Wall Street Journal op-ed: Tax Inversions Must Be Stopped Now, by Edward Kleinbard (USC):
On Friday the U.S. drug maker AbbVie announced a plan to buy the U.K.-based Shire in a $54 billion deal, from which AbbVie will emerge as a subsidiary of the U.K. firm. It is but the latest example in a flurry of acquisitions known as inversions.
In an inversion, a large U.S. firm acquires a much smaller target company domiciled in a tax-friendly jurisdiction such as Ireland or the U.K., but the deal is structured so that the foreign minnow swallows the domestic whale. U.S. shareholders of the U.S. firm must pay immediate capital gains tax for the privilege of inversion, and the U.S. company ends up as the nominal subsidiary of a publicly held foreign corporation.
The deals are driven by planning to avoid paying the U.S. tax that applies when firms repatriate their low-taxed foreign earnings to the U.S. This has triggered demands—most recently, from Treasury Secretary Jack Lew —to close down inversions through the tax code, or to deprive inverted firms of government contracts or other benefits.
Firms that invert argue that the deals are "legal," harmless to U.S. tax-revenue collection, and a necessary response to our anticompetitive world-wide corporate tax system. The first point is a red herring and the second demonstrably false, but there is a kernel of truth in the third. ...
Companies argue that inversions are a reasonable response to an anticompetitive U.S. corporate tax system. But the hoary complaints about competitiveness are simply not true, as a quick glance at the financial statements of many U.S. firms pursuing inversions reveals. Take AbbVie: The drug maker reported a global effective tax rate for 2013 of 22.6%, a roughly one-third discount off the U.S. statutory rate of 35%, largely as a result of its low-taxed foreign earnings. What's at stake for U.S. firms is their ability to goose their stock prices through dividends and buybacks funded by low-taxed foreign cash, not international "competitiveness."
Yet inversions are symptomatic of a corporate tax system that is highly distortionary, unstable and riddled with loopholes. The headline rate of 35% is well above world averages, effective rates imposed on investments vary wildly, and the international rules in particular are an incoherent mess. Inverting firms try to justify corporate self-help as the right response, but inversions both gut the domestic tax base and allow key players (those with international operations) to excuse themselves from the debate, while domestic firms are left holding the bag.
Thus fundamental corporate tax reform is urgently needed, but the path forward has two prongs. First, Congress should enact a temporary law to preserve the status quo, and thereby the corporate tax base, by treating inversions according to their economic substance, and by foreclosing the "hopscotch" strategies described above. Without this, there will be no corporate tax base left to reform.