House Bill 970 Would Help Curb Tax Avoidance

March 15th, 2012

House Bill 970 would not allow corporations to deduct payments to related corporations that are not for legitimate business expenses.Closing this loophole would bring in an additional $30 million for the state of Mississippi.

Tax Avoidance: How does it work?

Some corporations set up a related corporation in another state that “owns” an intangible asset of the company, such as their logo. They then pay royalties to that related corporation and deduct those royalties so that their profit, or taxable income, seems lower in Mississippi at tax time. House Bill 970 would not allow deductions of these royalty payments, or payments for other purposes, unless there is a legitimate business reason for them beyond tax avoidance.

Several years ago, Mississippi closed a similar loophole that allowed businesses to deduct royalty payments to a holding company in another state that essentially did nothing other than own intangible assets. However, businesses found another loophole by moving the intangible asset to companies in other states that had some real business operations. Since the royalty payments to operating entities located in other states were eligible for deduction from corporate taxable income, corporations simply moved the ownership of the intangible assets, such as the logo, to operating entities in other states—but for no business purpose other than tax avoidance.

Why should we close this loophole?

The bill is not a tax increase, instead it would limit tax avoidance by corporations who should already be subject to the income tax. Last year, PEER found that 8 out of 10 corporations in Mississippi pay no state income tax. Some of those corporations do not pay income tax because they legitimately have no profit to pay taxes on or they receive credits that have lowered their taxes to zero. However, some are not paying taxes by taking advantage of tax avoidance measures.
The bill would help level the playing field for local businesses that don’t have out of state subsidiaries and must pay taxes on their full profit.
Recent polling by Better Choices Mississippi found that a majority of Mississippians favor closing corporate tax loopholes. Three out of five Mississippians support a balanced approach to building a budget that includes raising some revenue. Of those supporting a balanced approach, 60% favor closing corporate loopholes as a means for collecting additional revenue.

Individuals and corporations alike benefit from our state’s infrastructure, education systems, court systems, and other state services. During these tough budget times, we should be making sure that we maximize revenue collections that should already be owed to our state. House Bill 970 would help address some of the challenges in collecting our taxes and help curb tax avoidance.