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Illinois losing billions by allowing companies to report profits offshore, report says

Illinois Watchdog.Org

Thursday, January 31, 2019  |  Article  |  By Cole Lauterbach

Budget--State (8) , Revenue , Taxes, income (86)
Two public interest groups have reported that Illinois could gain billions of dollars  in new tax revenue by going after offshore profits made by corporations that do business locally, but a tax expert warns that the strategy may punish job creators in the state.

The U.S. Public Interest Research Group and the Institute on Taxation and Economic Policy found that Illinois stands to make $1.3 billion annually by requiring businesses to report worldwide income instead of just national income.

Other states have either enacted a form of worldwide reporting or considered it.

Oregon’s worldwide reporting law was repealed in 2018 after lawmakers found diminishing returns and raised concerns about costly lawsuits challenging the state’s ability to tax assets in other jurisdictions.

Nathan Proctor with the Illinois PIRG Education Fund and co-author of the report said companies are using accounting gimmicks to hide the money they may make locally in low-tax places like Panama.

“That means Illinois has less revenue to pay for critical public services [such as] transportation or education,” he said. “[The offshoring of funds] is not something that’s going to be available to local, smaller domestic businesses.”

Common accounting maneuvers to lower a corporation’s tax bill include the use of subsidiaries to shift money out of high-tax jurisdictions and placing ownership of intangible goods like patents and stocks in tax havens like the Cayman Islands.

Proctor said tax law would have to be changed to allow for worldwide reporting.

Taxation expert and Forbes contributor Peter Reilly said worldwide reporting is a fair way to look at taxing businesses, but he warned that it should solely look at sales and not other factors that could push businesses out of the state.

“The companies might say ‘hey, we don’t want to have people working in Illinois or own plants in Illinois. We’re going to get out of there,’” he said but adding that “if people want to do business in a state, they should be paying for the infrastructure of the state.”

Critics have said worldwide reporting creates a race for higher taxes.

"It will lead to governments collaborating to raise taxes everywhere," said Orphe Divounguy, chief economist at the Illinois Policy Institute. "Instead, we should aim for more tax competition, to incentivize more efficient government spending. Capital should go where it is the most productive and tax havens facilitate just that, thus promoting economic growth and improving living standards everywhere."