Closing ‘Water’s Edge’ Tax Loophole Could Add $20 Million To State Treasury

February 07, 2014

A new report says closing just one tax loophole could put $20 million in the state treasury.

The United States Public Interest Research Group says closing the ‘water’s edge’ exemption allows a corporation to avoid taxes by doing something as simple as setting up a post office box in a low-tax country, like the Cayman Islands. The exemption prevents taxes from being collected on money generated inside another country.

Dan Smith of U.S. PIRG helped write the report.

“That income wasn’t made beyond the water’s edge,” Smith said. “It’s not like companies are putting up factories or doing research and development in the Cayman Islands.”

The report points out that while federal action could close the loophole, states can close it themselves, and Montana and Oregon already have. As a result, Montana collected an additional $7 million in corporate taxes in just one year.