Following up on yesterday's post on the New York Times and Wall Street Journal articles on tax-motivated corporate inversions: Fortune, Positively Un-American Tax Dodges, by Allan Sloan:
Yes, leaving the country–a process that tax techies call inversion–is perfectly legal. A company does this by reincorporating in a place like Ireland, where the corporate tax rate is 12.5%, compared with 35% in the U.S. Inversion also makes it easier to divert what would normally be U.S. earnings to foreign, lower-tax locales. But being legal isn’t the same as being right. If a few companies invert, it’s irritating but no big deal for our society. But mass inversion is a whole other thing, and that’s where we’re heading.
We’ve also got a second, related problem, which I call the “never-heres.” They include formerly private companies like Accenture, a consulting firm that was spun off from Arthur Andersen, and disc-drive maker Seagate, which began as a U.S. company, went private in a 2000 buyout and was moved to the Cayman Islands, went public in 2002, then moved to Ireland from the Caymans in 2010. Firms like these can duck lots of U.S. taxes without being accused of having deserted our country because technically they were never here. So far, by Fortune’s count, some 60 U.S. companies have chosen the never-here or the inversion route, and others are lining up to leave.
All of this threatens to undermine our tax base, with projected losses in the billions. It also threatens to undermine the American public’s already shrinking respect for big corporations.
Inverters, of course, have a different view of things. It goes something like this: The U.S. tax rate is too high, and uncompetitive. Unlike many other countries, the U.S. taxes all profits worldwide, not just those earned here. A domicile abroad can offer a more competitive corporate tax rate. Fiduciary duty to shareholders requires that companies maximize returns.
My answer: Fight to fix the tax code, but don’t desert the country. And I define “fiduciary duty” as the obligation to produce the best long-term results for shareholders, not “get the stock price up today.” Undermining the finances of the federal government by inverting helps undermine our economy. And that’s a bad thing, in the long run, for companies that do business in America. ...
How much money are we talking about inverters sucking out of the U.S. Treasury? There’s no number available for the tax revenue losses caused by inverters and never-heres so far. But it’s clearly in the billions. Congress’s Joint Committee on Taxation projects that failing to limit inversions will cost the Treasury an additional $19.5 billion over 10 years–a number that seems way low, given the looming stampede. ...
So what do we need? I’ll offer you a bipartisan solution–no, I’m not kidding. For starters, we need to tighten inversion rules as proposed by Sandy and Carl Levin, who are both bigtime Democrats. That would buy time to erect a more rational corporate tax structure than we have now–bolstered, I hope, by input from tough-minded tax techies.
We also need loophole tighteners along the lines of proposals in the Republican-sponsored, dead-on-arrival Tax Reform Act of 2014. One part would have imposed a tax of 8.75% a year on cash and cash equivalents held offshore, and 3.5% a year on other retained offshore earnings.
Another thing we need to do–which the SEC or the Financial Accounting Standards Board could do in a heartbeat, but won’t–is require publicly traded U.S. companies and U.S. subsidiaries of publicly traded foreign companies to disclose two numbers from the tax returns they file with the IRS: their U.S. taxable income for a given year, and how much income tax they owed. This would take perhaps one person-hour a year per company.
That way we would know what firms actually pay instead of having to guess at it. Then we could compare and contrast companies’ income tax payments. ...
Until–and unless–we somehow get our act together on corporate tax reform, companies will keep leaving our country. Those that try to do the right thing and act like good American corporate citizens will come under increasing pressure to invert, if only to fend off possible attacks by corporate pirates–I’m sorry, “activist investors”–who see inversion as a way to get a quick uptick in their targets’ stock price.
(Hat Tip: Francine Lipman.)