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House of Representatives
Session of 2013 - 2014 Regular Session

MEMORANDUM

Posted: January 9, 2013 01:34 PM
From: Representative Phyllis Mundy
To: All House members
Subject: Reintroduction of Legislation – Addback Approach to Closing the “Delaware Loophole” (Formerly HB 2288 of the 2011-2012 Legislative Session)
 
Earlier, I circulated a co-sponsorship memo for legislation that would implement unitary combined reporting to close a wide array of corporate tax avoidance schemes, including what is commonly referred to as the “Delaware loophole” (see below for explanation). While I believe combined reporting is the best and most comprehensive approach to ensuring all corporations in Pennsylvania pay their fair share of taxes, I continue to recognize the political reality that neither Governor Corbett nor the Republican leadership in the General Assembly will support such legislation.

Therefore, I will soon reintroduce a proposal (referred to as the “addback” approach) that specifically targets and closes one of the most egregious tax-avoidance strategies – the Delaware loophole. My legislation also would reduce the Corporate Net Income Tax rate to 6.99 percent, which would give us one of the lowest corporate income tax rates of the surrounding states.

My bill, which is based on the Multistate Tax Commission’s model language, would require corporate taxpayers to “add back” to their Pennsylvania taxable income both intangible (i.e., use of patents, trademarks, copyrights, etc.) and interest expenses paid to related parties. It also sets a high standard for allowing such deductions and puts the burden of proof on corporations, not the Pennsylvania Department of Revenue, to justify the legitimacy of the deductions.

In the spirit of tax fairness, my legislation also would lower the Corporate Net Income Tax rate from 9.99 percent to 6.99 percent over a period of six years, beginning in 2015.

Pennsylvania businesses and taxpayers are the ones left holding the bag when foreign and multistate corporations choose to shirk their tax obligations. Join me in creating greater tax fairness.

Here is how the Delaware loophole works: A corporation operating in Pennsylvania sets up a shell company in Delaware, a state that does not tax royalty income. The parent corporation transfers ownership of its trademarks, patents, or other intangible property to the shell company. The shell company then charges the parent corporation a royalty for using the trademarked name or patent. This allows the corporation in Pennsylvania to treat the payment as a business expense, which it then deducts from its income in the Keystone state, reducing its tax burden here.

PRIOR CO-SPONSORS:
Briggs, Caltagirone, Carroll, Cohen, Daley, Davis, DeLuca, Fabrizio, Frankel, Freeman, George, Goodman, Hanna, Hornaman, Josephs, Kavulich, Kortz, Mirabito, Mullery, Murphy, Preston, Readshaw, K. Smith, Youngblood, Bradford, and Pashinski



Introduced as HB639