Paul L. Caron

Tuesday, December 15, 2015

Icahn:  How To Stop Turning U.S. Corporations Into Tax Exiles

PfizerNew York Times op-ed:  How to Stop Turning U.S. Corporations Into Tax Exiles, by Carl C. Icahn (Chair, Icahn Enterprises):

The Pfizer-Allergan deal is a travesty. Pfizer, which is based in New York, will move overseas by merging with Allergan, based in Ireland, in a maneuver known as a corporate inversion. The point isn’t to find corporate synergy. It is to leave behind our uncompetitive international tax system.

Not only is this the largest inversion in history, but it will also open the floodgates for other companies to leave the United States, further eroding our tax base, damaging our economy and costing many thousands of jobs. ...

This is not just me speculating. I have spoken to many chief executives who confirm they are planning to follow Pfizer’s lead. But while this inversion has set off a firestorm of public statements by our leading presidential candidates and other politicians, Congress continues to do nothing.

Recently, Hillary Clinton came out against this mechanism and proposed slowing the pace of future inversions by tightening regulation and imposing an exit tax on companies leaving. While I applaud her for speaking out publicly, her proposal is flawed because it fails to fix the underlying problem: Our international tax code is disadvantageous to companies based in the United States, as most countries now employ a territorial tax system, which allows companies to pay taxes only where the money is earned. More important, we can’t afford to wait more than a year for the election of a new president to take action, as we will lose many more companies in the interim.

Fortunately, there is a very simple and immediately available solution. Senators Chuck Schumer of New York and Rob Portman of Ohio have created a bipartisan framework for international tax reform that is supported by House Speaker Paul D. Ryan and Kevin Brady, the chairman of the Ways and Means Committee.

Currently, we tax a company’s foreign earnings at 35 percent when the money is repatriated to the United States. And even though the tax code allows for a deduction based on the tax paid to the country in which it was earned, the overall tax is still much higher than it would be in most other countries. We are one of the few countries in the world that asks our companies to pay a double tax on foreign earnings.

Our uncompetitive tax code is why companies have chosen not to bring their foreign earnings back to the United States, stranding an estimated $2.6 trillion abroad. It’s also exactly why companies ultimately seek corporate inversions.

The Schumer-Portman framework fixes this problem by allowing companies to repatriate all that stranded cash at a reduced rate of between 8 and 10 percent (or lower, depending on the foreign tax deduction). This tax on repatriated earnings would yield the United States huge incremental revenue — an estimated $200 billion on the $2.6 trillion now kept overseas — and would allow companies to reinvest the nontaxed portion in the United States, creating thousands of jobs. The Schumer-Portman framework also includes provisions that would stop “earnings stripping,” a method a company uses, once it leaves the country, to reduce the tax it pays on its remaining United States-based subsidiary (Mrs. Clinton’s proposal also addressed earnings stripping).

Update:  New York Times Letters to the Editor, Avoiding U.S. Corporate Taxes

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Last time we did the "holiday repatriations tax," US corps spent almost all of their after-tax dollars on stock buybacks and dividends. This spending, of course, increased share prices and, ultimately, allowed C-suite executives to cash in their stock options. Whut a country!

Posted by: Dale Spradling | Dec 15, 2015 6:31:31 AM