House panel OKs closing loophole in corporate tax

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HARRISBURG -- A corporate tax reform package seeking to close the so-called Delaware loophole has cleared a House panel after numerous attempts by Democrats to change the bill.

Policy makers have talked for years about stopping companies from reducing their Pennsylvania corporate income taxes through royalties and similar payments to holding companies in other states. The House Finance Committee on Monday approved legislation to lower the corporate tax rate while attempting to close the loophole by requiring that companies claim tax deductions only for intangible expenses directly related to a valid business purpose.

The ranking Democrat on the committee, Rep. Phyllis Mundy of Luzerne County, said during a meeting of the committee that the legislation would create further opportunities for tax avoidance by assuming the legitimacy of transactions conducted at fair-market value and clearing any transaction that could be claimed as having a legitimate business purpose.

"The language is so broad and riddled with exceptions that it's ineffective and meaningless," she said.

She proposed that lawmakers instead institute an approach, known as combined reporting, that requires corporations to file tax returns based on their and their affiliates' total business activity. Republicans on the committee defeated the amendment after the sponsor of the original legislation, Rep. Dave Reed, the Republican policy chairman, said combined reporting, unlike the mechanism in his bill, would burden companies that did not exploit the loophole.

The committee also defeated a proposal by Ms. Mundy to require corporations to present evidence that payment for an intangible expense qualifies for a tax deduction.

Mr. Reed of Indiana said after the meeting that the mechanism in his bill would result over five to 10 years in the collection of hundreds of millions of dollars otherwise lost to the loophole. He said the bill could receive a final vote by the House in May.

The committee approved two changes to the bill. One specifies that interest payments as well as payments for intangible expenses must meet the standard of a valid business purpose to qualify for a deduction. The other caps at $300 per year the amount of sales tax collection that can be used by retail vendors to offset their tax obligations.


Karen Langley: or 1-717-787-2141.


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