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Tax Shelters

 

 

NEWS RELEASE

SOUTH CAROLINA DEPARTMENT OF REVENUE

Public Affairs Office                   Phone (803) 898-5464

Contact: Danny Brazell                 Fax   (803) 898-5446

                                              Email: brazeld@sctax.org

_____________________________________________________________

FOR IMMEDIATE RELEASE

July 15, 2003

 

Multi-State Tax Commission: Corporate tax shelters cost South Carolina estimated $80 million in lost revenue yearly

       Corporate income tax revenue collections in South Carolina were an estimated $80 million less in 2001 because of corporate tax sheltering activities, according to a new national study released today by the Washington-based Multistate Tax Commission (MTC).

       The South Carolina Department of Revenue said today the $80 million in lost South Carolina tax revenues is "substantial," since a total of only $142.9 million in state corporate income taxes were collected in 2001. 

      For fiscal year 1988 89, South Carolina collected $1.1 billion in sales and use tax, $1.2 billion in individual income tax and $211 million in corporate income tax collections. By contrast, in fiscal year 2001 2002, sales tax collections had risen to $2 billion (a $900 million increase), income tax collections were $2.3 billion (a $1.1 billion increase) while corporate income tax collections dropped to $143 million, a decline of $68 million. 

      "While a significant portion of the decline can be traced to the failing national economy in the past years, and the increasing attractiveness of entities other than corporations, such as Sub S corporations and limited liability corporations (LLCs,  there is increasing evidence that corporate tax sheltering plays a substantial role in state revenue losses," said Department of Revenue Director Burnet R. Maybank.

      While a corporate tax shelter is difficult to define, it shares several characteristics:

      (1) lack of economic substance;

      (2) inconsistent treatment for financial accounting and tax purposes;

      (3) use of parties not directly affected by the tax treatment, such as

            foreign entities;

      (4) active marketing by promoters;

      (5) promoters who require participants to sign confidentially agreements;

           and (6) the payment of contingent, or large upfront fees.

      Maybank said while the tax shelter schemes are devised to reduce state income tax collections in all states, the practice is especially "galling" in South Carolina, which has one of the lowest corporate income tax rates in the country.

      "The effect of these schemes is to shift the tax burden to individual taxpayers who already pay one of the highest individual income tax rates in the United States," said Maybank. "The tax burden is also shifted to domestic South Carolina corporations who do not have the ability, sophistication or desire to engage in risky and sometimes illegal tax avoidance techniques. It also can create tremendous unfair competition for businesses who dutifully pay what they lawfully owe."

      In South Carolina, the painful state budget crisis that lawmakers will grapple with again in 2004 will center on a continuing state revenue shortfall --  estimated by the Budget and Control Board Office of State Budget at $230 million for annualizations.

      The MTC report said, overall, corporate tax sheltering reduced corporate income tax revenues for states by more than a third in 2001.

      "The lost revenue attributable to (nationwide) domestic and international income tax sheltering is adding to the size of state budget deficits.  It is not enough to say that state corporate tax revenues are declining just because of federal tax law changes or state tax-cutting during the 1990's. It is apparent that some corporations are increasingly taking advantage of structural weaknesses and loopholes in the state corporate tax systems," read a statement in the Multistate Tax Commission report.

      The MTC report concludes that the "vast majority of U.S. businesses are not part of the state corporate income tax sheltering problem."  Very few small businesses can take advantage of the tax sheltering schemes studied by the MTC. The majority of the revenue losses are linked to such "exotic" tax sheltering schemes as:  reincorporating strictly for tax income purposes in Bermuda; creating separate corporations to house "intangibles" (e.g., trademarks) and then siphoning profits away from taxation in the states in which the companies actually do business; shifting taxable income away from the U.S. to other nations through the pricing of goods and services involved in transactions between jointly owned companies; and using complex interpretations of tax laws to create so-called "no-where income" that is earned by a corporation but then not reported to states that impose corporate income taxes.

      Maybank said one of the main driving forces behind the vast increase in tax sheltering activities for both individuals and corporations in the past 10 years has been the charging of contingency fees by large law and accounting firms.  Contingency fees are fees collected based upon a percentage of the potential tax savings, or, in some cases, the charging of large upfront fees, typically for the issuance of tax opinion letters. Firms hired to prepare tax returns for corporations sometimes reap millions of dollars in contingency fees for the filing of a single return.

      While the collection of a contingency fee is allowed when a law firm or accounting agency prepares an amended return with a claim for a refund, it has long been unlawful with both the Internal Revenue Service and the South Carolina Department of Revenue for a firm to prepare an original income tax return and charge a contingency fee.  

            Maybank said the South Carolina Department of Revenue had begun preliminary investigations into violations of IRS Circular 230, which prohibits the collection of a contingency fee when an original tax return is filed. 

      "There is one common denominator to virtually all tax shelters," said Maybank. "The payment of large contingency fees."   

      The full text of the MTC study, including rankings for individual states, is available on the web at http://www.mtc.gov/statebudgetcrisis.html. 

 

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About the Multistate Tax Commission

The Multistae Tax Commission was created in 1967 and 45 state governments now participate in the MTC.  The Commission encourages states to adopt uniform tax laws and regulations that apply to multistate and multinational enterprises. Greater uniformity in multistate taxation reduces compliance burdens for multistate businesses helps insure that interstate commerce is neither undertaxed nor overtaxed.

 

EDITOR'S NOTE:  For more information about the national MTC study, contact Christine Kraly 703/276-3258 or ckraly@hastingsgroup.com.  The MTC study will be available on the Web July 15, 2003, at www.mtc.go



 
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