Tax havens empty state coffers

Tax revenues lost to overseas tax havens last year could have closed the state’s current $140 million budget shortfall more than six times or funded the salaries of 13,000 teachers, according to a recent report.

The report, authored by the non-partisan Connecticut Public Interest Research Group, claims the state lost $904 million due to the use of international tax havens, such as Bermuda and the Cayman Islands, by corporations and individuals alike. The U.S. Government Accountability Office defines a tax haven as a jurisdiction with no or nominal taxes, a lack of information exchange with foreign tax authorities and generally low transparency.

“Tax dodging is not a victimless offense. When corporations skirt taxes, the public is stuck with the tab. And since offshore tax dodgers avoid both state and federal taxes, they hurt everyday taxpayers twice,” Connecticut Public Interest Research Group Education Fund Director Abe Scarr said in a statement earlier this month. “Connecticut should be using the money to benefit the public.”

The study claims that corporate use of tax havens cost the state around $586 million in 2012. At least five Connecticut-based Fortune 500 companies — General Electric, Aetna, Hartford Financial Services, Travelers Insurance Operations and United Technologies — make active use of such havens to avoid the state’s corporate income tax of 9 percent, according to the report. Requests for comment to all five companies were not returned Thursday, although Scarr said Travelers had reached out to him claiming they did not utilize tax havens.

“They claim that they do have subsidiaries in tax havens but they’re not using them as tax havens,” Scarr told the News. “I have not taken time to verify that claim.”

As part of the report, the group provided a series of policy recommendations, some of which, Scarr admitted, are more likely to be implemented than others. The recommendations included “decoupling” state and federal tax systems and requiring combined reporting for multinational corporations, the latter of which Scarr said his organization will focus on in its legislative efforts. Combined reporting would require all related corporations to file one corporate income tax return in the state.

The idea has already garnered support at high levels in the state government. In an August letter to the commissioners of Governor’s Business Tax Policy Task Force, Connecticut Comptroller Kevin Lembo said that combined reporting is one of nine proposals that would improve transparency and oversight within the state’s tax code.

“It eliminates the ability of corporations to lower their tax liability by shifting income amongst related entities,” Lembo said in the letter. “By implementing combined reporting, the Connecticut business tax will be simpler, more transparent and fair.”

Lembo could not be reached for comment.

At the moment, however, any significant change in the state’s tax code appears unlikely to occur in the near future.

“We haven’t had that many conversations after the release of the report with specific members of the general assembly or Malloy or Lembo’s office,” Scarr said Thursday. “We’re planning to continue working with members of the legislature and administration on combined reporting, but so far we haven’t engaged that much.”

State Representatives Diana Urban, Susan Johnson and Bryan Hurlburt, who released the study results along with CPIRG, could not be reached for comment Thursday.

Although corporate taxes comprised the bulk of lost revenue, the report claims, use of tax havens by wealthy individuals amounted to $318 million in lost revenue last year, further preventing Connecticut from collecting all the taxes it was owed.

While Stamford tax attorney James Rubino said that using offshore accounts for tax evasion is illegal and can lead to jail time, the report noted that loopholes allow wealthy individuals to create “shell corporations or trusts” in countries with low taxes, and thereby avoid paying taxes. According to the report, this denied $13.8 billion in rightful tax revenue to all states combined last year.

“To make it worth [using a tax haven] you’d have to be very wealthy and have a large amount of money to move offshore,” Rubino said, adding that the figure of $318 million did not surprise him “given the relative amount of wealth that comes from Fairfield County as opposed to the rest of the country.”

The five companies headquartered in Connecticut listed by the report as making use of tax havens had combined total revenues of $285 billion in 2011.

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