Tax Holidays and Tax Amnesty Programs: Do they work or are we just giving tax violators a break?

In recent news, the State of Alabama is considering creating a tax amnesty period from June 30 through Aug. 30, 2016.  The amnesty program will apparently forgive tax liabilities related to individual and business income taxes, sales and use tax, lodgings tax, severance taxes, cigarette taxes and business privilege taxes. While some exclusion from the program are motor fuel taxes and certain healthcare and environmental taxes.  As noted by the Bloomberg blog, other states have also instituted amnesty programs, Massachusetts, or are considering implementing a tax amnesty program, South Carolina.

The IRS also has several amnesty programs in place for people that have not filed their taxes or have not paid their tax liabilities.  The programs are as follows:

  1. Domestic Tax Amnesty for unfiled tax returns or unreported tax liability (Voluntary Disclosure, See IRS IRM provisions.  See also blog discussing how far back to file unfiled tax returns.)

  2. Offshore Voluntary Disclosure Program

Additionally, Congress has, in the past, instituted a one-time tax holiday to allow U.S. multinational corporations to bring back money the multinational corporations had previously invested in its offshore foreign subsidiaries.  See NY Times article about the 2004 tax amnesty and its effects.  See also the article and the Senate PSI report stating that the promised 2004 tax repatriation holiday failed to meet the promised benefits of new jobs, or research and development (R&D) expenditure. 

The 2004 tax holiday allowed corporations to repatriate amounts held offshore at a reduced rate 5.25% instead of the statutory corporate rate of 35%.  The PSI report highlights the fact that the 2004 tax holiday permitted corporations to bring back $312 Billion.  The PSI report also highlights that while the 2004 law prohibited the repatriated funds for stock repurchases or executive pay, there was no mechanism for monitoring the use of the repatriated funds, so most of the funds were used exactly for stock buybacks and increased executive pay.

There have also been recent attempts by Congress to allow another tax holiday to allow U.S. multinationals to repatriate offshore funds.  In 2014, Senators Boxer and Paul introduced an infrastructure bill tied to a tax holiday (a 6.5% tax on repatriation of funds over a five year period).  The Boxer-Paul bill prohibits dividends, shareholder buybacks or executive compensation for 3 years and the revenue generated would by the 6.5% tax would fund infrastructure projects.  However, as presented in the Salon article, and as reported in Bloomberg, the Joint Committee on Taxation determined that such a tax holiday would really cost taxpayers $96 billion over 10 years.

An alternative to a tax repatriation holiday appears to be a transitory tax on “permanently reinvested offshore earnings.  Such a transitory tax was proposed by former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014.  As stated in The Center on Budget and Policy Priorities article, “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure” by, The Tax Reform Act of 2014 proposed to tax all offshore profits as a transition to a new international tax system that would generate an estimated $170 billion of revenue over 10 years for the Highway Trust Fund. 

President Obama has also introduced a budget proposal (fiscal year 2015) which would utilize revenue from transitioning to a new corporate tax system to finance infrastructure.  See the CBPP article.  The President’s proposal would require multinational corporations to pay a one-time U.S. tax on the profits held overseas prior to changing the permanent way the U.S. would account and tax the offshore profits currently not being taxed.  The President’s proposal allegedly would generate taxes in the amount of $268 billion over 10 years to fund infrastructure improvements.  See this CBPP article comparing transition tax and repatriation tax holiday.

As the CBPP articles reflect, and the PSI’s examination of the 2004 tax holiday, a tax repatriation holiday does not work to generate present and future investment in the United States.  Instead, the empirical data suggests that companies will use the repatriated funds to:

  1. Repurchase Shares from Shareholders or pay dividends to shareholders;

  2. Increase Executive Compensation;

  3. Terminate workers in the United States;

  4. More Aggressively transfer profits offshore to increase amounts “held” or “permanently reinvested offshore” to avoid U.S. taxes because Congress will just grant another tax repatriation holiday in the future.

Following the 2004 tax repatriation holiday as an example of what to expect when IRS or States permit tax violators to be forgiven of their tax liabilities through tax holidays or tax amnesty program, the question to ask is: Why are the tax violators getting a break at the expense of compliant taxpayers?  Or alternatively: Shouldn’t government be in the business of rewarding compliance instead of rewarding habitual tax violators?

How can governments reverse or flip the logic behind a tax holiday or tax amnesty program?  Maybe the governing bodies should reward compliant taxpayers by allowing them to reduce their tax rate for each year of compliance.  Or maybe governments could permit additional deductions/exemptions or reduce phase-outs for deductions for the taxpayers that are compliant and based on the length of compliance.  If the goal is compliance and tax collection, shouldn’t the carrot be a reward for compliance instead of rewarding habitual tax violators by giving them a break for their continued tax violations.  Something to think about.

If you know of any individual or corporation that has not paid their tax liabilities or has habitually avoided paying its taxes, you should file a tax whistleblower claim.  The IRS has a whistleblower program that will pay between 15% and 30% of the collected proceeds (that exceed $2,000,000) to whistleblowers that provide specific and credible evidence of the tax violations of the individuals/corporations.  Contact us to evaluate your claim and to file your claim for an IRS award.