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Wednesday, May 24, 2017

Knoll Critiques Kleinbard's Influential Article Claiming That Competitiveness Has Nothing To Do With Inversions

Michael Knoll (Pennsylvania), Taxation, Competitiveness, and Inversions: A Response to Kleinbard, 155 Tax Notes 619 (May 1, 2017):

In a 2014 article [Competitiveness’ Has Nothing to Do With It, 144 Tax Notes 1055 (Sept. 1, 2014)], Professor Edward D. Kleinbard leaped into the center of [the inversion] debate. In that article, he contended that competitiveness arguments for corporate inversions are “almost entirely fact-free” and constitute “a false narrative,” and that “international business ‘competitiveness’ has nothing to do with the reasons for these deals.” He concluded that although the current U.S. tax system “is highly distortive and inefficient . . . one of the few deficiencies it has avoided is imposing an unfair international business tax competitive burden on sophisticated U.S. multinationals.”

Kleinbard and his article have played and continue to play a highly visible role in public policy debates over inversions.

His article has been cited for the propositions that U.S.- domiciled companies are not tax-disadvantaged relative to their foreign competitors and that U.S.- domiciled companies do not improve their competitive position by inverting. Kleinbard is also one of the authors of a September 25, 2015, letter to Congress signed by 24 international tax experts urging lawmakers not to align the United States’ international tax system more closely to those of other major advanced economies by exempting the active foreign income of U.S. MNCs, advocating instead that the United States move its international tax system further away from those of its major trading partners by adopting “a true worldwide tax system — without deferral.” One of the rationales offered by the letter’s signatories for their proposal is that U.S. MNCs are not at a tax-induced competitive disadvantage relative to their foreign rivals.

In this report, I offer a response to Kleinbard. I argue that the situation is more nuanced, complex, and ambiguous than he acknowledges, that his claim that U.S. MNCs are on a tax par with their foreign competitors is not well supported, and that attaining a more level playing field is one — albeit not the only — plausible rationale for inversions.

Ultimately, the claim that U.S. MNCs are on a tax par with their foreign rivals is an empirical claim. Unfortunately, there is little, if any, empirical work directly determining whether U.S.-based MNCs are tax-advantaged, taxdisadvantaged, or roughly on par with their foreign rivals and measuring the amount by which, if any, U.S.-based MNCs improve their competitive position by inverting. As a result, one cannot at this time clearly and convincingly describe the magnitude or even the direction of any such advantage or disadvantage, let alone the effect of inverting. That said, the stronger case would seem to be that U.S.-domiciled corporations are often tax-disadvantaged relative to their non-U.S. rivals and that they can improve their competitive position by inverting. In other words, not only has Kleinbard not established his claim that U.S. companies are not at a competitive disadvantage relative to their foreign rivals, that claim is more likely than not wrong.

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