San Francisco Chronicle - Legislators making bigger push to curb tax inversions
Rep. Mike Thompson, D-St. Helena, and California Sen. Dianne Feinstein are among those on Capitol Hill mounting an assault on corporate America’s rising reliance on minnow-swallows-whale mergers that permit corporations to avoid U.S. taxes by relocating overseas.
In recent examples of inversion, as the tactic is known, a larger U.S. corporation typically merges with a smaller European counterpart and moves its legal business address to Dublin or London or Switzerland. More often than not, the company maintains its U.S. base and does business as normal.
But the move permits it to save billions in U.S. tax liability and repatriate foreign earnings through a series of rapid-fire financial transactions designed to get around existing tax law.
“These inversions are deleterious to our country and all the important services our tax dollars provide,” Thompson said in an interview. “When you are a U.S. company, you benefit from U.S. investments and protections. You use our roads, our intellectual property law, and you draw from workforce that’s been educated in our schools, so to turn around to save tax dollars (through inversion) is really disappointing.”
According to the Congressional Research Service, 75 corporations have gone the inversion route in the past two decades. Among them: Valeant Pharmaceuticals, which merged with the smaller Canadian firm Biovail in 2010 and relocated from Aliso Viejo in Orange County to Laval, Quebec, just outside Montreal. Valeant is now embroiled in a controversial $53 billion hostile takeover attempt of Allergan of Irvine, maker of Botox.
The pace of inversions has picked up considerably in the past year.
This summer, two large pharmaceutical companies — AbbVie of Chicago and Mylan of Pittsburgh — agreed to mergers that would move them to Europe.
Burger King raised eyebrows by acquiring Canadian doughnut king Tim Hortons, and relocating north of the border. But the company insisted tax savings had nothing to do with its decision. Walgreens backed off a similar inversion deal last month.
President Obama and Treasury Secretary Jacob Lew have appealed to the corporate world’s sense of “economic patriotism” in encouraging companies not to relocate, whatever the financial advantages might be. Last week, Lew announced the Treasury Department would take action to force companies to “think twice before undertaking an inversion ... It is critical that this unfair loophole be closed.”
But Thompson and others in Congress questioned whether Treasury’s measures were sufficient to end the exodus overseas.
“The administration’s actions are a step in the right direction, but Congress needs to pass strong, anti-inversion legislation if this abusive practice is going to be successfully curtailed,” Thompson said.
The financial stakes are huge. Had it gone the inversion route, Walgreens could have saved up to $797 million annually, according to a Barclays report.
Lots of lawyers
If nothing else, inversions are a full-employment program for tax lawyers who pick over the IRS code in order to fabricate corporate structures around new loopholes created through attempts to close old ones.
“Inversions are economically rational deals as reimagined by Lewis Carroll’s Humpty Dumpty,” said Edward Kleinbard, a professor of law and business at the University of Southern California.
Thompson and Feinstein are co-sponsors of legislation in their respective chambers that would crack down on inversions by stipulating that shareholders of a foreign company in such a deal must own 50 percent of the newly merged entity, up from 20 percent under current law. The inverted corporation would be subject to U.S. taxation if its stock ownership exceeded 50 percent. California’s Barbara Boxer is also a co-sponsor of the Senate version.
The measures include a smell test in which inverted companies that continue to be managed in the U.S., do most of their business in the U.S. and have few dealings in the new overseas location would still be treated as U.S. corporations for tax purposes.
Republicans on Capitol Hill generally favor the approach of House Ways & Means Chairman Dave Camp, R-Mich., who has proposed lowering the corporate tax rate from 35 to 25 percent as a way of persuading more corporations to stay home.
“In this global marketplace, a (higher U.S.) tax rate puts them at a competitive disadvantage,” said Rep. Kevin Brady, R-Texas, also a Ways & Means member. “If they’re going to survive and create profits and economic growth, unfortunately oftentimes they don’t have a choice.”
The 25-percent rate is still far above those of corporate-inversion destinations such as Ireland, which offers a 12.5-
Ireland is sensitive to identification as a “tax haven.”
“We seek to attract investment that generates substantive economic activity and jobs — not 'brass plate’ operations — while fully abiding by the framework that governs international corporate taxation issues,” said Ralph Victory, press officer at the Embassy of Ireland in Washington.
Feinstein and Thompson agree tax reform is necessary, but the rising tide of corporate departures requires immediate action.
“Ideally, this problem will be solved as part of comprehensive corporate tax reform, but given the low chances of such legislation passing soon, we must find other solutions for the near-term,” said Feinstein. “The longer Congress waits, the more we will miss out on jobs, squander research opportunities and lose tax revenue.”
Analysts say that few domestically based U.S. corporations pay anywhere near the 35 percent top tax rate.
“Both the high U.S. tax rate and the worldwide system of taxation have more bark than bite,” said Kimberly Clausing, an economist at Reed College in Portland, Ore., who authored a paper on inversions last month. “Effective tax rates in the teens are common and some global corporations even pay rates in the single digits.”
Exhibit A may be Apple Inc., the subject of a Senate probe last year that found the Cupertino company entered a cost-sharing agreement with foreign affiliates that enabled it to ship $74 billion in worldwide sales income to Ireland between 2009 and 2012.
The Senate Permanent Investigations subcommittee also found Apple created an affiliate, Apple Operations International, that had no employees and no plant anywhere, and still booked $30 billion of income between 2009 and 2012 without paying a dime of taxes to any national government.
At a subcommittee hearing, Apple CEO Tim Cook insisted the company had paid “all the taxes we owe — every single dollar.”
But, he added, “unfortunately, the tax code has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors, who don't have such constraints on the free movement of capital.”
For some firms, the grass-is-greener allure of foreign locales has proven less than satisfying.
A Berkeley biotech firm, Xoma Corp., moved its legal address to Bermuda in 1998 but came home (technically to Delaware) 13 years later. The company cited the prospect of “punitive” tax legislation, the desire to be in a jurisdiction with a “body of law more familiar to its officers,” and a fear of “blacklisting” of its shares by pension funds.