SB 2738: Department of Taxation; Taxation; Corporations; Combined Reporting; State-by-State Reporting; Penalties

A BILL FOR AN ACT

RELATING TO TAX HAVEN ABUSE.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

     SECTION 1.  The legislature finds that the State's tax revenue showed robust growth, starting in the last quarter of fiscal year 2020, as the economy recovered from the effects of the COVID-19 pandemic.  Although tax collections totaled $10,440,000,000 in fiscal year 2023, a relatively marginal decrease from $10,460,000 in fiscal year 2022, the legislature finds that additional sources of state revenue should be considered.

     The legislature further finds that corporations use complicated schemes to shift domestic earnings to subsidiaries incorporated in offshore tax havens, countries with minimal or no taxes, in order to reduce their state and federal income tax liability by billions of dollars in certain cases.  A January 2019 report by the Institute on Taxation and Economic Policy and the United States Public Interest Research Group estimated that the State is losing $38,000,000 annually by not updating tax laws to mandate worldwide combined reporting of corporate income.  Worldwide combined reporting is considered the gold standard for closing tax loopholes, and the report found it would raise nearly three times more revenue than other options to address revenue currently lost to tax avoidance.

     The purpose of this Act is to ensure transparency in the manner in which corporations conduct business in the State by:

     (1)  Changing the manner in which corporate tax is determined in the State to a more fair and effective form of calculating corporate tax liability through:

          (A)  Requiring corporations to include in their income the income of all foreign subsidiaries to the State, as is already required by the Internal Revenue Service; and

          (B)  Applying the State's apportionment formula to determine the share of reported profits subject to the appropriate tax, to be deposited into the state general fund;

     (2)  Requiring corporations to report all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states; and

     (3)  Establishing penalties for violations.

     SECTION 2.  Chapter 235, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:

     "§235-A  Corporation income reporting; foreign subsidiaries.  (a)  Every corporation subject to the tax imposed under this chapter shall report all income from foreign subsidiaries by filing a copy of federal Internal Revenue Service form 5471 with the department of taxation at the same time as such forms must be filed with the Internal Revenue Service.

     (b)  Notwithstanding any law to the contrary, all income from a corporation's foreign subsidiaries shall be apportioned as business income pursuant to section 235-29.

     (c)  The revenues generated from the tax imposed on the business income apportioned pursuant to subsection (b) shall be deposited into the general fund for the purposes of funding critical public services.

     (d)  Any violation of this section shall be subject to penalties established under chapter 231.

     §235-B  Corporation income; state-by-state reporting.  (a)  Every corporation subject to the tax imposed under this chapter shall submit to the department of taxation a report on all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states at the same time as the forms required pursuant to section 235-A must be filed with the Internal Revenue Service.

     (b)  Any violation of this section shall be subject to penalties established under chapter 231."

     SECTION 3.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 4.  New statutory material is underscored.

     SECTION 5.  This Act shall take effect on July 1, 2050; provided that section 2 shall apply to taxable years beginning after December 31, 2027.

Report Title:

Department of Taxation; Taxation; Corporations; Combined Reporting; State-by-State Reporting; Penalties

Description:

Effective 1/1/2028, requires corporations to include in their income the income of all foreign subsidiaries to the State; applies the State's apportionment formula to determine the share of reported profits subject to the appropriate tax, which shall be deposited into the state general fund; and requires corporations to report all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states.  Establishes penalties for violations.  Effective 7/1/2050.  (SD1)

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

A BILL FOR AN ACT

relating to tax haven abuse.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

PART I

     SECTION 1.  The legislature finds that the State's tax revenue showed robust growth, starting in the last quarter of fiscal year 2020, as Hawaii's economy recovered from the effects of the COVID-19 pandemic.  Although tax collections totaled $10,440,000,000 in fiscal year 2023, a relatively marginal decrease from $10,460,000 in fiscal year 2022, the legislature finds that additional sources of state revenue should be considered.

     The legislature further finds that corporations use complicated schemes to shift domestic earnings to subsidiaries incorporated in offshore tax havens, countries with minimal or no taxes, in order to reduce their state and federal income tax liability by billions of dollars in certain cases.  A January 2019 report by the Institute on Taxation and Economic Policy and the United States Public Interest Research Group estimated that the State is losing $38,000,000 annually by not updating tax laws to mandate worldwide combined reporting of corporate income.  Worldwide combined reporting is considered the gold standard for closing tax loopholes, and the report found it would raise nearly three times more revenue than other options to address revenue currently lost to tax avoidance.

     The purpose of this part is to ensure transparency in the manner in which corporations conduct business in the State by:

     (1)  Changing the manner in which corporate tax is determined in the State to a more fair and effective form of calculating corporate tax liability through:

          (A)  Requiring corporations to include in their income the income of all foreign subsidiaries to the State, as is already required by the Internal Revenue Service; and

          (B)  Applying the State's apportionment formula to determine the share of reported profits subject to the appropriate tax, to be deposited into the state general fund; and

     (2)  Requiring corporations to report all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states.

     SECTION 2.  Chapter 235, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:

     "§235-A  Corporation income reporting; foreign subsidiaries.  (a)  Every corporation subject to the tax imposed under this chapter shall report all income from foreign subsidiaries by filing a copy of federal Internal Revenue form 5471 with the department of taxation at the same time as such forms must be filed with the Internal Revenue Service.

     (b)  All income from a corporation's foreign subsidiaries shall be apportioned as business income pursuant to section 235-29.

     (c)  The revenues generated from the tax imposed on the business income apportioned pursuant to subsection (b) shall be deposited into the general fund for the purposes of funding critical public services.

     §235-B  Corporation income; state-by-state reporting .  (a)  Every corporation subject to the tax imposed under this chapter shall submit to the department of taxation a report on all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states at the same time as the forms required pursuant to section 235-A must be filed with the Internal Revenue Service."

PART II

     SECTION 3.  Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

     "§231-     Corporate tax law task force.  (a)  There is established within the department of taxation for administrative purposes a corporate tax law task force to annually review the State's corporate tax laws and recommend updates to close corporate tax loopholes.

     (b)  The task force shall include the following:

     (1)  The director of taxation or the director's designee, who shall serve as chairperson of the working group; and

     (2)  The chairperson of the council on revenues or the chairperson's designee.

     (c)  In addition to the members designated by subsection (b), the task force may invite any other appropriate person to join the working group.

     (d)  Members of the task force shall serve without compensation.

     (e)  In reviewing the State's corporate tax laws, the task force shall:

     (1)  Determine what income generated by a corporation, regardless of the corporation's physical presence in the State, may be taxed in accordance with state corporate tax laws; and

     (2)  Review new or amended federal corporate tax laws and make recommendations to amend state corporate tax laws to align with federal laws.

     (f)  The task force shall submit a report of its findings and recommendations, including any proposed legislation, to the legislature no later than twenty days prior to the convening of each regular session beginning with the regular session of 2027."

PART III

     SECTION 4.  In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

     SECTION 5.  New statutory material is underscored.

     SECTION 6.  This Act shall take effect upon its approval; provided that section 2 shall take effect on January 1, 2027.

Report Title:

Taxation; Corporations; Combined Reporting; State-by-state Reporting; Department of Taxation; Corporate Tax Law Task Force

Description:

Part I:  Effective 1/1/2027, requires corporations to include in their income the income of all foreign subsidiaries to the State; applies the State's apportionment formula to determine the share of reported profits subject to the appropriate tax, which shall be deposited into the state general fund; and requires corporations to report all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states.  Part II:  Establishes within DOTAX a Corporate Tax Law Task Force to annually review the State's corporate tax laws and recommend updates to close tax loopholes.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.

STAND. COM. REP. NO. 2611

Honolulu, Hawaii

RE:     S.B. No. 2738

        S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirty-Third State Legislature

Regular Session of 2026

State of Hawaii

Sir:

     Your Committees on Commerce and Consumer Protection and Judiciary, to which was referred S.B. No. 2738 entitled:

"A BILL FOR AN ACT RELATING TO TAX HAVEN ABUSE,"

beg leave to report as follows:

     The purpose and intent of this measure is to:

     (1)  Require corporations to include in their income the income of all foreign subsidiaries to the State;

     (2)  Apply the State's apportionment formula to determine the share of reported profits subject to the appropriate tax, which shall be deposited into the State general fund;

     (3)  Require corporations to report all profits, losses, revenues, and inter-company transactions made and all taxes paid in other states; and

     (4)  Establish a Corporate Tax Law Task Force within the Department of Taxation to annually review the State's corporate tax laws and recommend updates to close tax loopholes.

     Your Committees received testimony in support of this measure from Imua Alliance and two individuals.

     Your Committees received testimony in opposition to this measure from the Council on State Taxation.

     Your Committees received comments on this measure from the Department of Taxation and Tax Foundation of Hawaii.

     Your Committees find that tax-haven abuse is a large-scale  drain on revenues, costing the State an estimated $38,000,000 each year.  This shortfall forces the State to either reduce services or increase taxes for residents.  This measure would protect the State's fiscal capacity at a time of increasing funding pressures.

     Your Committees acknowledge the concerns raised in testimony by the Department of Taxation that they do not have sufficient resources, including staff and funding, to properly accomplish the tasks required of the Corporate Tax Law Task Force proposed by this measure in its current form.

     Accordingly, your Committees have amended this measure by:

     (1)  Inserting language that clarifies that notwithstanding any law to the contrary, all income from a corporation's foreign subsidiaries shall be apportioned as business income pursuant to section 235-29, Hawaii Revised Statutes;

     (2)  Inserting language that extends penalties established under chapter 231, Hawaii Revised Statutes, for violations;

     (3)  Deleting language that would have established a Corporate Tax Law Task Force within the Department of Taxation;

     (4)  Inserting language to delay implementation to taxable years beginning after December 31, 2027;

     (5)  Amending section 1 to reflect its amended purpose;

     (6)  Inserting an effective date of July 1, 2050, to encourage further discussion; and

     (7)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the records of votes of the members of your Committees on Commerce and Consumer Protection and Judiciary that are attached to this report, your Committees are in accord with the intent and purpose of S.B. No. 2738, as amended herein, and recommend that it pass Second Reading in the form attached hereto as S.B. No. 2738, S.D. 1, and be referred to your Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committees on Commerce and Consumer Protection and Judiciary,