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As exemplified in our recent Joy of Tax Law article, Apple has sheltered $44 billion in offshore tax havens. Like Apple, many other U.S.-based multinational companies are able to protect many of their billion dollar profits abroad through a U.S. Treasury tax loophole called the “check the box” rule.

What is this loophole?

A 1962 compromise between President John F. Kennedy and Congress imposed U.S. taxes on “‘passive’ income such as royalties and interest earned abroad, but not on ‘active’ income from regular operations”.

Since its inception, U.S. Congress has revised the the rule over 10 times. In 1996, the Treasury Department created the “check the box” rule on the tax form “to describe a given corporate entity, including whether it was, for tax purposes, irrelevant, a so-called ‘disregarded entity’”.

These “disregarded entities” allowed U.S.-based multinational companies to set up subsidiaries in low-tax jurisdictions such as Luxembourg. As aforementioned, a recent US Senate Committee on Investigations report revealed that Apple used this “check the box” rule to keep all of it’s European profits funneled through it’s Irish subsidiary.

How are U.S. companies saving billions of tax dollars each year?

Has anything been done to close the loophole?

In early 1998, Clinton’s Treasury administration noticed a spike in cross-border financing shortly after this “check the box” rule was imposed. The administration moved to rescind the rule; nevertheless, multinational companies such as “Hallmark, Coca-Cola, IBM and Philip Morris launched a full-court press to convince Congress to keep the rule in place”.

Tax lobbyist, Ken Kies, pointed out that revocation of the rule would damage multinational companies greatly, for they would have to pay taxes in the U.S. but also in nations with high corporate taxes such as France. That same year, the Senate Finance Committee birthed a bill to revoke the loophole; however, it never made it past that point.

Check the Box Rule” Today

Kies and other lobbyists wanted to prevent further pushes to repeal the rule; so instead, they pushed Congress to make the rule into law.

Congress did so in 2006 with “legislation that became known as the ‘look through’ rule. It bolstered the ‘check the box’ loophole by giving corporations more latitude to move some types of income from one foreign unit to another without paying a tax”.

According to the current Obama administration, because of the rule, U.S.-based multinational corporations “paid an effective tax rate of about 2.3 percent on $700 billion in foreign earnings”.

However, President Obama has not proposed a repeal of the law since 2009, when business groups fought back saying that repealing the law would hurt U.S. businesses already being affected by the weakened economy due to recession.

President Franklin Roosevelt once noted, “We face a challenge to the power of government to collect uniformly and fairly, and without discrimination, taxes based on statues adopted by Congress”.

Perhaps President Obama will follow this adage and go after these “check the box” shelters abroad during the rest of his tenure; however, the current loophole situation with Apple and many other companies reveal how difficult it can be to repeal a tax benefit once it becomes established.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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At JDKatz: Attorneys at Law, each of our attorneys brings a unique set of experiences and perspectives to bear on our clients’ legal problems. For each case or task we take on, we assemble a team of lawyers ideally situated to our client’s specific needs and goals. Our managing partner, Jeffrey D. Katz, founded our firm in 2000 after starting his career in the tax department of Big Four accounting firm KPMG Peat Marwick. To learn more about our attorneys’ backgrounds and qualifications, please review their individual profiles.

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