Opinion: Eliminating the “water’s edge”

By TOM SCHAMBERG and THOMAS OPPEL

Published: 09-23-2023 6:00 AM

NH State Representative Tom Schamberg, D-Wilmot, introduced legislation in the 2023 session to end the “water’s edge” method. Thomas Oppel, Canaan, consults with the Coalition for a Prosperous America, a 503(c)3 based in Washington.

“We point out that the water’s edge method was adopted for the benefit of foreign businesses. Prior to 1986, New Hampshire utilized worldwide combined reporting…” – Caterpillar Inc v NH Department of Revenue Administration (1999)

New Hampshire relies on business taxes for a third or more of its tax revenue, more than twice as high as any other state, even despite recent cuts. But New Hampshire’s tax system is far more favorable to foreign companies, putting domestic businesses at a competitive disadvantage.

Current law allows foreign and multi-national enterprises to use accounting techniques and paper transactions to reduce their tax liability, no matter how much business they do in the Granite State, by shifting profits to lower tax entities beyond the “water’s edge,” the boundaries of the United States.

New Hampshire’s Supreme Court spotlighted this competitive disadvantage for domestic business as far back as 1999 when it wrote in a decision involving heavy equipment manufacturer Caterpillar that “the water’s edge method was adopted for the benefit of foreign businesses.”

Foreign companies and other multinationals have the capacity, the overseas operations, and the financial incentives to use accounting techniques, paper transactions, and other tactics to shift profits to lower tax jurisdictions overseas, where the water’s edge provisions obscure the truth from states like New Hampshire. These companies are not required to account for their operations outside the U.S. but in worldwide reporting, these companies must do it for their entire enterprise.

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As a result, domestic companies — local bookstores, craft breweries, hardware stores — face a disproportionate tax liability, while the state is losing revenue needed to pay for state services. At least one study suggests the revenue losses could be as high as $177 million annually, nearly 14% of what is currently raised by business taxes. (“A Simple Fix for a $17 Billion Loophole.”)

This inequity in our current state business tax system is likely to be made worse by a transition in how businesses are taxed. Until last year, business taxes were based on payroll, property and sales, but we’ve now switched to apportioning liability based only on sales.

While New Hampshire’s economy indisputably benefits from foreign and multinational companies, domestic businesses still account for about nine of every 10 jobs in the Granite State and thus deserve a more level playing field when it comes to their tax bills.

Such a level playing field is not only possible, it actually would return New Hampshire’s tax structure to what it was prior to 1986. A special commission created by the state Legislature is meeting this fall to consider repealing the “water’s edge” provision in tax law and adopting “worldwide combined reporting.”

Combined reporting requires companies with one or more subsidiaries under its control to report all income, expenses and net revenues from the entire operation, however they are divided up. The companies then must report to each jurisdiction where they do business, their net profits attributable to that jurisdiction, making it easier for those jurisdictions to track that activity and to conduct audits to confirm those reports.

Combined reporting is currently practiced by New Hampshire and other states on activities within the United States, but the “water’s edge” provision means foreign and multinational companies can shift profits overseas to reduce their actual tax liability.

It’s well past time to end the competitive disadvantage for domestic business owners and the nine out of 10 New Hampshire citizens they employ by eliminating the “water’s edge” provision benefiting foreign companies and adopting worldwide combined reporting to put every business, domestic and foreign, on the same level playing field.

The Commission holds its first public hearing on Monday, Sept. 25, at 9:30 a.m., in the Legislative Office Building (Rooms 202-204).

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