USA: Battle on Capitol Hill over tax inversions
16 September 2014
Posted by: Author: Dan Freedman
Author: Dan Freedman (Hearst Newspapers)
U.S. Sen. Chuck Schumer and others on Capitol Hill are mounting an assault on corporate America's rising reliance on inversions, the minnow-swallows-whale merger tactic in which U.S. corporations avoid U.S. taxes by relocating overseas.
Typically in an inversion, a larger U.S. corporation merges with a smaller European counterpart and moves its legal business address to Dublin or London or Switzerland. More often than not, the company maintains its U.S. base and does business as normal.
But the move permits the businesses to save billions in U.S. tax liability and repatriate foreign earnings through a series of rapid-fire financial transactions designed to get around existing U.S. tax law.
"Inversions are economically rational deals as reimagined by Lewis Carroll's Humpty Dumpty," said Edward Kleinbard, a professor of law and business at the University of Southern California.
According to the Congressional Research Service, 75 corporations have gone the inversion route in the past two decades, and the pace has picked up considerably in the past year.
Just this summer, two large U.S. pharmaceutical companies — AbbVie of Chicago and Mylan of Pittsburgh — agreed to mergers that would move them to Europe.
Burger King raised eyebrows by acquiring the Canadian doughnut king, Tim Hortons, and relocating north of the border. But the company insisted tax savings had nothing to do with its decision. Drugstore giant Walgreen Co. last month backed off a similar inversion deal.
President Barack Obama and Treasury Secretary Jacob Lew have appealed to the corporate world's sense of "economic patriotism" in encouraging companies not to relocate, whatever the financial advantages might be.
But in more and more cases, the temptation of huge tax savings appears to be superseding flag-waving appeals.
The financial stakes are huge. Had it gone the inversion route, Walgreen could have saved up to $797 million annually, according to a Barclays report.
"We need to move quickly and aggressively to curtail inversions and prevent companies from using shady accounting practices to avoid their U.S. tax obligation," said Schumer, who last week introduced legislation to restrict the interest deductions that inverted companies use to avoid taxes.
On Capitol Hill, the tension is between lawmakers like Schumer who favor a crackdown on inversions that make them less appealing — the Democratic position — and lowering the top corporate tax rate from 35 percent to 25 percent — favored by Republicans.
The White House favors changing the law to require shareholders of the foreign company in an inversion to own 50 percent of the newly merged entity, up from 20 percent under current law. The president also favors a smell test in which inverted companies that continue to be managed in the United States, do most of their business in the United States and have few dealings in the new overseas location would still be treated as U.S. corporations for tax purposes.
The business world insists the culprit in this controversy is the high tax rate, 10 to 15 percentage points higher than England or Ireland or other nations where U.S. corporations relocate.
"Congressional and administrative attempts to artificially limit the ability to mitigate this difference will only exacerbate the situation, further disadvantaging American companies and encouraging foreign purchases of American companies," said Caroline Harris, U.S. Chamber of Commerce's chief tax counsel. "To truly address this problem, the U.S. must undertake comprehensive tax reform that lowers rates for all taxpayers and shifts to an internationally competitive tax system."
But some outside experts insist the claims about competitive rates have little bearing on U.S. corporations that go the inversion route.
Corporate claims of tax-rate victimization are "a false narrative," Kleinbard wrote in a research paper last month titled "'Competitiveness' Has Nothing to Do With It."
Inversions permit U.S. corporations with foreign partners to funnel a good chunk of the approximately $1 trillion parked overseas back to the United States without major tax liability, Kleinbard argues. The methods include what Kleinbard terms "hopscotching," in which a foreign subsidiary sends profits to its inverted parent now based overseas, which in turn can pay dividends to U.S. shareholders without incurring U.S. taxes.
Another is "income stripping," in which the foreign overseer lends money to the U.S.-based company and the U.S. company deducts interest payments from its U.S. taxes.
Schumer's legislation, co-authored by Sen. Dick Durbin, D-Ill., addresses income stripping by limiting the interest expense deductions that inverters use and also by requiring U.S. subsidiaries of inverted companies to get IRS pre-approval for 10 years after departure.
"(Income) stripping is the number-one incentive driving the wave of inversions we've seen in recent months, and we need to shut it down," Schumer said. "This bill curtails the incentive for companies to use shady accounting gimmicks to avoid paying their U.S. tax obligations."
Corporate complaints about the oppressive U.S. tax burden are questionable, some analysts say, because few domestically based U.S. corporations pay anywhere near the 35 percent top tax rate.
"Both the high U.S. tax rate and the worldwide system of taxation have more bark than bite," said Kimberly Clausing, an economist at Reed College in Portland, Ore., who authored a paper on inversions last month. "Effective tax rates in the teens are common and some global corporations even pay rates in the single digits."
Among those corporations is General Electric, which maintains major facilities in the Capital Region.
GE, the nation's one-time household product icon that branched out into lending and production of turbines, jet engines and other industrial products, has earned a reputation for vigilant lobbying of Congress and mining the IRS code for tax breaks. GE's effective tax rate in 2013 was 4.2 percent.
Seth Martin, a GE spokesman, attributed the low rate to asset sales from shrinking GE Capital, the company's financial services unit. In 2013, GE earned $13 billion on revenues of $146 billion.
Because of its size, GE is an unlikely candidate for inversion. The company has never considered inversion and has no plans to do so, Martin said.
Congressional agreement on inversions is not likely to come anytime soon, but Republicans and Democrats are not that far apart on at least one aspect of the controversy. The president has advocated a top rate of 28 percent, just three percentage points higher than the Republican proposal of 25 percent put forward by House Ways & Means Chairman Rep. Dave Camp, R-Mich.
"I may be the only one in America who believes this, but I'm optimistic business tax reform can happen,'' Kleinbard said.
This article first appeared on timesunion.com.