Jul 21, 2014 | By Carolyn Burstein, NETWORK Communications Fellow
Allen Sloan, a business writer for the Washington Post and hardly a flaming liberal, wrote a long blistering attack in the Post's July 13 edition on the U.S. stampede of "corporate inversions." One might expect a liberal organization to write such an article, but not Allen Sloan!
"Corporate inversion," according to ThinkProgress is a "loophole in the tax code [that]essentially allows a corporation to renounce its corporate citizenship in the United States, move its address overseas by merging with a foreign company, and dodge its U.S. tax obligations by paying most of its taxes to a foreign government with lower tax rates than the U.S." The process takes place primarily on paper, since most corporate operations (often including corporate headquarters) remain here.
How does Allen Sloan define corporate inversions? In part, he says, "...companies that have deserted our country to avoid paying taxes but expect to keep receiving the full benefits that being American confers, and for which everyone else is paying." And these benefits are not trivial. They include access to developed infrastructure, a highly educated workforce, the best universities in the world, first-class R&D sponsored by the government and universities, and peaceful, democratic conditions. Sloan goes on to say that "being legal isn't the same as being right." After reading his article, everyone should be angry!
Let's consider some of the major aspects of corporate inversion. First, under U.S. tax law, the U.S. firm must have no more than 79% of its shareholders American, which means that the corporation will seek a smaller foreign firm with which to merge. In other words, in order to be considered a foreign corporation, only 20% of the shareholders need to be foreign. Senator Carl Levin (D-MI) and Representative Sander Levin (D-MI) introduced legislation this past May (that has been languishing in Congress) proposing that the number of foreign shareholders must be at least 50% of the total, a much more difficult goal for an American firm to achieve.
Secondly, in many cases very little economic activity is moved from the U.S. to the new home country, and the firm may continue to be listed on the U.S. stock exchange; yet, it is highly likely that future job expansion and investment will occur abroad rather than in the U.S. This fact is the source of frustration for most members of Congress.
Thirdly, the corporate tax bill of the new corporation will be lower, depending on the country in which the new firm is incorporated -- many are incorporated in the UK where the tax rate is 20% or in Ireland, where it is 12.5%. The U.S. statutory tax rate for corporations is 35%, but given all the loopholes and deductions, the effective rate is much lower, even non-existent in some cases. U.S. stockholders, however, will continue to pay capital gains taxes (except tax-exempt shareholders, such as 401(k) plans and IRAs).
The new corporations would still be required to pay U.S. taxes on their U.S. operations, but many corporations have become expert at using profit-shifting techniques to book profits offshore for tax purposes, even though the proceeds result from activity and sales in the U.S.
Sixty companies have now either already succeeded in their efforts of corporate inversion or are in various stages of the process, and many more are planning to join the stampede. Congress's Joint Committee on Taxation projects that failing to limit inversions now will cost the Treasury an additional $19.5 billion over 10 years -- a figure that seems abnormally low, according to Sloan's article in Fortune on July 12. But even $2 billion a year could usefully shore up many safety-net programs that have been decimated.
Many of the companies that have succeeded or are attempting corporate inversions are well-known corporations – Carnival Cruises, Medtronic, Walgreen, Pfizer (recently walked away from a smaller firm, but may try again), Mylan (whose CEO is Senator Joe Manchin's (D-WV) daughter). Many others are not household names, but add to the deluge of lost taxes.
A recent article in the New York Times (July 14, 2014) explains why healthcare companies are part of the inversion wave that is sweeping corporate America. They are already a leader in mergers and acquisitions (it's easier to buy smaller companies and acquire new drugs than to develop them); there's an abundance of drug makers that are suitable targets; and most drug companies are already global players and have substantial international profits they are eager to use. Healthcare companies are the most active inverters, with an estimated $328.8 billion in deals announced through July 10.
Most analysts and