Taxation committee votes to pass tax haven bill, increasing taxes on manufacturers that export overseas
On Wednesday, February 19, the Taxation committee voted along party lines (7-4) “ought to pass as amended” on LD 403, An Act to Prevent Tax Haven Abuse, sponsored by the committee cochair, Rep. Ryan Tipping (D-Orono). In addition to Rep. Tipping, committee cochair Sen. Benjamin Chipman (D-Cumberland), and Rep. Ann Matlack (D-St. George), Rep. Diane Denk (D-Kennebunk), Rep. Stephen Stanley (D-Medway), Rep. Maureen Terry (D-Gorham), and Rep. Kristen Cloutier (D-Lewiston) all voted in favor of the bill as amended. Sen. Matthew Pouliot (R-Kennebec), Rep. Bruce A. Bickford (R-Auburn), Rep. Donald G. Marean (R-Hollis), and Rep. Theodore Joseph Kryzak Jr. (R-Acton) voted ought-not-to-pass.
The Maine State Chamber testified against the bill last week. As amended, the bill would strip out the Foreign Derived Intangible Income (FDII) deduction. This would result in an income tax increase on Maine’s manufacturers that export outside the United States. FDII is one of two provisions enacted by Congress in the Tax Cuts and Jobs Act legislation from 2017. The act was intended to update the nation’s tax policies to make the taxation system competitive with the rest of the world and to also incentivize companies to make investments within the United States. Among its most notable provisions, intended to make the United States a competitive place for investment, was the alignment of the U.S. corporate tax rate with the average tax rate of the world’s 30 largest economies.
Less noted by the public due its complexity, but equally important, were provisions within the law that intended to increase incentives for U.S. investment. These provisions utilized a “carrot and a stick” approach and are referred to as FDII (Foreign Derived Intangible Income) and GILTI (Global Intangible Low Taxed Income). They are intended by the legislation to work hand-in-glove with one another, and both have to do with the income that is generated on sales to customers located outside the United States.
FDII – the carrot – benefits companies located in the United States where income is recognized on their U.S. tax return that is the resultant of a non-U.S. sale. The greater the income that is subject to U.S. taxation, the greater the FDII benefit. And because more income is recognized in the U.S., if manufacturing and R&D occurs within the U.S., the provision encourages U.S. investment in these activities.
GILTI – the stick – harms companies that make that same international sale, if they recognize that income outside the U.S. Prior to this tax reform, this income would not have been taxable in the U.S., unless the cash portion of those profits were actually repatriated to the U.S., which practically rarely happened. With GILTI, the U.S. imposes immediate taxation on those international profits, which are generated by having the manufacturing and R&D occur outside the U.S., regardless of whether the income is repatriated.
Because these two calculations and provisions have closely intertwined policy goals, both were included as part of the federal provision, and according to the Council on State Taxation (COST), the majority of states who have adopted GILTI adopted FDII.
LD 403 as amended now heads to the Maine House of Representatives for debate. Please contact your legislators and urge them to “vote no” on LD 403. If you have any questions, please contact Linda Caprara by calling (207) 623-4568, ext. 106, or by emailing firstname.lastname@example.org.