Bramwell’s Lunch Beat: IL Gov. Candidate’s Use of an Overseas Tax Haven

Raising all federal tobacco taxes can stop tax avoidance
Last week, the US Government Accountability Office (GAO) released a report that found that large federal excise tax disparities among smoking tobacco products, which resulted from the Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009, created opportunities for tax avoidance and led to significant market shifts toward lower-taxed products by manufacturers, importers, and price-sensitive consumers.

According to the GAO, many roll-your-own tobacco and cigar manufacturers shifted to the lower-taxed products after CHIPRA to avoid paying higher taxes.

In an op-ed published on Saturday, the Washington Post editorial board wrote that it’s time Congress passed a law equalizing all tobacco taxes.

“That would raise taxes for pipe tobacco and large cigars to the same level as cigarette taxes, preventing any market shift. A bill introduced by Senator Richard Durbin (D-IL) in 2013, still stuck in committee, would accomplish this task,” the editorial board wrote.

“Better yet, Congress should hike all tobacco taxes – not just the lower ones – up to higher and equal levels,” the op-ed continued. “State taxes vary widely, from $4.35 per cigarette pack in New York to $0.17 per pack in Missouri, making smuggling a big problem for law enforcement. The current cigarette and small cigar federal tax is a meager $1.01 per pack of 20; a higher federal tax would diminish the effect of inconsistency between states and allow for a more uniform response.”

Bruce Rauner channeled part of fortune to Cayman Islands
Dave McKinney of the Chicago Sun-Times wrote on Friday that Bruce Rauner, the multimillionaire Republican candidate for Illinois governor, has channeled at least part of his fortune into the Cayman Islands, a Caribbean paradise long criticized as a tax haven for American investors.

A Rauner spokesman insisted that the former private equity investor has met his legal tax obligations and properly disclosed to the federal government information regarding at least five investments by him or his firm in a country that has no income tax and a financial system cloaked in secrecy.

Rauner’s campaign has refused so far to release a full set of his most recent tax returns to corroborate that and perhaps show the extent and value of those investments in offshore companies. No one has suggested Rauner has done anything illegal. In fact, offshore investments among the wealthy have been a common practice in recent years, McKinney noted.

However, Rauner’s Cayman Island interests are raising questions about why, as a candidate for governor, he would keep any of his wealth in an island nation with a reputation for its pristine, palm-tree-laden beaches – and tax avoidance.

“I’d think someone who anticipates being in the public eye wouldn’t be in the Cayman Islands because the question to be asked is, ‘Why would you have invested there?’” said Richard L. Kaplan, a University of Illinois law professor and internationally recognized expert on US taxation and tax policy, according to the article.

Rauner is challenging incumbent Democrat Pat Quinn in the November election.

An ‘inversion’ deal could raise your taxes
Laura Saunders of the Wall Street Journal wrote on Friday that shareholders in companies pursuing inversions are likely to owe capital-gains tax if the deals occur, but, unlike with other taxable mergers, they won't receive any cash payment to help cover it.

The deals are taxable because the US company, although it will ultimately control the foreign firm, is technically the one that's being acquired, says Robert Willens, an independent tax adviser in New York, according to the article. The US firm's shareholders will receive new shares to replace their old ones. That exchange is considered taxable by the IRS.

As a result, Saunders wrote, if an investor bought shares in a firm at $10 apiece, and the firm “sells” itself in an inversion merger at $40 a share, the investor will typically receive shares in the new firm and owe tax on the $30 per-share difference between the original cost and the price at the time of the merger.

The new shares' cost is $40 each for future tax purposes, but the tax on the $30 must be paid using other funds, Willens said, according to the article. Currently, the rate on long-term capital gains ranges from zero to nearly 24 percent, depending on an individual's taxable income.

Inversions will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes, Saunders wrote. At that point, there is no capital-gains bill, so some shareholders in firms doing inversions will owe taxes they would never have had to pay.

Activist firms join tax-deal push
David Benoit of the Wall Street Journal wrote on Sunday that activist investors are also pressing for overseas mergers that can slice tax bills.

In the latest example, Marcato Capital Management LP hired an investment bank to try to drum up interest from US hotel companies that could possibly cut down on their tax bills by buying UK-based InterContinental Hotels Group PLC, according to people familiar with the matter.

The $3 billion activist hedge fund says it owns about a 4 percent stake in InterContinental and has already publicly called on the owner of the InterContinental and Holiday Inn chains to explore a deal. Now, Marcato is trying to ramp up the pressure by hiring the bank, Houlihan Lokey, and focusing on the possibility of a tax-beneficial merger, Benoit wrote.

Activists have long pushed various moves to lower taxes. They have urged restaurant chains to put real-estate holdings into tax-efficient vehicles known as real-estate investment trusts. Energy companies have been pushed to create similar structures with their pipelines, known as master limited partnerships. Now tax inversions are emerging as the latest wedge.

Senate Dem seeks more Treasury action on offshore deals
In a letter to Treasury Secretary Jack Lew, Senator Bob Casey (D-PA), a member of the Senate Finance Committee, asked what the Obama administration could do to stop the cross-border deals known as inversions without legislation, Bernie Becker of The Hill reported on Friday.

Casey said in his letter to Lew he still thinks that dealing with inversions through tax reform is the best path, but the recent rash of offshore deals has him “considering the merits of short-term solutions.”

Casey specifically pressed the department on how much revenue the United States is losing from inversion deals, if the administration can better enforce existing rules, and how easy it would be to skirt the new proposed rules, Becker wrote.

“The increasing trend of corporate inversions is troubling. Companies that are genuinely headquartered in the U.S. should be responsible for paying their fair share,” Casey said in a statement. “I’m urging the Treasury Department to look at all available steps to combat inversions so businesses that are playing by the rules can compete on a level playing field.”

Senate passes bill to help monitor financial institutions
The Hill also reported that the Senate passed a bill on Friday that allows the Treasury secretary to use state reports when determining if financial institutions are complying with federal law.

The Senate passed the bill – HR 4386, the Money Remittances Improvement Act, introduced by Representative Keith Ellison (D-MN) – through a unanimous consent agreement. The House passed the same measure by voice-vote in May, meaning the bill now heads to President Obama’s desk for his signature before becoming law, Ramsey Cox of The Hill wrote on Friday.

Quick Links:

  • Loan accounting: It’s high time for the SEC to step up to the plate (Accounting Onion)
  • After 45 years, Honeywell switches auditor (Audit Analytics)
  • Initial public offerings: Q2 activity continues momentum (Audit Analytics)
  • Accounting firm steps up with name change, move downtown (Pioneer Press)
  • A tax bill killed by the push and pull of politics on the Hill (NPR)
  • Inverted view of US corporate-tax bite (Wall Street Journal)
  • To address the issue of ‘inversion,’ tax shareholders (Washington Post)
  • Close loopholes that let US firms avoid taxes by using inversions (Los Angeles Times)
  • Wash U expert: High stock prices, low interest rates cause uptick in corporate tax inversions (Washington University-St. Louis)
  • What US should do to stop tax deserters (San Francisco Chronicle)
  • Uptick in inversion may be clue to change corporate tax rate (Milwaukee Journal Sentinel)
  • The US Treasury would not lose $20 billion from corporate tax inversions (Forbes)
  • Amazingly, Robert Reich has just had a good economic idea (Forbes)
  • Lionel Messi tax evasion case (secrecy = willfulness) impacts US & UK taxpayers too (Forbes)
  • Missouri decides whether to tax lawyers or soap bars: Muni week (Bloomberg)
  • Closed mind on open borders (Tax Analysts)
  • Lawyers whining about taxes (Tax Analysts)
  • Hedge fund ‘basket’ options and the second Hundred Years’ War (Tax Analysts)
  • A new way to invest for old age, but how many will buy? (TaxVox)
  • How REIT spinoffs will further erode the corporate tax base (TaxVox)
  • States see electronic cigarettes as a new tax source (Don’t Mess With Taxes)
  • Congress is required to take August off. Really! (Don’t Mess With Taxes)
  • Sharpton demands accountability, but still owes millions in back taxes (New York Post)

 

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