Tax-Dodging Corporate Inversions Accelerating

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By Roger Bybee, a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the first article in a three-part series, originally published in the May/June issue of Dollars & Sense

Corporate “inversions”—the fast-accelerating phenomenon of major U.S. firms moving their official headquarters to low-tax nations through complex legal maneuvers—are causing an annual loss of about $100 billion in federal tax revenues.

But new rules imposed in early April by the U.S. Treasury Department scuttled the mammoth $162 billion deal between pharmaceutical giant Pfizer and Allergan, based on relocating the official headquarters to low-tax Ireland. The Treasury rules are designed to inhibit “serial inverters”—corporations that repeatedly shift their official headquarters to cut U.S. taxes—and to discourage “earnings stripping,” where firms use loans between their American units and foreign partners to reduce U.S. profits subject to federal taxation. The collapse of the Pfizer-Allergan inversion suggests that the Treasury regulations may constitute a major barrier to some future inversions. However, with firms like Johnson Controls and Tyco moving ahead with their inversion plans, stronger measures will clearly be needed to halt the tide.

U.S. corporations have pulled off about 60 inversions over the last two decades, according to Fortune. In the last five years alone, corporations have executed 40 inversions, the New York Times stated.

This fast-rising dimension of corporate globalization has immense implications for Americans. The industrial powerhouse Eaton Corp. (#163 on the Fortune 500), Medtronic, Accenture (formerly the consulting wing of Arthur Andersen), Burger King, and AbbVie (the world’s 11th-largest drug maker) are among the firms that have repudiated their U.S. nationality and shifted their official headquarters to lowtax nations. The annual toll to the U.S. Treasury from corporate inversions is about $100 billion, based on the studies of Reed College economist Kimberly Clausing. This impact is likely to worsen significantly in the near future. Another dozen or more inversions are currently under consideration, according to conservative New York Times business columnist Andrew Ross Sorkin.

Fortune senior writer Allan Sloan, who has been outraged by inversions despite his overall pro-corporate stance, points to powerful vested interests who stand to gain: “There’s a critical mass of hedge funds, corporate raiders, consultants, investment bankers, and others who benefit from inversions.” (The collapse of the Pfizer-Allergan deal could cost just the major banks as much as $200 million, the New York Times reported.) These interests and their political allies have incessantly claimed that American-based multinational corporations are driven to repudiate their U.S. nationality in order to escape “burdensome” U.S. corporate tax rates that they call “the world’s highest.”

In reality, actual federal corporate taxes on 288 profitable corporations —as distinguished from the official 35% rate almost all firms easily avoid—were actually only 19.4% in the 2008-2012 period, a 2014 Citizens for Tax Justice (CTJ) report revealed. This placed the U.S. 8th lowest among the advanced nations in the Organization for Economic Cooperation and Development (OECD), the CTJ found.

A just-released CTJ study went further in its scope and included state and local taxes as well as federal levies in comparing the U.S. with other OECD countries. It found combined U.S. corporate taxes at 25.7%, ranking 4th lowest in the OECD, based on U.S. Treasury figures. The OECD average is 34.1%. Only Chile, Mexico, and South Korea had a lower total burden as a share of GDP.

Despite this reality of low corporate taxes, a growing number of large multinational firms have concluded that repudiating their U.S. “citizenship” and inverting is the most effective means of cutting their tax burdens, avoiding possible reforms that could potentially hike their tax bills, and most importantly, gaining direct and unregulated access to untaxed “offshore” funds.

The 35% Myth

The fundamental realities of U.S. taxes on multinational corporations are obscured by an elite debate fixated on the official statutory rate of 35%, which is relentlessly cited as a barrier to U.S. competitiveness.

House Republican James Sensenbrenner (R-Wisc.), for example, wrote in a recent Milwaukee Journal Sentinel opinion piece, “The current rate paid by American companies is 35 percent—the highest corporate tax rate among developed countries.”

This narrative—endlessly recited by leading corporate and media elites, along with virtually all Republicans and a number of Democrats, has come to dominate much of the national dialogue. Robert Pozen, a senior fellow at the liberal Brookings Foundation, urgently called for a sharp cut in the 35% statutory rate, claiming broad bipartisan support in Congress. “If there’s one policy agreement between Republicans and Democrats, it’s that the 35% corporate tax rate in the United States should be reduced to 28% or 25%,” he asserted. “The current rate, highest in the advanced industrial world, disincentivizes investment and encourages corporations to relocate overseas.”

Even President Barack Obama, while an outspoken foe of inversions, perversely weakened his own case against them by speaking of “companies that are doing the right thing and choosing to stay here, [and] they get hit with one of the highest tax rates in the world. That doesn’t make sense,” as he told a Milwaukee audience in a typical comment.

Obama has thus inadvertently reinforced the conventional wisdom among U.S. elites that is used to justify inversions, as outlined by John Samuels of the International Tax Foundation. “Today, with most of their income and almost all of their growth outside the United States, U.S. companies have a lot more to gain by relocating their headquarters to a foreign country with a more hospitable tax regime,” declares Samuels. “And conversely they have a lot more to lose by remaining in the United States and having their growing global income swept into the worldwide U.S. tax net and taxed at a 35% rate.”

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  1. KYrocky

    I suspect that Obama’s trade deals, all of which contain language that would specifically prevent governments from restricting contracting or purchases to nationally owned companies, are very concerned in providing protection to all of these companies abandoning their countries for tax benefits but continuing to enjoy their same domiciles. There should be no such protections for the greedy men controlling these companies. The government of the Untied States needs to be prepared to direct its purchasing strength to U.S. based companies and exclude these firms fleeing the U.S. for personal financial gains.

    1. Raj

      If you want to relocate to a different country for tax purposes, go ahead, but you shouldn’t also enjoy free & unlimited access to the U.S. market (i.e., consumers) and carte blanche lobbying power with U.S. politicians. Sadly, we have corporations that don’t pay taxes, but pay to put our political leadership in power. Then these corporations use puppet strings to get our politicians to engage our nation in foreign intervention or war as a means to open up markets & resources. They’re having their cake & eating it too.

    2. John Zelnicker

      @KYrocky – Related to this is something I haven’t seen expressed elsewhere. By becoming foreign companies, they could now bring an action through ISDS against the US, which has the deepest pockets in the world. As domestic companies they wouldn’t be able to do that. This is the exact reason a Philip Morris subsidiary moved from Australia to Singapore(?). They then sued Australia for lost profits due to anti-tobacco warnings required on packaging.

  2. ke

    Feudalism has exploited natural resources to the point that it has subjected itself and the middle class serving it, chasing its money, to global methylation. It’s fiscal policy is a FILO bankruptcy queue built on an actuarial ponzi, a rigged lottery. Monetary policy is just misdirection, creating noise, at additional cost.

    Silicon Valley is the endpoint of feudal infrastructure aspiration, now requiring exponential printing of money to maintain, with no replacement because there is no remaining storehouse of easily exploitable natural resources sufficient to maintain the stupidity of global trade. And you cannot change inbred behavior, whether public, private or nonprofit, in real time, leaving demographic deceleration to implode the ponzi.

    RE inflation is a multidimensional tax on production, but all the corporatists can do is self selectively increase relative RE inflation, because that is all they know, and biological positive feedback loops can only implode. Feudalism has no future and no retreat because it has cut itself off from nature and is dependent on automation it can’t fix. Separating production for consumption for the purpose of having consumers vote to exploit producers doesn’t work, surprise. The choice between public and private school, democrat or republican, is false.

    How much of the counterweight you keep depends upon where you want to go.

    The problem isn’t the size of the population; its the stupidity of energy wasted in global trade to maintain the misdirection, leaving a population with no real skills subjecting itself to environmental pressure, looking for a scapegoat, as a means of avoiding personal responsibility, more of the same.

    1. ke

      As the article provides, they are pitting middle class peer pressure consumer groups against each other, in rotation, like a snake oil salesman getting out of Dodge, until next time. They are not running from taxation.

  3. Praedor

    Ugh. This is EASY to fix, but politicos don’t want to because it is lucrative for their personal bank accounts. You simply state the obvious in law: The larger/richer of two companies is the one buying the other. THAT is where the official HQ for the new combined company is – the country of origin for the larger company.

    1. Michael Thompson

      That concept should work for state taxes as well, no? Delaware, for example, the world leader of PO Boxes and corporate name plates per resident employee.

  4. inode_buddha

    Thing is, they won’t shut up about taxes until they are zero. Then they’ll find something else to whine about, like child labor laws. I mean, even with all the subsidies, and the social safety net picking up the slack on the low end (walmart), and it *still* isn’t enough for them….

  5. ke

    If public, private and nonprofit corporations can all print, and do such a scrappy job of it, Why can’t individuals and communities?

    How can Hillary possibly represent anyone, unless she does accurately represent them, and what does that say about those she represents?

    Why is it that a feudal body of law with no due process acts as the primary prism, the output of which is the input for all other laws, with nary a squeak from the majority?

    How can 1% possibly control 99%, and what kind of mentality makes such an argument?

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