The revenue losses from this tax avoidance and evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax abuses may be around $100 billion per year. This evasion has occurred in part because the United States does not withhold tax on many types of passive income (such as interest) paid to foreign entities; if U.S. individuals can channel their investments through a foreign entity and do not report the holdings of these assets on their tax returns, they evade a tax that they are legally required to pay. As discussed below, estimates of the revenue losses from corporate profit shifting vary substantially, ranging from about $10 billion to about $90 billion, or even higher. Several legislative proposals have been advanced that address international tax issues. 111-147 . Methods of Corporate Tax Avoidance

U.S. multinationals are not taxed on income earned by foreign subsidiaries until it is repatriated to the U.S. parent as dividends, although some passive and related company income that is easily shifted is taxed currently under anti-abuse rules referred to as Subpart F. (Foreign affiliates or subsidiaries that are majority owned U.S. owned are referred to as controlled foreign corporations, or CFCs, and many of these related firms are wholly owned.) Allocation of Debt and Earnings Stripping

One method of shifting profits from a high-tax jurisdiction to a low-tax one is to borrow more in the high-tax jurisdiction and less in the low-tax one. These data suggest not only a significant amount of profit shifting but also a notable change. In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment Act (HIRE; P.L. 111-147 ). Limited Information Reporting Between Jurisdictions

In the past, the international taxation of passive portfolio income by individuals has been easily subject to evasion because there was no multilateral reporting of interest income. Estimates of the Revenue Cost of Individual Tax Evasion

A number of different approaches have been used to estimate corporate tax avoidance, however, all of these approaches rely on data reported on assets and income. Studies have estimated a significant increase in taxes from adopting formula apportionment. Foreign Tax Credits: Source Royalties as Domestic Income for Purposes of the Foreign Tax Credit Limit or Create Separate Basket; Eliminate Title Passage Rule; Restrict Credits for Taxes Producing an Economic Benefit

As noted above, one of the issues surrounding the cross-crediting of the foreign tax credit is the use of excess credits to shield royalties from U.S. tax on income that could be considered U.S. source income. Options to Address Individual Evasion

Most of the options for addressing individual evasion involve more information reporting and additional enforcement. As noted above, there is also a shift in the burden of proof for accounts with non-qualified intermediaries for filing an FBAR (Foreign Bank and Financial Account Report). Extension has been proposed by numerous commentators, is supported by the IRS officials and is included in the proposed Stop Tax Haven Abuse Act, proposals discussed by the Senate Finance Committee, and proposals made by President Obama. The HIRE Act ( P.L. 111-226 . Provisions Affecting Multinational Corporations and Other Tax Law Changes

				Hybrid Entities and Check-the-Box (FY2010 Budget Only)

The most significant provision in the FY2010 budget, based on revenue gain, is a revision directed at hybrid entities and check-the-box. A portion of overall deductions, such as interest, that reflect the share of foreign deferred income, would be disallowed until the income is repatriated. Provisions Relating to Individual Tax Evasion, Not Enacted in the HIRE Act

The President's proposals included a number of provisions relating to individual evasion, including reporting of information, withholding, and various penalties. Provisions in the Stop Tax Haven Abuse that are addressed in the HIRE Act ( P.L. Additional Proposals in the 113th Congress

A number of bills introduced in the 113 th Congress would have made a variety of changes in the tax law affecting the treatment of foreign source income.
Addressing tax evasion and avoidance through use of tax havens has been the subject of a number of proposals in Congress and by the President. Actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations also have addressed this issue. In the 111th Congress, the HIRE Act (P.L. 111-147) included several anti-evasion provisions, and P.L. 111-226 included foreign tax credit provisions directed at perceived abuses by U.S. multinationals. Numerous legislative proposals to address both individual tax evasion and corporate tax avoidance have been advanced.
Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries (except for certain passive income) is deferred until income is repatriated (paid to the U.S. parent as a dividend), this income can avoid current U.S. taxes, perhaps indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also indicates a significant increase in corporate profit shifting over the past several years. Recent estimates suggest losses that may approach, or even exceed, $100 billion per year.
Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions. There is no general third-party reporting of income as is the case for ordinary passive income earned domestically; the Internal Revenue Service (IRS) relies on qualified intermediaries (QIs). In the past, these institutions certified nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion. The Foreign Account Tax Compliance Act (FATCA; included in the HIRE Act, P.L. 111-147) introduced required information reporting by foreign financial intermediaries and withholding of tax if information is not provided. These provisions became effective only recently, and their consequences are not yet known.
Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama's proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income, along with a number of other restrictions. Changes in the law or anti-abuse provisions have also been introduced in broader tax reform proposals. Provisions to address individual evasion include increased information reporting and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the HIRE Act, the proposed Stop Tax Haven Abuse Act, and some other proposals.