Tax arbitrage trend stories are rare – the last time we had one was the summer of 2012 when carried interest was all the rage. Now we have another. Corporate America’s hottest new tax avoidance strategy is the inversion. This structure has everything: acquisitions of non-U.S. domiciled companies, presidential umbrage at a lack of C-suite patriotism, unreliable data, proposed but unlikely to ever be enactedlegislation, and Mark Cuban twirling a basketball and tweeting his opinion.
Matt Yglesias explains the nuts and bolts of how tax inversions work. American Company A acquires Non-American Company B. If Company B is based in a country with lower corporate tax rates than the U.S. – and it probably is because the U.S. has the highest statutory rates in the developed world – “the merged company will probably domicile itself for tax purposes in Company B's country. In a pure tax inversion... Company A would be acquiring Company B not so much to obtain its technology or its brand or its supply chain but its tax status.”
Unlike most trend stories, this one has solid data backing it up. Reuters’ Kevin Drawbaugh reported in April that since 2008, about two dozen companies completed tax inversions, “versus about the same number over the previous 25 years.” Drawbaugh says the most desired tax residences are Britain, Canada, Ireland, the Netherlands, and Switzerland. The UK is particularly attractive for pharmaceutical companies, the WSJ reports, because patent-related revenue is taxed at just 10 percent, versus the 35 percent nominal U.S. corporate tax rate.
So what can or should be done? Treasury Secretary Jack Lew has proposed effectively ending this type of acquisition. Lew, along with the Economist and seemingly everyone in Washington, D.C., thinks the better solution is comprehensive corporate tax reform.Paul Krugman thinks a wide-ranging debate on corporate taxes is fine, but shouldn’t stop quick action on inversions.
There is solid evidence that tax inversions do lower the amount of taxes companies pay to the U.S. Martin Sullivan studied the rise of inversion and the fall of effective tax rates in the oil and gas industry. And tax inversions, he noted, don’t happen in a vacuum. They’re also, “accompanied by planning techniques that strip income out of the United States.” Corporations are simply paying a much, much smaller share of taxes than they used to. Tax inversions are just part of that trend. — Ben Walsh