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Delaware governor fears impact of closing 'loophole'

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By John D. Oravecz
Saturday, May 11, 2013, 12:01 a.m.
 

Delaware Gov. Jack A. Markell said $50 million to $200 million in corporate taxes that Pennsylvania estimates it could recover if the Legislature closes a Delaware “loophole” would have a “very significant impact” on his state.

But other states that have either tried to emulate Delaware's status as the nation's most corporation-friendly state or lessen its dominance have not had any impact, he said on Friday during a visit to Pittsburgh.

The state House on Monday adopted legislation to close the Delaware loophole and enact comprehensive corporate tax reforms. House Bill 440, sponsored by Rep. David Reed, R-Indiana, was approved by a vote of 129-65. It now goes to the Senate.

Reed's bill also would reduce the state's corporate income tax rate from 9.99 percent to 6.99 percent by 2019.

The Delaware loophole is used by multistate corporations to take deductions to avoid state income taxes, the Department of Revenue has said. Certain types of payments that have no economic benefit or purpose, made by a corporate subsidiary in one state to a subsidiary in another state, and resulting in a deduction, often are abused. Interest payments are one type often manipulated in sham transactions, state officials have said.

Reed's bill requires a legitimate business purpose for out-of-state transactions within a company, such as the use of a patent for a manufacturing process.

The Pennsylvania Budget and Policy Center estimates $50 million to $200 million annually could be recovered by closing the loophole.

Markell said that's “a big number” in the context of his state's $3 billion annual budget, although he said he is not familiar with the Pennsylvania issue.

Corporations in general prefer to incorporate in Delaware because of the state's laws, courts and the body of case law those courts have developed, Markell said. He pointed to its national reputation and importance of its Court of Chancery, where controversial corporate cases most often are heard.

“We are proud that over half of the Fortune 500 companies are incorporated in our state,” he said.

The impact of corporate activity of all kinds accounts for about 20 percent of Delaware government's revenue, he said.

“Some states have a adopted our laws wholesale,” he said, mentioning Nevada as one. But because they don't have Delaware's experienced judges and corporate case law, he has noticed no impact.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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