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Posted by on Jul 22, 2014 in Business, Economy, Government, Law, Politics | 11 comments

Inversion or Perversion?

moneybagsThe house is on fire and the occupants are eating dinner and not paying attention. While our tax base is being whittled away by large American corporations, members of Congress are twiddling their thumbs and doing nothing. The willingness of Congress to allow these “inversions” to occur is another sign of the dysfunction in Washington and the “perversion” in the American political system. [icopyright one button toolbar]

To escape higher corporate taxes in the U.S., American corporations are merging with foreign companies and incorporating in their countries, taking advantage of lower tax rates abroad. This results in America losing billions of dollars in tax revenue because of these corporate moves. Many of the companies pursuing this strategy are in medically related industries and make most of their money in America. In fact, the federal government is the largest supporter of most of these companies through the Medicare, Medicaid, and other federally sponsored programs.

While revenues made in the United States may continue to be taxed by our government, the total company profits will be taxed in the countries in which they are incorporated. Though Treasury Secretary Jacob Lew and the Obama administration has urged Congress to stop the bleeding, thus far nothing has been done to insure that American companies do not flee abroad, and to financially penalize the ones that have already done so. Whether or not this will be done in the future remains to be seen and many companies will have already departed for greener pastures (or pastures where they can keep more of their green). Some lawmakers are considering legislation that will have retroactive clauses to capture some of the lost taxes, but the legality of this and the ethical ramifications will be questioned. After all, these American corporations have not been breaking the law as it now stands. It is really the stupidity of Congress in not changing the law that is to blame.

The latest company to leave the U.S. is the drug company AbbVie which is acquiring another drug company Shire based in Ireland. By doing this AbbVie’s effective tax rate will drop from 22.6% in 2013 to 13% in 2016, saving the company (executives and shareholders) significant sums of money. The generic drug company Mylan is also leaving the country for the Netherlands by buying Abbot’s European assets for $5.3 billion. Pfizer also went after AstraZenica earlier this year to relocate in England but were rebuffed in their bid. Other companies who followed the inversion path include Medtronics, Chiquita, and Applied Materials. Walgreen’s has also been seeking a partner to move abroad.

The fact that these companies, that were founded in America and owe their growth to payments from American citizens and the federal government, are now leaving America so they can pay lower taxes is disgusting. But they are not breaking any current laws. The executives of these companies will certainly get an increase in pay and bonuses for raising company revenues by lowering their tax burden.

The inertia of Congress in allowing these inversions to occur is almost beyond belief. No matter what conflicts exist between the Republicans and Democrats, this should be a straight-forward issue in not allowing revenues that support federal programs to disappear. Will some members of Congress from both parties step forward and put their fingers in the dike to halt the outflow of cash to other countries. Given the way Congress functions, I wouldn’t bet on it.

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  • JSpencer

    Anyone who doesn’t realize by now that money is the one true god in this country is living in la la land.

  • dduck

    Thanks, RAL, you remind us of the fracking that Americans are getting from a dysfunctional congress that refuses/doesn’t want tax reform. Lower corporate rates would prevent some of this country shopping for lower rates, but a bigger overhaul is needed.
    I believe Simpson-Bowles had some good ideas, but I’m afraid the government believes in the stick rather than the carrot and bigger and better regulations.
    Big campaign money is doing a good job of allowing the little guys money to flow overseas by way of less lax revenue.

    And the hoards of money that companies earn and keep overseas would sure come in handy if there were an incentive for GE and the like to repatriate their bucks.

  • slamfu

    So what is the solution? I’m all for lowering the corp tax rate and closing loopholes, in fact, so are Republicans, and so are many democrats. We are leaving a lot of tax money on the table by not giving corporations a reason to bring that money home. The average Fortune 500 company actually pay something like 17% in taxes on their profits due to the countless write offs they have woven into the labyrinth of corporate tax law. That money would be doing a lot of good in this country, theoretically, but we’d actually probably net out more this way. This isn’t your standard trickle down theory, which largely revolves around personal income taxes, but structuring tax code to keep American businesses here and their money sunk back into this country as well.

    And Money is the most important thing, simply because money is the record of all labor, goods and services, nothing more. We could do away with the idea, but it would have to be immediately replaced by another abstract concept to track all of that, which would of course end up being the same thing, money. That’s why I always laugh at the Glenn Beck conservatives of the world, who seem to think gold has some intrinsic value in an economic cataclysm. You can’t eat it, or drink it, or use it for much. The value gold has is completely arbitrary and abstract, just like paper money. So funny.

  • sheknows

    The thing about America as opposed to other western countries which have an actual culture, is that this country was founded on the tenet ” every man for himself”.
    Other countries have a sense of national pride and genuine caring for it’s citizens. That is why we do not have a national healthcare system in this country. That us why we have such capitalistic greed that it can literally destroy our economy. Anyone think the guys who are sitting on their yachts in the Caribbean care about the billions of revenue their country COULD be using to improve things? They are thinking of ways to hide their money, make more of it and” I got mine”.
    It’s a giant free for all here…and the only rule is…win!.

  • dduck

    I sure am glad that some of those that made it big are giving it away big. Buffett and, Gates and many others are not sitting around in their yachts. Instead, they have vowed to give away at least 50% of their wealth. Good thing they had what it takes to accumulate a lot.

  • adelinesdad

    I’m no corporate tax expert, but I decided to do some digging as a result of this article. Let’s start here:

    “While revenues made in the United States may continue to be taxed by our government, the total company profits will be taxed in the countries in which they are incorporated.”

    Yes, we’re only talking about the portion of profit that is derived outside the US. Firstly, it’s not clear to me why the US should think it is entitled to tax that portion at all. It’s taxed in the country where it is derived, after all. In fact, as long as we’re comparing the US to other countries, it’s worth noting that most other countries (no, not just the common tax shelters) don’t have a repatriation tax. Apparently this is called “territorial” as opposed to “worldwide” taxation and I think it makes a lot of sense (tax the money where it is made). Also, since we’re comparing the US to other nations, the US has a higher rate than most other nations which, combined with the worldwide (w/ deferral) taxation policy, contributes to both sheltering profit overseas as well as inversion (which have the same effect, except that latter makes it cheaper for the company to invest profits back to the US, which some argue makes it actually a good thing compared to the alternative:

    I guess my point is: it’s complicated. But my bottom line is that if a company can pay a significantly different amount of taxes just based on where it’s address is, I think that’s a broken system. The address should have little to do with taxes. Moving to a territorial system (by eliminating the repatriation tax) would fix that, but short of that we could tax all profits moved to the US, whether they are from a US company or foreign company, which would defeat the purpose of inversion and generate a lot more revenue. But that’s not going to happen because we don’t want to discourage foreign companies from investing in the US. But then why should we discourage US companies from doing that? Again, why should the home address matter? But then we’re back to removing the repatriation tax and moving to a territorial system.

    But before this morning I didn’t even know what a territorial system was, so what do I know? I do know I’d rather debate the issue on the merits though, rather than demonizing corporations for doing exactly what the tax code incentivizes that they do, and only because the US tax code is an outlier in the international community.

  • sheknows

    Very few exceptions to the rule like Buffet and Gates. VERY few.
    If there weren’t so few, this article wouldn’t have to be written. As RL says:
    “The fact that these companies, that were founded in America and owe their growth to payments from American citizens and the federal government, are now leaving America so they can pay lower taxes is disgusting.”

  • jdledell

    adlinesdad – Yes theoretically the U.S. should only tax profits made in the U.S. and not those profits generated in other countries. However, before we do that there is a critical loophole that has to be closed. Right now Tech companies and Pharmaceutical companies assign their patents to a subsidiary in a no tax jurisdiction like the Guernsey Islands. The parent company in the U.S. then pays the subsidiaries royalties for the use of the patents and the royalties just happen, by coincidence, of course, to be about equal the profits made in the U.S. This means little to no U.S. corporate tax payments.

  • adelinesdad


    Yes, moving to a territorial tax system would make it more important to make sure we have good policy in place to decide where profits are made. However, that’s already an issue due to the deferment of taxes on overseas profits. If profits are never repatriated then we essentially have a territorial tax system already, except that in a real territorial tax system, companies could invest foreign profits in the US without a tax penalty.

    But, in the case you brought up, shouldn’t the royalty payment to the foreign subsidiary be considered “profit derived in the U.S.” by the foreign company and therefore taxed at the U.S. corporate tax rate? The point of royalty is to substitute for potential profits, so I don’t see why we should treat them differently. But “should” and “do” are not the same, of course.

  • jdledell

    adelinesdad – The subsidiary “buys” the patent as soon as it’s issued for a token amount – usually the R&D cost associated with that patent but before any products are made with the patent. Thus when the product starts selling, the royalty payment schedule is adjusted to fit the profits. In my CFO prior life – I used this technique for a software subsidiary. This game has been around for decades.

  • adelinesdad

    Yes, I get it, but why isn’t the foreign subsidiary taxed by the US on the profit they make from the royalty payments received from the US company, which would recoup the taxes from the US company’s lost profit? It is US-sourced income, so I’d think it would be taxable at US corporate tax rates regardless of whether we have a worldwide or territorial tax system.

    I looked it up and found this:

    This says royalties paid to foreign companies are taxable, but it does say that there are certain kinds of royalties that are given special rates, though I don’t know if pharmaceutical patents would fall into those categories. Is that what you are referring to? I guess then we’d have to get into the justification for that special treatment for specific types or royalties.

    I suppose having the foreign company own the patent means that royalties received from other foreign companies would not need to be taxed at the US corporate tax rate, which is the main benefit I think. But then we’re back to the same point again: under a territorial system, profit derived from foreign sources shouldn’t be taxed regardless of where the patent is owned.

    We’re getting into the weeds here but yes I agree with the general point that we’d probably need to re-enforce the tax code to prevent shifting US-sourced profits overseas under a territorial tax system.

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