Hawaiʻi should close tax loopholes for multinational corporations

Multinational corporations make huge profits from the business activity they conduct in Hawaiʻi, while dodging the taxes they should be paying to support our state. These huge corporations do this by moving the profits earned within Hawaiʻi to their tax havens in foreign countries that levy almost no corporate taxes. 

The Institute on Taxation and Economic Policy (ITEP) has found that Hawaiʻi could take back $85 million a year in tax revenue by closing this type of loophole with the help of a policy known as worldwide combined reporting.

U.S.-based multinational companies use a common tax-dodging strategy, whereby they create a smaller company that they own (a “subsidiary”) in a tax haven and transfer ownership of a trademark to it. Then, the parent company pays the subsidiary a fee to use its trademark.

For example, a hotel chain that is headquartered in the U.S. could open a subsidiary in the Cayman Islands. Essentially, this corporation would be allowed to pay its subsidiary for the right to use its own branding, along with consultations and other “services.” Since the subsidiary would be taxed at a lower rate, it can then pass the savings back to the parent company. In 2025, the U.S. will lose an estimated $18.7 billion in tax revenue because of this practice.

Figure 1. The process by which U.S.-based multinational corporations are able to use subsidiaries to evade U.S. taxes.

Like most states, Hawaiʻi already has a law called combined reporting, which requires corporations to report all their profits made within the U.S. Although this prevents corporations that do business in Hawaiʻi from sending their profits to another state, it doesn’t stop them from moving their profits overseas.

This can be tackled with worldwide combined reporting (WWCR), which forces corporations to report all their income—whether it’s earned in the U.S. or abroad. This way, companies would be taxed based on where they do business, instead of where they stash away their profits.

In the 1980s, California and several other states attempted to enforce WWCR, but corporate lobbyists pushed for loopholes that made it optional. To this day, Alaska still applies WWCR to oil companies, proving that this policy can be revived.

The State of Hawaiʻi has an obligation to tax multinational companies for the full amount of taxes they owe, even if it cuts into the bottom line of millionaire investors. The state can reinvest this money into priorities like building more affordable housing, feeding children in schools, and funding tax credits for working families.