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Congress may be feeding the tax inversion beast

by Osahon Okundaye
Aug 27, 2014

Calls by regulators to close the inversion loophole have driven companies to relocate overseas before they miss out on the savings.


America’s high corporate tax rate has put U.S. companies perpetually behind foreign competitors in the race to minimize costs and maximize profits.


For today’s business executives considering the accounting exercise, “if we were thinking of doing in the next two or three years, we should probably do it sooner rather than later,” says Northwestern Kellogg School of Management Professor Mitchell Petersen.


A tax inversion allows corporations to leave their high-tax home country and reincorporate somewhere with a lower tax rate, essentially changing corporate citizenship. Legislators on the Capitol Hill have built steam to ban the corporate practice, which may encourage more businesses to push for an address change before the opportunity closes.


“Anytime the government discusses taking away a tax benefit on activity X, activity X booms as taxpayers rush to do it before the deadline,” Petersen said.


But Petersen sees this as more than just an intellectual exercise by money-grubbing companies. He sees inversions as an example of a basic competitiveness issue and points to Stanley Works.


In May 2002 tool manufacturer StanleyWorks Inc., now called Stanley Black & Decker Inc., considered an inversion and wrote in one public filing that “foreign competitors pay lower taxes on their worldwide operations. The U.S. tax rules place us at a competitive disadvantage in the global marketplace.” 


That statement echoed a similar one from the Treasury, agreeing that high U.S. tax rates make American companies less competitive.


Little more than 12 years later, talk of inversions are flitting through corporate America again but with billions of dollars at stake. The Joint Committee on Taxation estimates the federal government will lose $19.46 billion in taxes over the next 10 years due to companies swapping addresses. And that figure doesn’t include new companies mulling a change, including Walgreen Co., AbbVie Inc. and Abbott Laboratories.


Walgreens said in an email to Medill that it is considering much more than just taxes and whether or not it chooses to invert, the company will continue to grow domestically and pay more than $2 billion a year in U.S. taxes.


Treasury Secretary Jack Lew observed that tax regimes around the world have normalized in the last decade and are essentially the same. Corporate rates are typically at about 25 percent of profits in developed countries, compared with 35 percent of worldwide profits in the U.S.


Lawmakers on both side of the aisle are promising to close the series of corporate tax loopholes. Even President Barack Obama joined the chorus of lawmakers crowing for tax reform recently, or at least for a ban on inversions calling the dodgers “corporate deserters.”


But for all the tough-minded talk about civic pride, patriotism doesn’t always make sense for the bottom line.


“The problem is caused by the government’s overly high tax rate,” says Northwestern Kellogg professor David Stowell. “We’re as misguided and illogical as can be -- worst in the world.”


“It’s unlikely that any of the CFOs learned about this transaction in the paper,” Northwestern's Petersen says. “Anybody’s that’s going to do it has thought about it some before.” But pressure from lawmakers may be pushing some of our largest companies out of the country.