Connect with us

Crackdown on ‘corporate inversions’ highlights the monstrosity of US tax code



Companies such as drugmaker Pfizer and medical device maker Medtronic that have used a technique called an inversion to reduce their tax bill recently got a smackdown from President Barack Obama:

I am very pleased that the Treasury Department has taken new action to prevent more corporations from taking advantage of one of the most insidious tax loopholes out there, and fleeing the country just to get out of paying their taxes… They benefit from our research and our development and our patents. They benefit from American workers, who are the best in the world. But they effectively renounce their citizenship.


That new action, announced on April 4, involves tightening the rules by which which a U.S. company acquires or merges with a foreign business in order to change its corporate headquarters and enjoy lower taxes. The aim is to make these so-called corporate inversions harder.

The new rules immediately scored a victory by torpedoing the planned US$152 billion merger between New York-based Pfizer and Dublin-based Allergan because one of the Treasury changes would have severely limited the tieup’s tax benefits. Had it gone through, it would have been the biggest inversion ever, overtaking the $50 billion Medtronic deal completed in 2015.

But it won’t stop them altogether – especially in high-tech sectors like pharmaceuticals – because the underlying reason U.S. companies invert is that the corporate tax rate here (35 percent) is so much higher than in countries like Ireland (12.5 percent).

The issue has received tons of attention this year as candidates from all sides declare inversions “disgusting” (Donald Trump) and “nothing less than a tax scam” (Bernie Sanders).

Perhaps the most important lesson we should draw from all the attention inversions are getting, however, is that the powerful incentive to relocate abroad to pay less tax will remain until Congress and the president can agree to reform and rationalize the U.S. tax code. Until then, companies will continue to do whatever they can within the law to lower their tax bills, and that includes inverting.


How to invert

In simple terms, an inversion involves a company shifting its corporate headquarters to a lower-tax jurisdiction. For large multinational companies like Pfizer, the annual savings can be in the billions.

But it is not just a matter of declaring a new address and printing new stationery. The U.S. company has to acquire a foreign business large enough to qualify for the inversion so that the combined entity can get all the tax perks. If the target company is too small, the tax savings are diminished, making it less worth it.


Under one of the new Treasury rules, meeting that threshold became a lot harder because now the foreign company cannot itself have bulked up its equity base with serial acquisitions in the prior 36 months. In other words, recent purchases won’t count toward the company’s size for tax purposes, making it potentially not large enough to qualify for all the benefits of inverting. That’s exactly what Botox-maker Allergan had done and why the deal was killed.

Overall, inversions aren’t that numerous, though they have increased substantially in the past couple decades. Just six were completed in 2015, up from four in each of the previous two years, according to Bloomberg.


Why companies invert

Here is the gist of the arguments in favor of inversions:

The U.S. federal corporate tax rate is the highest in the developed world. Not only that, but unlike most major countries, U.S. tax is applicable not only to a company’s American operations but to its activities across the globe.


Some argue this creates a comparative disadvantage relative to companies in lower-tax nations because higher taxes mean less money left over for dividends for shareholders or investment in research and development, undermining the competitiveness of American companies.

And since inversions are technically legal, it’s a company’s fiduciary duty to its shareholders to do all it can (legally) to reduce its tax burden.

To counter arguments that it’s unpatriotic because it costs U.S. jobs, inversion backers say that it generally changes very little in terms of operations and employment levels in each jurisdiction.

Who has to ‘foot the bill’?

Critics of inversions, however, contend it’s more than just jobs at stake. Shifting a company’s tax bill overseas means the rest of us are left to “foot the bill,” in the words of Republican Senator Charles Grassley.


Congress’ nonpartisan Joint Committee on Taxation estimated in 2014 that the U.S. government will forgo $33.6 billion in corporate tax revenue over the next 10 years as a result of inversions.

This helps explain why inversions have enemies among both Democrats and Republicans. If U.S. multinationals pay less tax, the difference has to be made up by individual taxpayers and companies (who would otherwise pay less).

In addition, critics argue that the tax rate companies actually pay isn’t that high once loopholes and other deductions are taken into account. That rate is much lower but varies according to who’s doing the analysis (19.4 percent, according to Citizens for Tax Justice, and 27 percent, according to PricewaterhouseCoopers). What they actually pay only the Internal Revenue Service knows.

In that same vein, companies already have many ways to avoid a large U.S. tax bite, from leaving their foreign profits overseas (and out of the reach of the IRS) or by using various tax avoidance schemes.


Why all the hullabaloo?

As noted earlier, inversions aren’t that numerous and, despite the new rules, won’t be stopped entirely. So why do they draw so much ire?

Primarily, the point is that they appear unpatriotic, particularly in an election year, making them an easy target for politicians. As Obama put it, companies that do inversions are essentially renouncing their U.S. citizenship yet still benefiting from all the things taxpayers pay for such as infrastructure and education.

More fundamentally, however, they highlight the bloated monstrosity that is the U.S. corporate tax code, with thousands of arcane provisions and loopholes that require an army of accountants to take advantage of. That leaves them out of reach of the majority of small business owners.

These small businesses cannot take advantage of international tax loopholes, making them resentful of large multinational firms that can shift operations, earnings and tax payments across countries. Hence, the issue of inversions highlights fundamental tensions between domestic and multinational businesses as well as between single-jurisdiction governments and companies that operate beyond borders.

These issues have been building steam over the past two decades but have been ignored by a political establishment content to “kick the can down the road” and avoid making the hard decisions.


Despite the virtually unanimous opinion that we need to rationalize the tax code, nothing is done, in my view, because of the concentrated vested interest on the part of international tax experts, lobbyists, lawyers and the large firms that can afford to hire them with generous professional fees in Washington, D.C.

Ironically, Obama’s speech introducing the new Treasury rules used virtually the same words as that of Senator Grassley, suggesting perhaps that a bipartisan effort to rationalize the U.S. tax code may be possible.

The Conversation

By Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers University


This article was originally published on The Conversation. Read the original article.

Report typos and corrections to: [email protected].
Continue Reading


Watergate’s John Dean thinks Trump wrote part of his legal team’s brief — because it’s so terrible



Former White House counsel for Richard Nixon, John Dean, explained that the legal brief out of President Donald Trump's White House was so bad that it had to have been dictated by Trump himself.

Saturday evening, Trump's legal team, chaired by Trump lawyer Jay Sekulow and White House counsel Pat Cipollone, filed their own form of a legal brief that responded to the case filed by Democrats ahead of Tuesday's impeachment trial.

The document called the proceedings “constitutionally invalid” and claims House Democrats are staging a “dangerous attack” with a “brazen and unlawful attempt to overturn the results of the 2016 election and interfere with the 2020 election.”

Continue Reading


WATCH: Prince Harry explains why he and Meghan are leaving the royal family — but promises ‘a life of service’



Prince Harry posted a video from an HIV/AIDS fundraiser his mother once supported, where he explained his methodology for leaving his profile role as a royal.

"I will continue to be the same man who holds his country dear," said Harry.

He went on to say that he doesn't intend to walk away and he certainly won't walk away from his causes and interests. "We intend to live a life of service."

In the speech, he thanked those who took him under their wing in the absence of his mother

"I hope you can understand that it's what it had come to," he said for why their family intends to step back.

Continue Reading

Breaking Banner

‘You cannot expect anything but fascism’: Pedagogy theorist on how Trump ‘legitimated a culture of lying, cruelty and a collapse of social responsibility’



The impeachment of Donald Trump appears to be a crisis without a history, at least a history that illuminates, not just comparisons with other presidential impeachments, but a history that provides historical lessons regarding its relationship to a previous age of tyranny that ushered in horrors associated with a fascist politics in the 1930s.  In the age of Trump, history is now used to divert and elude the most serious questions to be raised about the impeachment crisis. The legacy of earlier presidential impeachments, which include Andrew Johnson and Bill Clinton, provide a comparative historical context for analysis and criticism. And while Trump’s impeachment is often defined as a more serious constitutional crisis given his attempt to use the power of the presidency to advance his personal political agenda, it is a crisis that willfully ignores the conditions that gave rise to Trump’s presidency along with its recurring pattern of authoritarian behavior, policies, and practices.  One result is that the impeachment process with its abundance of political theater and insipid media coverage treats Trump’s crimes as the endpoint of an abuse of power and an illegal act, rather than as a political action that is symptomatic of a long legacy of conditions that have led to the United States’ slide into the abyss of authoritarianism.

Continue Reading
Help Raw Story Uncover Injustice. Join Raw Story Investigates for $1 and go ad-free.