Inverted tax logic
Tax arbitrage trend stories are rare â€“ the last time we had one was the summer of 2012 whenÂ carried interest was all the rage. Now we have another. Corporate Americaâ€™s hottest new tax avoidance strategy is the inversion. This structure has everything: acquisitions ofÂ non-U.S. domiciled companies, presidentialÂ umbrageÂ at a lack of C-suite patriotism,Â unreliable data, proposed but unlikely to ever be enactedlegislation, and Mark CubanÂ twirling a basketball and tweetingÂ his opinion.
Matt Yglesias explainsÂ 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. â€“ and it probably is because the U.S. has the highest statutory ratesÂ in the developed worldÂ â€“ â€śthe 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.â€ť
Unlike most trend stories, this one hasÂ solid data backingÂ it up.Â Reutersâ€™ Kevin DrawbaughÂ reported in April that since 2008, about two dozen companies completed tax inversions, â€śversus about the same number over the previous 25 years.â€ť Drawbaugh says the most desired tax residences are Britain, Canada, Ireland, the Netherlands, and Switzerland. The UK is particularly attractive for pharmaceutical companies,Â the WSJ reports, because patent-related revenue is taxed atÂ just 10 percent, versus theÂ 35 percentÂ nominal U.S. corporate tax rate.
So what can or should be done? Treasury Secretary Jack Lew hasÂ proposed effectively endingÂ this type of acquisition. Lew, along withÂ the EconomistÂ and seemingly everyone in Washington, D.C., thinks the better solution is comprehensive corporate tax reform.Paul Krugman thinksÂ a wide-ranging debate on corporate taxes is fine, but shouldnâ€™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.Â Martin Sullivan studiedÂ the rise of inversion and the fall of effective tax rates in the oil and gas industry. And tax inversions, he noted, donâ€™t happen in a vacuum. Theyâ€™re also, â€śaccompanied by planning techniques that strip income out of the United States.â€ť Corporations are simply paying aÂ much, much smaller shareÂ of taxes than they used to. Tax inversions are just part of that trend. â€”Â Ben Walsh
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