by Michael Lodge
One of the issues very seldom discussed is the international tax issues surrounding this election. Caroline Byrne of International Tax Review has written a great story on corporate inversions and trying to halt it. I am sharing this article with you.
US elections: Presidential plans to halt corporate inversions
Donald Trump has said he will curb “job-killing corporate inversions” by reducing the US business tax rate from 35% to 15% if he becomes the next US President. Meanwhile, his rival Hillary Clinton plans to deter companies by levying an ‘exit tax’ on businesses moving overseas. Will either plan work? Caroline Byrne reports.
Donald Trump unveiled his tax plan before the Detroit Economic Club in early August with a familiar mix of bombast, Clinton-baiting and hecklers, who interrupted the presidential candidate no less than 14 times during his one-hour speech.
Trump called for a reduction in the top federal business tax rate from 35% to 15% to stop so-called “corporate inversions”, a manoeuvre that allows multinationals to relocate their legal domicile to lower-tax jurisdictions without moving material operations overseas.
More than 50 US companies have left for lower-tax nations since the 1980s – 20 of those since 2012. Notable deals include Burger King’s $11.4 billion inversion with Tim Hortons in Canada, Medtronic’s $43 billion deal with Covidien in Dublin, Ireland and Mylan’s $5 billion inversion with a unit of Abbott Laboratories in the Netherlands.
Made in America
As a result, both US Presidential candidates are struggling to find a tax strategy that will reverse the trend, keep US multinationals and jobs at home and repatriate the estimated $2.4 trillion the companies have parked offshore. As it stands, the Fortune 500 companies have legally avoided paying $695 billion in US federal income tax, according to the Citizens for Tax Justice lobby group.
“We punish companies for making products in America – but let them ship products into the US tax-free if they move overseas. This is backwards. All of our policies should be geared towards keeping jobs and wealth inside the US,” Trump told the Michigan crowd on August 8.
“It’s not a matter of being patriotic or not patriotic. It doesn’t go that the more you pay, the more patriotic you are”
Tim Cook, Apple CEO
“Our lower business tax will also end job-killing corporate inversions, and cause trillions in new dollars and wealth to come pouring into our country – and, by the way, into cities like right here in Detroit,” he added.
But will America’s missing tax billions really pour straight back into the US?
Apple, Microsoft, Cisco Systems, Oracle and Google’s parent company Alphabet collectively had more than $500 billion of their almost $1.7 trillion in cash and equivalents held overseas in 2015, according a Moody’s Investors Service study. Not one of these five companies was involved in a corporate inversion.
Apple, which has more than 4,000 staff at its European headquarters in Cork, Ireland, holds $215 billion of its $232 in cash outside of the US, according to Apple’s third-quarter earnings.
“The tax law right now says we can keep that in Ireland or we can bring it back. And when we bring it back, we will pay 35% federal tax and then a weighted average across the states that we’re in, which is about 5%, so think of it as 40%. We’ve said at 40%, we’re not going to bring it back until there’s a fair rate,” Apple CEO Tim Cook told the Washington Post in an interview on August 13.
“There’s no debate about it. Is that legal to do or not legal to do? It is legal to do. It is the current tax law. It’s not a matter of being patriotic or not patriotic. It doesn’t go that the more you pay, the more patriotic you are,” Cook added.
American companies like Apple have long complained that they are being driven abroad by a US corporate tax rate that is the third highest in the entire world – exceeded only by the United Arab Emirates, a Middle East nation with a 55% corporate rate, and Chad, a developing, landlocked country in Central Africa.
In comparison, Ireland – which is also the European headquarters of Facebook and Twitter – has a corporate tax rate of 12.5% and the increasing number of US inversions has helped Ireland’s economy grow 26% in 2015, the fastest of any OECD member nation.
Ireland’s growth figures – at the expense of the US and other countries – were so extraordinary they were dubbed “leprechaun economics” by American economist and Nobel prize winner Paul Krugman, which refers to the buried tax treasure that is only found when the leprechaun is caught.But even with Ireland’s 12.5% corporate tax advantage, Team Trump is betting American multinationals will be sufficiently swayed by a US corporate tax rate of 15%, foregoing corporate inversions and moving their untaxed trillions back home.
Trump has offered few specifics on how the Republicans’ tax strategy would prevent the deficit from ballooning, however. Neither Trump’s press office, nor his tax adviser Larry Kudrow responded to emailed requests for interviews.
Territorial tax system
Chris Warner, head of NautaDutilh’s tax practice in Amsterdam, said the proposed corporate tax reduction from 35% to 15% would be significant and possibly persuasive. Warner advises international companies on M&A transactions and corporate re-organisations.
“If the US rate is lowered to 15%, there would not be a lot of additional US tax, because often the foreign tax credit will fully offset US tax,” Warner told International Tax Review.”Also, the US system is in combination with the worldwide system, so if the US went to a territorial system, the US would be able to keep a higher rate of corporate tax. The lower rate still leaves a significant compliance burden, because of the credit of foreign tax. This is a consequence of the US worldwide tax system,” Warner said.
In other words, the US might be even better off switching to a territorial system, where foreign profit up-streamed to the US would be tax exempt, since it has already been taxed abroad. With a territorial system, the US could keep its own rate for profit generated in the US at any level without affecting the taxation of foreign profit.
“In my opinion, that works better than the reduction in rate,” Warner said.
Three days after Trump’s trip to Detroit, Michigan, it was Hillary Clinton’s turn to roll into Detroit.
Clinton chose a blue-collar, suburban backdrop and 500 invited guests to discuss her latest plans to fix the US economy and tackle corporate inversions.
Rather than a convention hall, Clinton chose Detroit’s Futuramic, a tool and engineering firm in a Detroit suburb that is also where the headquarters of Big Boy Restaurants International is located.
Clinton talked about incentivising businesses to keep jobs in America and making it more difficult for companies to complete corporate inversions by levying an “exit tax” on businesses hoping to move to low-tax jurisdictions.
“For those that move their headquarters overseas to avoid paying their fair share of taxes, they should pay a new exit tax,” Clinton told Democratic supporters at Futuramic.
Chris Warner, of NautaDutilh’s tax practice, said the problem with an exit tax is that it would be complicated to draft without affecting foreign companies buying US companies.
“There are already a lot of anti-inversion rules. I think it is difficult to draft an effective exit tax without affecting cases that are not tax driven,” Warner said.
An exit tax might also encourage US companies to find alternative ways to take advantage of low-tax jurisdictions, including breaking up the business to sell piecemeal to foreign companies.
“It would be an unintended consequence, but eminently foreseeable,” Rohit Kumar, principal and co-leader of PwC’s tax policy services practice in Washington, said in an interview with the Financial Times. “They’ll have greater value in the hands of an overseas company.”
Clinton has previously said that she also wants tougher US legislation to impede company inversions. As it stands, an American company can take over a smaller overseas business if the foreign entity’s shareholders own at least 20% of the new entity. The Democratic candidate wants to raise that minimum requirement to 50%.
Business fights back
US corporate inversions gained traction in 2012 as mergers and acquisitions boomed. Companies have always argued that the deals are strategically important, rather than a cynical move to lower taxes.
President Barack Obama’s government and the US Treasury are unconvinced. The Treasury issued rules to curb the practice in 2014 and again in April 2016, effectively killing the largest planned corporate inversion in US history: Pfizer’s $160 billion tie-up with Ireland’s Allergan.
Obama claimed victory after the Pfizer deal collapsed, calling the new Treasury rules “important stuff”. The US Chamber of Commerce and Texas Association of Business responded with a court claim, arguing that the Treasury’s new rules breach the law.
The lawsuit, filed in Texas, claims the US rewrote the Internal Revenue Code after Congress refused to comply with Obama’s legislative changes to curb inversions. Treasury officials have said repeatedly that they did not target any particular deal.
The lawsuit ensures that no matter which presidential candidate is elected on November 8 2016, the argument over how best to deal with corporate inversions won’t be settled with a vote.
“This is not the way government is supposed to work in America,” Thomas Donohue, US Chamber of Commerce president and CEO, said in a statement emailed toInternational Tax Review.
“Instead of breaking the rules to punish companies engaged in lawful transactions, Washington should just do its job and comprehensively reform the tax code,” Donohue added.
This article first appeared in International Tax Review‘s sister publication, TP Week