whitehouse, Chairman............................. 1
Prepared Statement........................................... 24
Senator Charles E. Grassley...................................... 3
Prepared Statement........................................... 26
STATEMENTS BY COMMITTEE MEMBERS
Senator Ron Johnson.............................................. 13
Senator Chris Van Hollen......................................... 15
Senator John Kennedy............................................. 17
Senator Ron Wyden................................................ 19
Senator Mike Braun............................................... 21
WITNESSES
Ms. Zorka Milin, Policy Director, Financial Accountability and
Corporate Transparency (FACT) Coalition........................ 5
Prepared Statement........................................... 29
Mr. Stephen L. Curtis, President, Cross Border Analytics, Inc.... 7
Prepared Statement........................................... 36
Mr. Daniel Bunn, President and CEO, Tax Foundation............... 9
Prepared Statement........................................... 48
APPENDIX
Responses to post-hearing questions for the Record
Ms. Milin.................................................... 54
Mr. Curtis................................................... 58
Mr. Bunn..................................................... 64
Chart submitted by Chairman Sheldon Whitehouse................... 68
Charts submitted by Mr. Curtis................................... 69
Statement submitted for the Record by Mr. Curtis................ 71
Statement submitted for the Record by Democrats Abroad........... 82
SUNNY PLACES FOR SHADY PEOPLE:
OFFSHORE TAX EVASION BY THE WEALTHY
AND CORPORATIONS
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WEDNESDAY, APRIL 10, 2024
Committee on the Budget,
U.S. Senate,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:04
a.m., in the Dirksen Senate Office Building, Room SD-608, Hon.
Sheldon Whitehouse, Chairman of the Committee, presiding.
Present: Senators Whitehouse, Wyden, Van Hollen, Grassley,
Johnson, Braun, Kennedy and R. Scott.
Also present: Democratic Staff: Dan Dudis, Majority Staff
Director; Dan RuBoss, Senior Tax and Economic Advisor and
Member Outreach Director; Sion Bell, Tax Policy Advisor.
Republican Staff: Chris Conlin, Deputy Staff Director;
Krisann Pearce, General Counsel; Nick Wyatt, Professional Staff
Member; Ryan Flynn, Staff Assistant.
Witnesses:
Ms. Zorka Milin, Policy Director, Financial Accountability
and Corporate Transparency (FACT) Coalition
Mr. Stephen L. Curtis, President, Cross Border Analytics,
Inc.
Mr. Daniel Bunn, President and CEO, Tax Foundation
OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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\1\ Prepared statement of Chairman Whitehouse appears in the
appendix on page 24.
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Chairman Whitehouse. Good morning. This hearing of the
Budget Committee will come to order. The Ranking Member is very
nearby, and I've been instructed by his staff that I may
proceed. I'll do my opening statement, the Ranking Member will
do his, and we'll turn to introductions of our three witnesses,
and each of you will have five minutes to make your verbal
statement and your complete testimony will be made a part of
the record of the proceedings.
Good morning, Chuck. How are you, sir?
On Tax Day, Monday, the vast majority of Americans will
have paid the taxes they owe. That's because most Americans
have taxes taken out of every paycheck automatically and on
time. Most Americans understand that paying taxes is not just a
legal obligation, it's also a duty to their communities and to
their country. But there are super-rich individuals and giant
corporations who chose not to pay their fair share of taxes.
Instead, they chose to cheat everyone. They hide income in
offshore tax havens and construct sham transactions and
entities to cheat everyone else.
Most Americans don't have offshore bank accounts. The
super-rich stash nearly $2 trillion in offshore tax havens. The
top 0.01 percent, representing only about 13,000 households,
hold more than a third of that 2 trillion often through tangled
webs of shell companies.
The Internal Revenue Service (IRS) estimates tax cheats
cost the U.S. at least $688 billion in 2021 alone. Trump's IRS
Commissioner, Charles Rettig, told the Senate Finance Committee
that the actual annual tax gap could be $1 trillion.
One of our witnesses, Stephen Curtis, estimates that we
could raise $600 billion from just a handful of scofflaw
corporations for many years' worth of unpaid taxes. We have
seen in my lifetime a collapse in the share of United States
(U.S.) revenues that corporations contribute down to 6 percent
at the same time that corporate profits have soared.
A lot of that collapse of the corporate share of America's
revenue is through tax tricks like offshoring. In 2010,
Congress gave the IRS a new tool to root out offshore evasion
by individuals. The Foreign Account Tax Compliance Act, or
FATCA, made foreign banks report offshore accounts held by
Americans to the IRS, but Republican cuts hamstrung the IRS and
in 2018 the Treasury Inspector General for Tax Administration
found that, and I'm quoting here, ``the IRS had taken virtually
no compliance actions to meaningfully enforce FATCA.''
Most Americans had their incomes reported to the IRS by
their employer. The super-rich with offshore accounts were on
the honor system. Guess how that worked out? For large
multinational corporations, compliance can turn on whether the
IRS can investigate its way through their armies of lawyers,
accountants, and even lobbyists employed to avoid taxes.
A huge amount of revenue can be hidden by a big
corporation. The IRS has taken one Pharma giant to court for
$10 billion in unpaid taxes, more than the entire proposed Food
and Drug Administration (FDA) budget for next year. The Senate
Finance Committee investigation showed the company reported 60
percent of its profits offshore despite making 74 percent of
its sales to U.S. patients.
Facebook owes $9 billion for its own offshore tax schemes,
according to the IRS, enough to fund President Biden's proposal
to expand health coverage for kids. Microsoft, according to the
IRS, owes a whopping $29 billion for what one of its executives
called a pure tax play, enough loss revenue to fund, for
instance, a $10,000 tax credit for American first-time
homebuyers.
For years, the outgunned IRS, hampered by Republican budget
cuts, struggled against billionaires and corporations with
virtually unlimited resources at their disposal. In the
Facebook case, with time ticking on the statute of limitations,
the company sought to run out the clock on the IRS
investigation. The IRS had to pause its audit because it didn't
have the money to hire an economist.
What can we do to stop offshore tax evasion? First,
preserve and extend the Enforcement Funding enacted by the
Inflation Reduction Act (IRA). We're already seeing the
enforcement results. Since last fall, the IRS has recovered
nearly $500 million just from millionaires who didn't even
bother to file tax returns.
Second, the IRS and Treasury should enforce the FATCA law.
Mr. Curtis has outlined additional enforcement strategies that
deserve serious consideration. Treasury should use its
rulemaking authority to close loopholes and improve consistency
and fairness. A good start would be reversing the so-called
``check the box'' regulations for foreign subsidiaries, as Ms.
Milin mentions in her testimony.
Cracking down on offshore tax cheating would raise billions
of dollars a year to invest in our economic future or to reduce
the deficit. But it's not just about dollars and cents. It's
also about basic fairness. When people who've got the most
money cheat on people who've got the least money by avoiding
their taxes to get even richer, there's a price. Law-abiding
taxpayers have to pick up the slack, public services go
underfunded, deficits worsen. And, oh, by the way, it's wrong
to cheat and a Congress that takes the side of the cheats
demeans itself.
Some colleagues think the only way to reduce deficits is to
take away government services. Well, that's obviously not true.
Some colleagues would rather cut Social Security and Medicare
or withhold child tax credits than crack down on big tax
cheaters. Well, that would be wrong. If we stop giving big tax
cheaters amnesty for their scams, if we clean up our corrupted
tax code, and if we make important, value-based healthcare
reforms, we can make real progress reducing deficits. I hope
that's the path that we chose.
Chairman Whitehouse. And I turn now to our distinguished
Ranking Member, Senator Grassley.
OPENING STATEMENT OF SENATOR GRASSLEY \2\
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\2\ Prepared statement of Senator Grassley appears in the appendix
on page 26.
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Senator Grassley. Yes, I appreciate your holding today's
hearing on offshore tax evasion and closing the tax gap. I
think I have some experience in this area, and I've got some
experience on what I think works and what doesn't work and
that's what I'd like to discuss.
But talking about the tax gap, I remember what my late
friend and former Finance Committee Chairman, Orrin Hatch,
referred to as the tax gap, and this is his quote, ``the great
white whale of deficit reduction.'' Endlessly pursued in other
words, but forever eluding capture. No aspect of the tax gap
has been examined more than that of offshore tax evasion.
Between 2001 and 2010, Senator Baucus and I partnered together
in an effort to shut down the most egregious offshore tax
evasion and avoidance.
We enacted various pieces of legislation, held hearings,
commissioned studies, and even sent the Government
Accountability Office (GAO) to that famous Ugland House in the
Cayman Islands, the notorious registered office home of
thousands of offshore business entities. I'm proud of what we
were able to accomplish shutting down egregious tax practices,
raised billions of dollars in additional revenue, but not the
hundreds of billions some claimed are ripe for the picking.
The reality is that there are no pots of gold that can be
easily harvested off of the beaches of far-flung tax havens.
Even so, we owe it to the honest taxpayer, as a matter of
fairness, as the Chairman referred to, if for no other reason
than to snuff out tax evasion where we can. Those engaged in
tax evasion aren't only shortchanging the Federal Government,
but stealing from the American taxpayers. After all, it's the
law-abiding taxpayers who end up footing the bill. That's why
I've long championed reasonable policies intended to discourage
evasion while providing tools to the IRS to detect tax cheats,
but a key word here is reasonable.
Whether it's increased financial reporting or stepped-up
enforcement efforts, anti-evasion measures must be balanced
against taxpayers' rights and the cost such measures imposed on
innocent taxpayers. When it comes to catching tax cheats, I've
found targeted approaches to being far more preferable to
broadly applicable ones that sweep up innocent taxpayers in far
greater numbers than tax cheats.
One example of an overly broad sweep approach to offshore
tax evasion is the Foreign Accounts Tax Compliance Act or FATCA
enacted in 2010. FATCA imposed stringent requirements on
foreign financial institutions to report to the U.S. Treasury
on foreign assets held by their American account holders. In
2010, Democrats sold this law as a solution to wealthy tax
cheats hiding assets in offshore bank accounts. Yet, according
to a 2022 Treasury Inspector General report, other than
assessing $14 million in penalties, the IRS hasn't been able to
quantify any revenue raised under the law, and that is despite
spending $574 million on implementation and enforcement
campaigns.
Now, at the same time, FATCA has imposed great costs on the
Americans living abroad. According to the 2019 GAO report, due
to the law many Americans living overseas have seen their bank
accounts closed or been unable to open an account. For many
foreign financial institutions, the business of Americans
living abroad simply isn't worth the additional burdens and
costs of complying with the law.
Compare this, then, with an approach that I've used--the
IRS's whistleblower law I authored in 2006 which has brought in
over $6 billion to the Treasury. Under this law, a single
whistleblower--now just a single whistleblower took down an
offshore banking scheme that resulted in Swiss Banking UBS
paying $750 million in fines. In addition, thousands of illicit
overseas accounts were closed, and offending taxpayers
prosecuted.
Now, whether it's offshore banking schemes, a tangled web
of shell companies, or illicit transactions by shady
multinational companies, a single whistleblower can bring the
whole house of cards crashing down and at less cost and with
fewer burdens for the innocent taxpayer.
Finally, we shouldn't discount the value of good tax policy
itself in shrinking evasion and avoidance. The Tax Cut and Jobs
Act (TCJA) combined anti-based erosion and profit shifting
measures with a cut in corporate tax rates. Since its
enactment, we have seen intellectual property (IP) previously
held offshore for tax reasons returned to the United States.
Moreover, the act of companies moving their headquarters
offshore to avoid U.S. tax has ceased. Combating the tax
evasion is something we have an obligation to do, but we need
to be realistic about what our policies will affect and how
much revenue we actually stand to gain and enacting bad policy
that increases tax complexity and threatens the international
competitiveness of U.S. companies would only make matters
worse. Thank you very much.
Chairman Whitehouse. Thank you very much, Senator Grassley.
Let me recognize and thank you for your many years of work in
this space, and particularly, for mentioning Ugland House,
which brings back to me happy memories of my predecessor in
this chair, Kent Conrad, who had a graphic photo that he used
regularly of Ugland House, and we saw it a lot. It's nice to
have the memory of Chairman Conrad revived today.
Now, our first witness is Ms. Zorka Milin, who is the
Policy Director of the Financial Accountability and Corporate
Transparency Coalition, the FACT Coalition. Milin previously
served as senior advisor at financial transparency watchdog
Global Witness, and also practiced international tax law.
Next, after her, is Stephen Curtis, who is the President of
Cross Board Analytics, a consulting firm focused on transfer
pricing software and economics. He has 27 years of experience
as a corporate practitioner and previously was an economist and
partner at Price Waterhouse Coopers and Ernst and Young.
Finally, we have Daniel Bunn, the President and Chief
Executive Officer (CEO) of the Tax Foundation, where he has
served in various roles since 2018. Previously, he worked for
the Joint Economic Committee as part of Senator Lee's Social
Capital Project and on the policy staff for Senators Lee and
Scott. Ms. Milin, please proceed.
STATEMENT OF ZORKA MILIN, POLICY DIRECTOR, FINANCIAL
ACCOUNTABILITY AND CORPORATE TRANSPARENCY (FACT) COALITION \3\
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\3\ Prepared statement of Ms. Milin appears in the appendix on page
29.
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Ms. Milin. Thank you. Chairman Whitehouse, Ranking Member
Grassley, members of the Committee, thank you for inviting me
today to share my views on how we can tackle offshore tax
evasion. I'm here on behalf of the Financial Accountability and
Corporate Transparency, or FACT Coalition. We're a broad,
nonpartisan alliance of more than 100 civil society business
and labor organizations.
Right now, many Americans are working to meet their tax
obligations and file their tax returns before Tax Day. Most of
us want to do the right thing. We are the honest, law-abiding
majority, but there's a small, dishonest minority of
individuals and businesses who are breaking the law and dodging
their taxes very often by stashing their money abroad. Put
simply, offshore tax evasion is a crime and it's far from a
victimless crime because it gives an unfair advantage to tax
cheats at the expense of those who play by the rules.
When some of us fail to pay what they owe that takes away
money from everyone else. It leads to higher taxes and
ballooning budget deficits, and it robs us of the resources
needed for shared national priorities like defense, healthcare,
education. This is an enormous problem. Trillions of dollars in
U.S. individual wealth are stashed overseas, much of it in tax
havens and the main culprits are a relative handful of
extremely wealthy Americans. These tax evaders use many tools
and tactics, from secret Swiss bank accounts and anonymous
shell companies to complex offshore structures.
The good news is the U.S. is starting to crack down on
these tax dodgers. But to get the job done, it will take
resources and determination. I'd like to put forward four
solutions. First, we need to better enforce our financial
transparency laws because offshore tax evasion thrives in
secrecy. A breakthrough in our fight against offshore evasion
was the passage of the Foreign Account Tax Compliance Act known
as FATCA, which has been in effect since 2015.
FATCA requires foreign banks to send to the IRS data on
accounts held by U.S. taxpayers and is typically implemented
through bilateral agreements with other governments. Research
shows that FATCA has helped to reduce deposits by U.S. citizens
in tax havens and that offshore tax evasion has declined by a
factor of about three over the last decade, but unfortunately,
we still see brazen violations.
For example, recently a Florida businessman was arrested
and indicted for hiding more than $20 million in Credit Suisse
and other secret Swiss bank accounts. The Senate Finance
Committee has uncovered how Credit Suisse bankers failed to
comply with FATCA and with Credit Suisse's plea deal with the
Department of Justice (DOJ). We also need to make sure that the
IRS has the resources needed to fully leverage the data
disclosed under FATCA in order to collect the taxes that are
owed.
Beyond our borders, FATCA has had a dramatic global effect
galvanizing more than 100 other countries to join forces to
automatically exchange bank account information, but the U.S.
is not a part of that global standard and as a result risks
becoming a tax haven for foreign tax cheats. We should do more
so the information flows both ways, not only to help our
partner countries; this would also be in our interest. Other
countries willingness to share information with the U.S.
depends on our willingness and ability to reciprocate.
Second, in addition to FATCA, Congress has created a
valuable new transparency tool, the bipartisan Corporate
Transparency Act (CTA), which gives the IRS access to a new
database identifying the true owners of U.S. legal entities.
Ownership transparency is important because shell companies are
a significant conduit for tax evasion. For tax, as well as
anti-money laundering purposes, the government must continue to
vigorously defend the CTA against unfounded legal challenges.
Third, we also need to crack down on tax dodging by large
multinational corporations through better, tougher enforcement
of our current transfer pricing rules. Right now it's too easy
for big corporations to go beyond the law with fewer
precautions. The IRS needs more resources so it can take on
complexed transfer pricing schemes by big companies like
Microsoft, and Mr. Curtis will discuss that in more detail.
But I'd like to point out that transfer pricing also
presents huge financial risks for investors. To protect
investors from these risks the Securities and Exchange
Commission (SEC) should mandate more detailed tax reporting by
U.S. listed issuers, requiring basic information for each
country of operation, known as public country-by-country
reporting. Investor scrutiny would help to deter some of the
most aggressive and illegal transfer pricing practices now
underway.
Fourth, current Treasury rules allow corporations to check
a box on a tax form to effectively make an offshore subsidiary
and its otherwise taxable income disappear. This provision,
known as ``check the box election,'' harms our economy and
facilitates offshoring of jobs and profits. While technically
legal, this tax practice has lead to substantial losses to our
economy to the tune of more than 1 million American jobs and
more than $40 billion per year in lost domestic business
earnings according to a recent Brookings analysis. Treasury
should put a stop to these losses and repeal the ``check the
box'' selection rule.
I want to thank the members and staff of the Senate Budget
Committee for holding this important hearing today and I
welcome your questions.
Chairman Whitehouse. Thank you very much, Ms. Milin. Mr.
Curtis, please proceed.
STATEMENT OF STEPHEN L. CURTIS, PRESIDENT, CROSS BORDER
ANALYTICS, INC.\4\
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\4\ Prepared statement of Mr. Curtis appears in the appendix on
page 36.
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Mr. Curtis. Chairman Whitehouse, Ranking Member Grassley,
and distinguished members of the Committee, thank you for
inviting me to share my research on corporate offshore profit
shifting and related enforcement issues. I've been performing
transfer pricing projects for around 27 years, mostly as an
economist and partner in two Big Four accounting firms before
starting a consultancy in 2013 to develop forensic models and
technology for transfer pricing enforcement.
I began publishing these models in academic papers in 2016
and then in 2020 began working with a team of distinguished
academics to publish cases of offshore tax evasion by
multinationals. As seen here in Figure 1, from my written
testimony, this table summarizes 10 of our studies since 2020,
including 8 that have been published in Tax Notes, documenting
around $600 billion in revenues that we believe the IRS could
potentially recover for violations of the 2009 research and
development (R&D) cost-sharing regulation. We estimate that the
amounts owed for similar violations across all U.S. companies
employing similar arrangements could reach around $1 trillion
or more.
Figure 2 shows a chart based on research by Kimberly
Clausing, who previously testified before this Committee,
showing how U.S. federal and state tax underpayments from
offshore profit shifting have grown exponentially in recent
decades to around $140 billion per year by 2015. Research in
2023, cited in my written testimony, found no material impact
on offshore profit shifting after the Tax Cuts and Jobs Act of
2017.
Put simply, the IRS is overmatched, understaffed,
underfunded, and operating with vast information and resource
asymmetries against sophisticated taxpayers with virtually
unlimited resources. The IRS audits around a third of the
largest 3,800 U.S. companies and around 50 percent of these
conclude with no change result and only a fraction of these
exams ever involve transfer pricing, or the prices assigned to
cross boarder intercompany transactions by related affiliates
of the same multinational companies, often manipulated to move
taxable U.S. profits out of the U.S. tax net.
Here are a few examples of transfer pricing that passed IRS
exam. A U.S. company's most profitable subsidiary is a tax
haven shell company in Ireland that exists only on paper with
no employees. A U.S. Internet company serves billions of users
from around the world and its average cost per user is $21, but
it records $92 in the U.S. on its U.S. tax returns, but only
$12 offshore, which inflates its foreign pre-tax income to
twice that of its U.S. pre-tax income, or a U.S. company that
designs, builds, and exports products from the U.S. directly to
foreign customers, records the majority of these sales and
profits into Irish tax haven shell companies for distribution
operations that never touch the product.
So, how does this happen? Well, consider how one company
evaded around $100 billion in U.S. taxes, despite a decade of
continuous IRS exams and a Senate investigation in 2013. Figure
4 from my written testimony shows excerpts from a contract
required by the 2009 regulation mentioned earlier in order to
be exempt from some of the provisions of that law. Note how the
contract contains the words such as ``functions performed by''
these Irish affiliates listed in the contract.
These words could not be more clear in a document supported
by comments made under oath to the Senate Permanent
Subcommittee on Investigations (PSI). However, compare these
words with statements shown in Figure 5. These statements were
made 3 years later to European regulators, likewise, under
oath. These comments testify that the purported functions
performed by the Irish affiliates in the contract were actually
never performed by these affiliates at all, but instead by the
U.S. parent company, who booked their expenses against U.S.
profits. The income, however, was booked into two nontaxable
shell company branches of the Irish affiliates listed in the
contract.
These facts violate a cascade of tax regulations that the
IRS currently does not enforce, such as periodic adjustments on
effectively connected income for which we estimate this
taxpayer could be on the hook for around $200 billion.
In summary, our research over the past decade has found
that many corporate tax laws remain unenforced and that
offshore profit shifting continues unabated. However, many tax
underpayments going back a decade or more remain collectible,
some with no statute of limitation. The Inflation Reduction Act
funding for the IRS can provide targeted improvements that we
believe can recover $1 trillion or more from noncompliant
transfer pricing and other forms of corporate tax evasion while
reducing exams of compliant taxpayers and leading to more
voluntary compliance so that corporations pay their fair share.
I welcome your questions.
Chairman Whitehouse. Thank you very much. And before I turn
to Mr. Bunn, I just want to acknowledge the role of our friend
and former colleague, Senator McCain, in the proceedings that
you described, Mr. Curtis. We miss him to this day and I'm glad
that you mentioned his work. Mr. Bunn.
STATEMENT OF DANIEL BUNN, PRESIDENT AND CEO, TAX FOUNDATION \5\
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\5\ Prepared statement of Mr. Bunn appears in the appendix on page
48.
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Mr. Bunn. Chairman Whitehouse, Ranking Member Grassley,
members of the Committee, thank you so much for having me here
today for this hearing on offshore tax evasion. At the outset,
I want to distinguish between evasion, which is illegal, and
avoidance, which is the use of different policies that are in
the Tax Code, legal measures to reduce exposure to higher tax
burdens.
My view on evasion is simple. The Internal Revenue Service
should enforce existing tax rules so that evaders are brought
to justice and pay the correct amount of tax. On avoidance, we
get into a lot of policy questions. There are many things in
the Tax Code, domestic and cross border that provide
opportunities for individuals or businesses to reduce their
legal tax liability and it is up to policymakers to think
through the different tradeoff.
Ranking Member Grassley mentioned some of these, on what is
the appropriate enforcement mechanisms and the appropriate
policies to increase tax compliance. I'll mention the tax gap
as well. The Chairman mentioned the size of the tax gap
estimated in the $600 billion range for 2021. However, when you
look at the gap between revenues and outlays, even 100 percent
compliance does not close the deficit in the years that we've
seen, even over the previous decade, so there's a policy
question of what the appropriate measures should be to either
enforce existing rules or how existing rules could be changed
to recognize the tradeoffs between policy and enforcement of
those policies.
The U.S. is an outlier when it comes to offshore income or
foreign income. The U.S. has historically used worldwide rules
to tax the incomes of individuals and businesses. On the
individual side, we are the only country, other than Eritrea in
East Africa, that taxes our citizens on their worldwide income
and that requires us to have different policies to enforce
those rules. Now, the whistleblower policies, the FATCA that
have been mentioned, those incur different costs for taxpayers
to be able to comply with this worldwide tax system for
individual income.
On the FATCA, what we have seen as it has been rolled out
and enforced, we have seen a spike in U.S. citizens who are
often living abroad revoking their U.S. citizenship to avoid
the high burden of compliance with the FATCA. So, that, to me,
suggests there's a problem with the underlying policy of
citizenship-based taxation.
On the business side, up until 2017, we had a full
worldwide tax system for business income where we would pay
attention to income earned wherever it was in the world, but
there was an option for companies to defer U.S. taxation of
their foreign income and not repatriate the profits to avoid
paying our 35 percent corporate tax rate at the time. This
created a lot of bad incentives for businesses to create all
sorts of creative structures to avoid having to pay that 35
percent rate on repatriating profits.
In 2017, though, policymakers chose to lower the corporate
tax rate and enact a number of transition rules and anti-
avoidance mechanisms that, in my opinion, have improved the
U.S. tax system for corporate income, particularly offshore
income. Now, not everything with the Tax Cuts and Jobs Act was
perfect, and even some of those anti-avoidance measures are not
perfect. But, in general, it was a move in the right direction,
and we have seen intellectual property profits move back to the
United States as a result of the Tax Cuts and Jobs Act and
other changes internationally. And that's where I think
policymakers should also be thinking, not just with the
rearview lens, but also looking forward, paying attention to
where policy might change in the coming years.
Next year is an opportunity with the expiration of many
parts of the Tax Cuts and Jobs Act and changes that are
happening around the world for lawmakers to consider what areas
of the Tax Code should be adjusted to improve the incentives
for businesses to hire in the U.S., to invest in the U.S., and
to see an opportunity for lawmakers to move in that direction
rather than just thinking through the number of layers and
layers of anti-avoidance policies that have come to be.
The corporate alternative minimum tax is one of them and
that is still as yet uncertain for corporate taxpayers because
they do not have final guidance, even 2 years on from the
Inflation Reduction Act. Thank you for having me here for
testifying, and I look forward to your questions.
Chairman Whitehouse. Thank you very much.
Mr. Curtis, you discussed the commensurate with income law,
which goes back to the Reagan bipartisan 1986 tax reform and
its basic non-enforcement. As I understand it, that was
intended to prevent companies from mispricing intellectual
property allocated to foreign subsidiaries; is that accurate?
Mr. Curtis. Yes, Senator, it was.
Chairman Whitehouse. And you have literally decades of
experience as a corporate tax practitioner in the major tax and
accounting firms of the country and you've developed forensic
economic analyses of offshore structures. How does that work?
How does your forensic work lead to the conclusion that these
offshore companies are evading taxes?
Mr. Curtis. Sure. So, some of the forensic models we've
developed are designed to detect violations of transfer pricing
principles, so the arms-length principle. So, if you see a
corporation with high foreign profits, maybe more foreign
profits than U.S. profits, you might think that it could be in
violation of the transfer pricing rules or its transfer pricing
is aggressive, but you actually need to look at the functions
and risks and assets and how they're distributed and what goes
on offshore versus U.S.
We have some models that do this using time series analysis
of statistical indicators of transfer pricing risks because
profit is supposed to follow risks, so how do you define risk
and so all those kinds of things. So, once we identify a group
of companies that we think have these risks, we then start
investigating them forensically, so we start looking for
information, especially in offshore filings, like in Ireland.
Some of the companies we've researched have filed some things
in Ireland that are very difficult for those companies that if
you take a look at those you can actually see some violations
of U.S. tax codes. So, we investigate them going down that
route.
And then, for these companies that we've published, they do
violate this commensurate with income law. The law regulations
were passed to implement that law in 1994 with periodic
adjustment for offshoring of IP, but then in cost-sharing
arrangements in 2009 that is the law that the 10 companies that
we've written about violate.
Chairman Whitehouse. Senator Cassidy and I are also working
on mispricing as a mechanism for international money
laundering. You're talking about it as a means of tax avoidance
and tax evasion. Is it also a way in which value can be
transferred without proper accounting that allows for money
laundering as well, or is that beyond your expertise?
Mr. Curtis. I can only talk in the corporate context, but
in the corporate context, U.S. companies that have people and
assets, they also have intellectual property. It's hard to move
people and hard assets offshore at non-arm's-length pricing or
just to move your people to an onshore tax haven. That's very
difficult, so corporations will move more fungible assets.
When you're talking about a fungible asset like
intellectual property, those assets can be very valuable and
difficult to price and that's where you see a lot of the
corporate offshore profit shifting. Now, whether that applies
to money laundering, that I can't really speak to.
Chairman Whitehouse. You can see how it might work. Ms.
Milin, you've suggested that the $688 billion tax gap may
actually not fully account for offshore tax evasion. Could you
explain that further?
Ms. Milin. That's right. The IRS is not able to fully take
into account offshore tax evasion, so the figure is too low
with respect to that. And I think as you alluded in your
opening remarks, former Commissioner Rettig thought so too, and
he thought that it could be as high as $1 trillion.
Chairman Whitehouse. Just to a point in your testimony
where you mention that granting access to FATCA data beyond the
IRS could help--and I'm quoting you here--``law enforcement
agencies fighting drug cartels, corruption, sanctions
violations, human trafficking, and other major crimes.''
Is it fair to conclude from that that anonymous offshoring
in shell corporations has national security and law enforcement
issues as well as tax issues associated with it?
Ms. Milin. Absolutely. I mean it comes down to the problem
of secrecy that enables all of these problems from offshore tax
evasion to all of the issues that you just outlined and the way
to tackle that is through greater transparency.
Chairman Whitehouse. So, not just tax cheats, but
terrorists, drug lords, child traffickers, all can benefit from
the same secrecy.
Ms. Milin. That's right.
Chairman Whitehouse. Thanks very much. Senator Grassley.
Senator Grassley. Mr. Bunn, the 2017 tax bill did a carrot
and stick approach to the problem of multinationals shifting
profits to low tax jurisdictions. Tell us how that tax bill
reduced the incentive to engage in profit shifting transactions
and what are some examples?
Mr. Bunn. Thank you for the question. So, the Tax Cuts and
Jobs Act looked at the difference between the tax burden on
foreign income and the tax burden on domestic income and sought
to close that gap. When there's a large gap between domestic
tax rate and a foreign tax rate, there's a large incentive for
businesses to shift their profits, either artificially or
actually offshore activities--you know, physical activities in
employment to minimize their exposure to a high tax rate.
So, the Tax Cuts and Jobs Act, number one, brought the
corporate tax rate down, but then had a pairing of anti-
avoidance policies. One in the global and tangible low tax
income. The Global Intangible Low-Taxed Income (GILTI), which
is a minimum tax rate applied to foreign income, and the
foreign derived intangible investment, which is FDII, to
balance the difference that companies, when they're thinking
about where to put their research and development or put their
IP to allow them to think maybe it makes sense to keep that in
the U.S. rather than planning through different offshore
structures.
At the same time, we saw some changes in other
jurisdictions that were helpful for this balance shifting in
the U.S. and we've seen a significant amount of IP come from
offshore locations back to the U.S. and profits being earned in
the U.S. and we can see this in some data that I had in my
written testimony, showing that royalties earned by U.S.
companies on U.S. IP in the U.S. has increased dramatically,
especially in bilateral data with Ireland.
Senator Grassley. President Biden has proposed several
changes to the U.S. tax system, so Mr. Bunn, most notable are
reforms to the provision called GILTI. This includes taxing
foreign income of multinationals at higher rates than what
other countries are expected to adopt as part of Pillar II
Agreement that the Biden Administration just negotiated.
In addition, President Biden proposed corporate tax
increase to 28 percent. How would these changes affect the
competitiveness of U.S. companies, and would these proposals
tend to increase or decrease the incentives for multinationals
to shift profit offshore?
Mr. Bunn. Thank you for the question. I think they would
increase the incentive for planning through various structures
and minimizing exposure to U.S. tax. The changes that the
President is proposing would increase the gap between domestic
and foreign and do it in a context where a lot of foreign
jurisdictions that are adopting the global minimum tax are
going to have an effective tax rate of 15 percent. And if the
U.S. has a much higher tax burden through GILTI or the domestic
corporate tax rate, then companies, instead of continuing to
bring IP back or keep IP here in the United States, we'll
probably see some of those same games to move things offshore
or to develop things offshore rather than do them here in the
United States.
Senator Grassley. Also, Mr. Bunn, the Administration claims
Pillar II tax framework will end, and I quote, ``a global race
to the bottom with respect to corporate taxes.'' However, in
reality, Pillar II may simply shift the focus from a
competition-based on low rates and traditional tax incentives
towards one based upon providing direct-cash subsidies. How do
you feel or how do you expect tax havens to respond to the
implementation of Pillar II?
Mr. Bunn. So, we're already seeing some of this response.
Some jurisdictions looking at the minimum tax rules--and
minimum tax rules provide for certain things that I think a lot
of jurisdictions are looking at through an attractive lens.
The jurisdictions are looking at grants, refundable
credits, and different mechanisms that the minimum tax rules
treat more favorably than traditional tax credits. I was
spending some time earlier this year looking at some of the
jurisdictions and how they're planning to implement the rules,
but Bermuda is looking at a refundable tax credit. Singapore is
looking at a refundable investment tax credit. Switzerland,
some cantons in Switzerland are looking at refundable credit
programs. And the United Kingdom has had a refundable research
and development credit program for a number of years that are
treated very differently than our credits and I think what we
are seeing is a shift in this competition from rates to the tax
base and using the rules themselves to create advantages for
different jurisdictions.
Chairman Whitehouse. Thank you, Senator Grassley. Senator
Johnson.
STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Mr. Chairman. I'm going to try
and simplify these issues here because this is incredibly
complex what we're talking about.
First of all, I think the main root cause here is the
distinction between taxing worldwide income and not. I've known
that individuals get taxed on their worldwide income. I was not
aware of the fact that only American and Eritrea are the only
two countries.
Mr. Bunn, the reason we don't tax corporate worldwide
income is we would be uncompetitive, and we would see
inversions of corporations, right? They would just locate
offshore. They'd become--again, we don't want to change our
citizenship, so you can get away with taxing worldwide income
individuals, but corporations they can be run by U.S. citizens,
but domiciled someplace else. Correct? Is that the basic?
Mr. Bunn. Yes, that's correct.
Senator Johnson. So, if we attempted to tax worldwide
income, that backfires, wouldn't it?
Mr. Bunn. Yes. And it has historically with a lot of the
inversions that we saw leading to the Tax Cuts and Jobs Act.
Senator Johnson. So, the fact that we don't tax worldwide
income that sets up the whole complex issue of transfer
payments. And just, you know, paper entries, a legal document
that says this IP is owned in that country that has low tax
rates or all these costs we're incurring here. And I mean
that's playing whack-a-mole, isn't it, Mr. Curtis? I mean you
could say you could set up all these rules and all these laws,
but you're still just playing whack-a-mole.
Mr. Curtis. That is true. The ``check the box'' rules help
with this as well because under ``check the box,'' if you have
a shell company offshore and you put the IP in there, offshore
you can split the IP returns into a tax haven and then you have
functional entities that are doing some things. But under
``check the box,'' your entities underneath get checked into
this shell company or the shell company gets checked into
another company.
Senator Johnson. You're describing the complexity that we
have.
Mr. Curtis. Exactly.
Senator Johnson. My whole point--any of the three witnesses
think that the U.S. tax system is simple and rational? So,
really the thrust of this questioning--I only have five minutes
and it's not nearly enough to really explore this--is what
could we accomplish by simplifying our Tax Code, by making it
more rational? I mean, to me, it's--I mean income ought to be
income. The fact that we have different tax rates for corporate
income versus capital gains, I mean, index of the capital gain
and have a unified tax rate scheme. Things like cash income. We
have all these loopholes, it's just about amortizing, it's
depreciating over different years. They're all arbitrary. What
would we potentially accomplish, for example, just moving to
cash-based income? Would that have any impact on this at all? I
mean forget the paper entry or transfer payments or it's like,
no, you got the cash in the U.S. You're going to be paying tax
on it. I mean is there some way or ways that we can simplify
our Tax Code, rationalize it, then start addressing this as
opposed to continue to play whack-a-mole with something that's
naturally complex? Mr. Bunn.
Mr. Bunn. Thank you for the question. The answer is yes.
So, Tax Foundation has looked at various forms of corporate
income taxes, including cashflow taxes. And cashflow taxes are
relatively rare across the world, but where we see them, we see
them working well. There is a paper we put out last year
looking at essentially a cashflow tax for the U.S. And it can
be both supportive of growth and revenue positive. And these
are things that I think lawmakers should be thinking about,
thinking about simplicity while also aiming for certain revenue
targets.
Senator Johnson. Let me also point out. If we would
transition to cash-based income, it would simply be a timing
difference. Correct? I don't know how long a time period it
would all work its way out, but yeah, I mean if you're
investing today in some kind of R&D or some kind of capital
equipment, you're going to have a lower tax rate because you
have less cash on hand, but the next 4 years where you're not
making that investment your cash income is going to increase.
Correct?
Mr. Bunn. Exactly.
Senator Johnson. Did you have any feeling for how many
years that would take to play out in terms of that timing
difference?
Mr. Bunn. So, in the long run it all works out. The
challenge is that depending on what you're investing in,
whether it's a building or a tractor, the return-on-investment
timeline differs across the economy. In the aggregate, we could
see things turn around within the budget window, but more often
than not, you're looking outside the 10-year budget window to
really see things turn around.
Senator Johnson. So, most appreciation on equipment would
be pretty short, right, 5 years, 7 years?
Mr. Bunn. Correct.
Senator Johnson. Buildings are.
Mr. Bunn. Thirty-nine.
Senator Johnson. Buildings are what?
Mr. Bunn. Thirty-nine.
Senator Johnson. Yes. So, I mean it's going to take a while
for that to work its way--what about R&D?
Mr. Bunn. Well, we're currently amortizing R&D based on
the--I think it's 3 to 5 years, somewhere in there. Yes.
Senator Johnson. Okay. Again, what I'd love to have, I'd
love to hold a hearing on how do we simplify and rationalize
our Tax Code because, again, nobody wants to see tax evasion. I
don't know what percentage of the tax gap is evasion versus
avoidance, as you're pointing out, Mr. Bunn, but avoidance is
all about a complex tax system. So, anything we can do to
rationalize and simplify it that's the drum I've been beating,
and I'd like this Committee to take the time to really analyze
that. Thank you, Mr. Chairman.
Chairman Whitehouse. Thank you, Senator Johnson. Senator
Van Hollen.
STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you, Mr. Chairman. Thank all of
you for your testimony here today. Mr. Curtis, I'd like to
start with you. From your experience, roughly, how many tax
experts, accountants, lawyers, does the average, large
multinational have at their disposal to try to minimize their
U.S. tax obligation? I know there's not a one-size-fits-all,
but if you could just give a rough approximation.
Mr. Curtis. Well, if you include people working within the
corporations and their advisors because most of the large
corporations, Fortune 500 and higher, don't do all of their
transfer pricing documentation in-house. They use advisors. And
I'll pull a source. So, there's a study that was done in 2018
that predicted that there's 250,000 professionals, I believe
worldwide, that do transfer pricing that are in the industry of
transfer pricing. Compared to the IRS, we think as between 100
and 200 people that do transfer pricing inside the IRS, so it's
a big number if even a third of that was in the U.S., so it
would be 60,000 or something like that. So, the IRS is
overmatched maybe 100 to 1 or even more than that.
Senator Van Hollen. You totally anticipated my next
question, which was what the IRS does have, and you just
explained they're totally outgunned when it comes to doing this
kind of work. How about on the expertise side, right, because
it's both the number of people that are engaged in this, but
also the level of expertise. What kind of expertise and
resources are needed for the IRS to be able to compete in that
area?
Mr. Curtis. So, in the IRS, what you have in the IRS is you
have so few resources that people who perform exams, like
international examiners and transfer pricing economists, they
tend to be generalists, if you will. If it's a continuous audit
or a random audit, they'll come in and they'll do basically a
fishing expedition to try to find what's going on. What I felt
having worked inside the Big Four and how the Big Four operates
is you have experts that are an inch wide and a mile deep at
every code section. They know every loophole, every typo. They
know how different codes operate to create a loophole.
There's also technology. So, I took those things and said,
well, if you were the IRS, what would you want to do? Well, the
first thing you'd want to do is you'd want to take your
workforce and instead of auditing companies where 50 percent of
your audits are no change and doing fishing expeditions and
using generalists who don't have a grasp necessarily what might
be going on inside the company or is an expert in any number of
discrete transfer pricing issues, you would want some
technology that would identify the key risks and then put your
workforce there and then take that workforce, build it, add to
it, but what you're adding to it is you're adding more
specialists in different areas that you can have
multifunctional teams really operate more like the industry.
Now, you can go toe-to-toe with what's going on in the
industry. That's what I would say.
Senator Van Hollen. No, I appreciate that. And you
mentioned technology. The IRS is still operating, in some
cases, on 25-year-old technology. Do you expect that a lot of
the Fortune 500 companies are using technology that's older
than their employees?
Mr. Curtis. No, absolutely not.
Senator Van Hollen. So, this is one of the reasons, as part
of the Inflation Reduction Act, we provided the IRS with
additional resources to help on customer service, yes, but also
to allow upgrades in technology, as well as to allow them to
hire more people to go after very, very wealthy tax cheats,
including corporate tax cheats. And we are witnessing a battle
here where some people want to take away those resources and
not allow the IRS to at least try to compete with the resources
of big corporations.
Ms. Milin, I appreciate your testimony mentioning a bill
I've introduced, Disclosure of Tax Havens and Offshoring Act,
and the work that the FACT Coalition has done on the issue of
country-by-country reporting. As you mentioned, countries file
country-by-country reports with the IRS, but are not required
to disclose that information to investors. Could you just
expand briefly on how country-by-country reporting can be
meaningful for their investors?
Ms. Milin. Thank you, Senator, for that question, and thank
you for your leadership on corporate tax transparency. The
information is already available and filed with the IRS, so
this is not imposing any additional costs on companies, but it
would help investors better assess the very material risks of
the sort that Mr. Curtis has described and that his research
has documented. And those risks, in some cases, they run into
the tens of billions of dollars. So, it clearly impacts the
bottom line for many of these large companies, and yet, the
investors remain in the dark. So, the bill that you've
introduced would change that and make this information
available to investors so that they can scrutinize the risks
that the companies are taking. And in doing so, the hope is
that it will also deter some of these most aggressive
practices.
Senator Van Hollen. Thank you. It's investor right to know
to help protect others in the economy as well. Thank you, Mr.
Chairman.
Chairman Whitehouse. Thank you, Senator. We have Senator
Kennedy, then Chairman Wyden, and then Senator Braun.
STATEMENT OF SENATOR KENNEDY
Senator Kennedy. Thank you, Mr. Chairman. Ms. Milin, is
your expertise in the area--Mr. Bunn made this distinction. Is
your expertise in the area of tax avoidance or tax evasion or
both?
Ms. Milin. I would say both. I think the lines--there are
situations where the lines might get blurry, especially on the
corporate side. But in my----
Senator Kennedy. It's both?
Ms. Milin. It's both. In short, it's both.
Senator Kennedy. Do you believe that there are major
American corporations that are cheating on their taxes?
Ms. Milin. I think, yes, there are cases where the transfer
pricing regulations are not being followed and Mr. Curtis's
testimony speaks to that.
Senator Kennedy. Tell me who they are. Who are the five--
name the five American corporations that are the biggest tax
cheats?
Ms. Milin. Well, this is a question for the IRS. It's their
job to enforce the law, so I wouldn't----
Senator Kennedy. That's a pretty serious allegation you
made there and I'm just asking you who they are.
Ms. Milin. There are cases pending against a number of
companies. Until those cases conclude, it's not----
Senator Kennedy. Who do you think they are? You're an
expert in this area. I'm just asking you. You talked a lot and
I've read some of your writings about American corporations
cheating on their taxes. I'm just asking you who they are.
Ms. Milin. I wouldn't use the word ``cheating.'' I think
that they are----
Senator Kennedy. You've use----
Ms. Milin [continuing]. Taking advantage of the grey zone.
Senator Kennedy. You've used it in your testimony.
Ms. Milin. I'm sorry?
Senator Kennedy. You used it in your testimony. I'm not
trying to trick you. I just want to know--you have been very
vociferous in saying that American companies are cheating.
Okay, as an American, you're entitled to your opinion, but
you're an expert and just tell me who they are.
Ms. Milin. I stand by that. I think that there is evidence
to suggest that some of these companies, and the IRS has
pursued cases against a number of the companies that----
Senator Kennedy. Who are they, though?
Ms. Milin [continuing]. That Mr. Curtis has analyzed,
including Apple and Microsoft and Facebook and Coca Cola.
Senator Kennedy. Is Apple a tax cheat?
Ms. Milin. I wouldn't say tax cheat. I think that's putting
it too strongly and I didn't use that word.
Senator Kennedy. Then who are they?
Ms. Milin. I wouldn't say tax cheats, but I think they are
crossing the legal lines that have been set by Congress and by
the IRS in the relevant regulations and because the IRS is
outgunned, they're not able to enforce the law against them.
Senator Kennedy. Let me start over. Do you believe that
there are major American corporations cheating on their taxes?
Ms. Milin. I believe they are coming very close to crossing
the line and it's difficult for IRS that is outgunned to
enforce the law.
Senator Kennedy. Are they crossing the line or not? Are
they crossing the line or not?
Ms. Milin. Well, it's up to the IRS to enforce the line. If
they don't have the resources----
Senator Kennedy. I'm asking in your opinion. You're an
expert.
Ms. Milin. I think there is a good case to be made that,
yes, they are crossing the line.
Senator Kennedy. So, yes.
Ms. Milin. Yes.
Senator Kennedy. Who are they?
Ms. Milin. That's up to the courts and the IRS to
determine.
Senator Kennedy. You made this allegation, but you don't
want to say who they are? I mean you know who they are, you
just don't want to tell us.
Ms. Milin. I think that's been explained by Mr. Curtis in
his----
Senator Kennedy. No, I'm asking you to explain. You talk
about tax cheats. I'm just asking you who they are and you
don't want to tell us?
Ms. Milin. Again, I think it's for the IRS to enforce the
line and we need to make sure that the IRS is properly----
Senator Kennedy. Well, do you have a list of these tax
cheats?
Ms. Milin. No.
Senator Kennedy. Okay. Have you been to the IRS and said
here are these companies and they're cheating on their taxes
and I can show you how they're doing it?
Ms. Milin. No, I'm not--I've never practiced in that area
of law. I'm not a tax----
Senator Kennedy. So, all you've done.
Ms. Milin [continuing]. Lawyer.
Senator Kennedy. All you've done is run around saying
American companies are cheating on their taxes. I can't tell
you who they are and I haven't been to the IRS to show my data
to the IRS, but I want you to believe me that they're cheating
on their taxes. Is that your testimony today?
Ms. Milin. No, Senator. No.
Senator Kennedy. Sure sounds like it.
Ms. Milin. No, I think that the case against some of these
companies has been well documented----
Senator Kennedy. Which companies?
Ms. Milin [continuing]. In the public.
Senator Kennedy. Which companies because I'm going to run
out of time. Tell me in the last 23 seconds. Here's your
chance. You believe they're major American corporations
cheating on their taxes. You just testified to that. I believe
you told me yes. Tell me who they are.
Ms. Milin. I think they are the companies that Mr. Curtis
discussed in his----
Senator Kennedy. Tell me who they are----
Ms. Milin [continuing]. In his testimony.
Senator Kennedy. Tell me who they are.
Ms. Milin. It includes some of the big tech companies.
Senator Kennedy. Who are the five worst?
Ms. Milin. Big Pharma companies that are----
Senator Kennedy. Who are the five worst?
Ms. Milin. I don't have a ranking.
Senator Kennedy. You're not going to tell me. You don't
want to say.
Ms. Milin. I haven't looked into that.
Senator Kennedy. You understand it makes it hard to believe
your allegations if you won't tell us who they are.
Talk's cheap. You ever heard that expression? Thank you,
Mr. Chairman.
Chairman Whitehouse. Senator Wyden, who actually done some
investigation in this space.
STATEMENT OF SENATOR WYDEN
Senator Wyden. With your cooperation, I very much
appreciate it and glad that you're digging into these issues.
Ms. Milin, for you, the Finance Committee has conducted a
number of investigations into the role of Swiss banks who've
been implicated in major offshore tax evasion schemes,
including Credit Suisse. One of these investigations looked
into the Swiss Bank Mirabaud, where Robert Brockman hid more
than $1 billion from the IRS for over a decade and as Chairman
Whitehouse notes, we've long been concerned by the general lack
of criminal prosecution of bankers and other enablers complicit
in major tax evasion schemes.
And I know my colleagues are talking about naming people
and all the rest. I just named people. We named them and we
said specifically we're talking about somebody who hid more
than $1 billion from the IRS for over a decade. And I'd be
curious in your thoughts how is it credible for foreign banks
to claim that they did not know, who has an account like this.
I mean I heard my colleague from Louisiana said name some
names and all the rest, so we're talking about naming a name.
Somebody who had $1 billion hiding in a Swiss bank and I'm just
curious how you claim that you didn't know it if you're a
banker?
Ms. Milin. Thank you, Senator, for everything that you and
your Senate Finance staff have been doing to expose these
issues and the ways in which we still see too many violations
of the Foreign Account Tax Compliance Act. What you described
with the Mirabaud Bank is a very obvious breach of the law and
when such cases are uncovered it's important that the DOJ and
IRS are very tough on, not just the banks and the bankers, but
also to make sure that they turn over the names of individual
account holders.
Unfortunately, that hasn't always happened in the past with
respect to some of these Deferred Prosecution Agreements (DPAs)
and Non-Prosecution Agreements (NPAs) that DOJ has signed in
this area, so that's hopefully a lesson learned.
Senator Wyden. Aren't the bankers required to know who
their customers are?
Ms. Milin. Absolutely. And they're required, not only under
FATCA, but also under anti-money laundering laws, so
absolutely, yes.
Senator Wyden. That leaves us with kind of a choice. Either
they ignore the law or they're not capable of looking at their
customer. I mean it just kind of defies credulity here to
believe that they don't know about somebody sitting on $1
billion, so what is it? They don't follow the law, they don't
care about the law of being on the books and think they're
going to get away with it? I mean how does this work?
Ms. Milin. I agree with you. I think that they should know.
It's willful blindness if they claim that they don't know. And
perhaps if there was more resources put into enforcing FATCA
then we would see more of a deterrent effect.
Senator Wyden. I know of your work. I will tell you I don't
think this is a resource issue primarily. It's a question about
whether you consider it important. If you consider it
important, you go out and do it. And if you bump up against a
situation where you don't have the resources, you come to the
Congress.
And let me ask you about one last example with the
remainder of my time. The Finance Committee exposed how Credit
Suisse bankers helped a family with dual passports living in
Miami hide over $90 million from the IRS and DOJ. We are
unaware of any charges being filed. What kind of a message is
DOJ sending when they don't bring cases against bankers who
willingly help American clients hide money offshore? And
pretend you're talking to the people at the Department of
Justice because I have. I've talked to them repeatedly and I
have been pretty spirited in my comments about how it is when
our terrific investigators who are sitting behind me bring this
stuff to them, and we've worked with Chairman Whitehouse on it,
and nothing happens. What kind of a message does it send for
DOJ to basically sit back and kind of do nothing.
Ms. Milin. That's unfortunate and disappointing to hear and
I share the concern and I would hope that the DOJ would step up
their enforcement efforts to make sure that there's a really
strong deterrent effect as intended by FATCA.
Senator Wyden. For you and other people who are thoughtful
and well respected on these issues, I hope you communicate that
to the people at the Department of Justice as well because I've
done it on a number of occasions, and we are still waiting and
we're just going to keep pushing.
Thank you, Mr. Chairman.
Chairman Whitehouse. Let me interject for one second before
I turn to Senator Braun because this is an area where I've
spent some time and I really appreciate Chairman Wyden's work
here. And part of the problem is that the Department of Justice
before it brings a tax enforcement prosecution insists on there
being a referral from the IRS to the DOJ, even where the
challenged conduct is as simple as filing a false statement
under 18 U.S.C. 1001, which is bread and butter prosecution for
DOJ.
So, you can get very quickly into a situation in which the
IRS won't make the referral, so the DOJ won't prosecute and the
whole thing just flops and the ball falls between the second
baseman and the shortstop over and over and over again because
the protocol for these IRS referrals is a disaster from a point
of view of enforcement.
Sorry to seize that editorial moment but appreciate it.
Senator Braun, my apologies for taking some of the time ahead
of you.
STATEMENT OF SENATOR BRAUN
Senator Braun. Thank you, Mr. Chairman. I'm sure you'll
give me a little latitude to go over my standard 5 minutes
since I'm the last one here too, maybe.
Chairman Whitehouse. To a reasonable point, yes sir.
Senator Braun. Very good. Ms. Milin, I'm not going to ask
you to identify who the companies are, but I'm going to see if
you've got a good grasp of kind of the macroeconomics of what
we're dealing with. Let's take the year that just was
concluded. By the way, we never did a budget within Fiscal '23.
We're in some type of movement. I think, yes, we just got that
done without a budget with the two big spending bills. We need
to get more process into all that and I think we'd end up with
better results.
But in '23, what were federal revenues, since you're
talking about a gap there that we need to kind of shrink due to
better tax compliance and everything that you can do. Do you
know what our federal revenues were that we ended up in Fiscal
'23? And if you don't----
Ms. Milin. I don't know that off the top of my head.
Senator Braun [continuing]. You probably know the deficit
amount, roughly. Correct?
Ms. Milin. There is a substantial deficit, yes.
Senator Braun. Want to take a stab at what that is or what
it was for the last fiscal year?
Ms. Milin. I'm not sure.
Senator Braun. It was $1.9 trillion. Do you want to know,
or can you tell me what the Biden Administration has forecast
over the next 10 years in terms of what kind of deficit,
structurally, we'll be running?
Ms. Milin. I haven't looked at those numbers. My specialty
is in----
Senator Braun. That's pretty simple too.
Ms. Milin [continuing]. Tax law and policy. I haven't
looked at those numbers.
Senator Braun. I think it's important because it's $2
trillion a year and we're now $34 trillion in debt. We were
only $18 trillion in debt when I got here a little over 5 years
ago. And as far out as you can see, we are borrowing and
spending and this is something I hope you know. What has been
the average that we've generated as a percentage of GDP from
revenue raised over the last 50 years as a percentage of our
gross domestic product (GDP)?
Ms. Milin. I'm not sure. I couldn't say.
Senator Braun. Well, I would hope that being an expert in
the field of trying to shrink that gap you'd learned more of
that. It's been 17.5 percent of our GDP. So, if you look at
what we did in '23 with revenue, which would've been record
levels compared to what it would've been not too long ago, it's
$4.4 trillion. That was 16.5 percent of our GDP. We spent 23.7
percent, $6.3 trillion. That is in the books. It just occurred.
We are headed towards that again in '24 and for the next 10
years out.
In the last 50 years, we've never brought in more than 17.5
percent of our GDP with high rates. When you flush a little
more into the Treasury, you start to dampen economic growth.
When you cut taxes, you take a little bit away from the
Treasury. You bring more in due to economic growth. Is there
any possible way where you can be credible that we got a tax
compliance issue as opposed to a spending issue when you look
at those statistics? Remember we're currently spending nearly
24 percent of our GDP. We've never, historically, raised more
than 20 percent 2 years during the Clinton years out of the
last 50. So, do you think we have a tax compliance issue or a
spending problem? That's a fairly easy question.
Ms. Milin. I don't study spending issues, but I can assure
you there is a tax compliance problem. And so, even if it
wouldn't go all the way towards closing the deficit, it is
still something that we should address as a matter of fairness
and rule of law. Whatever the GDP share is--you said 17.5
percent.
Senator Braun. Five percent, historically, over 50 years.
Ms. Milin. It is important that everybody is contributing
their fair share.
Senator Braun. So, what do you think if you threw
everything in the kitchen sink at it, what would you do?
Hopefully, you've got that figure in terms of generating
additional revenues and at what cost would it come? How much
would it cost to do it? Do you have that there?
Ms. Milin. I'm sorry. I'm not following. What the cost of--
--
Senator Braun. In other words, what is the most do you
think we could generate in extra revenue if you threw
everything and the kitchen sink at it and what would the cost
of doing it be so you can net out what that difference would be
towards a $2 trillion deficit.
Ms. Milin. Well, I think there are experts who have looked
at the return on investment in terms of greater investment in
IRS resources and it's something like eight----
Senator Braun. Again, experts probably looked at it. I
think you're one of them. I can tell you that Trump tax cuts
were almost paying for themselves and that was $150 billion
annually over 10 years, $1.5 trillion. That is just a small
amount of a $2 trillion--chronic deficit.
Before I do run out of time and push the latitude of having
a little extra conversation here, I want to turn to Mr. Bunn.
Would you want to weigh on that in terms of--since I didn't get
an answer there, what you could possibly garner after the cost
of doing it in terms of extra revenue and how does that compare
relative to spending that has never, ever been close to 23 or
24 percent of our GDP in history, other than in wartime?
Mr. Bunn. Thank you, Senator. If you were to fully close
the estimated or projected tax gap, you'd maybe get, you know,
a half a percentage point on GDP. But the 100 percent
compliance, I think, is relatively unrealistic, but you can
think through policies----
Senator Braun. And would you put that into--since we've
been talking about dollars, roughly, what that would be, how
many billions a year?
Mr. Bunn. So, their estimated tax gap is about $600 billion
a year, so that would require full 100 percent compliance. And
then, as has been discussed, there's some questions about
whether that covers the full tax gap.
Senator Braun. Is that net of the cost of trying to get it?
Mr. Bunn. No. So, you would still need additional IRS
enforcement.
Senator Braun. Okay. So, let's just stop there. So, that
would be one-third of the gap. The other two-thirds clearly,
we're spending too much. We're borrowing it from our kids and
grandkids. Jamie Diamond, who would be respected in the private
sector, just said it's the biggest issue, economically, going
forward.
Jerome Powell finally got rid of the modern monetary theory
that it doesn't make any difference how much your deficits and
your cumulative debt would be. You've got two renowned experts
that have said----
Chairman Whitehouse. Senator Braun.
Senator Braun [continuing]. This place is going to swamp
the system under our current policies.
Chairman Whitehouse. I have to get to Judiciary and it's
starting to wrap up, I'd appreciate it.
Senator Braun. I think I've made my case. Thank you.
Chairman Whitehouse. You do very eloquently, sir.
Senator Braun. Thank you.
Chairman Whitehouse. Thank you to all of the witnesses. I
think I'd like to ask each of you a question for the record you
can get back to me with. I showed this graph that shows the
decline in the share of corporate tax revenue as a portion of
United States tax revenue. It's run in recent decades from a
high over 30 percent down to current levels of about 5 or 6
percent. I'd be interested in your thoughts on where you think
the sweet spot is. What is the right number or range of
corporate tax revenue as a percentage or portion of overall
U.S. tax revenue, if you have thoughts on that.
With that, thank you very much. And Committee members
questions for the record will be due by noon tomorrow. We ask
witnesses if you receive further questions for the record to
get back to us within seven days, and this hearing is
adjourned.
[Whereupon, at 11:21 a.m., Wednesday, April 10, 2024, the
hearing was adjourned.]
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