Los Angeles Times: Close Loopholes That Let U.S. Firms Avoid Taxes by Using Inversions, by Michael Hiltzik:
It's both endearing and infuriating to watch American corporate executives wring their hands about how the injustices of the U.S. tax code are forcing them — forcing them! — to reincorporate overseas through the procedure known as inversion.
Endearing, because one wants to sympathize with the pain felt by a homegrown CEO having to move a homegrown American company's headquarters to Ireland, Switzerland or some other foreign clime, just to remain competitive.
Infuriating, because they're so full of it. ...
Defenders of inversions say they don't really affect the American company's U.S. taxes — that's the claim made recently in the Wall Street Journal by Miles White, chairman of Abbott Laboratories, which is conniving with Mylan on its inversion deal.
But like much that's said about inversions, that's misleading, says Edward D. Kleinbard, a USC law professor whose role as a former chief of staff to the Congressional Joint Committee on Taxation certifies him as one of our leading experts on the corporate tax.
The claim that the corporate tax makes U.S. companies uncompetitive, he says, is "a complete red herring." Inversions aren't about improving competitiveness, Kleinbard observes. They're about making use of the huge cash hoards American companies have accumulated overseas. Kleinbard estimates this "stateless income" at roughly $1 trillion. It can't be spent directly in the United States without incurring a steep tax, and it's too large a sum to be profitably deployed outside the U.S.
Inversions allow companies to use these stockpiles in the U.S., at much lower cost.
Inversions also allow companies to use their overseas money as intracorporate loans to their domestic operations, charging the loan cost to their U.S. subsidiaries. This effectively pares down their U.S. domestic tax base, Kleinbard explains, which reduces their domestic taxes. Technically, the company's U.S. tax rate doesn't change, as White says. But it's applied to a smaller amount of declared income. ...
Kleinbard proposes a three-pronged approach. First is to close a loophole allowing an American firm to declare itself foreign-owned if at least 20% of its post-merger shareholders are foreign. The threshold should be 50%, which would require inversions to be genuine foreign acquisitions. This would put the kibosh on many, if not most, pending deals. This change has been proposed by the Obama administration and introduced in Congress by Rep. Sander M. Levin (D-Mich.).
Kleinbard also advocates tightening up rules against earnings-stripping, largely by lowering the limit on how heavily a company can saddle its U.S. operations with debt. Finally, he suggests ending "hopscotch" maneuvers, through which an inverted company bypasses U.S. tax rules by advancing its offshore cash stockpile directly to the new foreign company.
The appeal to corporate morality is eye-catching enough. But rhetoric like this has limited effectiveness. The proper way to deal with corporate immorality is to wipe it out through the law. "There is a breach of moral obligation and fiduciary duty here," Kleinbard says. "The moral failing is the refusal of Congress to do the most fundamental kind of loophole-closing."
In other words, the most effective comeback to "it's legal" is this: "It was legal. But not anymore."