Published on: August 1, 2014
by Kevin Coupe
So, a little while back, we had a story here on MNB about inversion, which is the practice of an American company acquiring a company based outside the US and relocating its headquarters to that country as a way of reducing business tax exposure. One example: Walgreen reportedly is considering the acquisition of the shares in British chain Boots that it does not already own, which would allow it to make such a move.
The most recent story we ran took note of a New York Times report saying that the Obama administration was calling for the US Congress "to strip away tax advantages that have encouraged a rush of mergers and acquisitions that give companies an overseas base while they maintain their presence in the United States." There even has been some suggestion that such legislation be made retroactive, so that even if companies rush to make such deals before any legislation could be passed, those deals could actually be voided by new law.
To be honest, I'm not sure anyone has to rush to do anything. The notion that the US Congress could come up with anything like a compromise bill to deal with inversion that would be signed by President Obama seems fairly unlikely. Companies like Walgreen can just take their sweet time, because nobody in Washington is doing anything.
Meanwhile, I got a number of emails on the subject. Here is a typical comment:
This is another example of an entity making decisions and not understanding the potential consequences. When labor costs got high in the US companies began shipping production overseas- look what that did to the US Manufacturing work force. This is another example of an action( higher corporate tax rate) that has become uncompetitive and now we want to not only make it illegal to move your company but penalize you for trying to be competitive. We need to ATTRACT businesses to the USA not imprison them through legislation.
The general consensus of the emails I received was that companies needed to do everything and anything that is legal to cut their taxes, and politicians should stop whining and start cutting corporate tax rates.
In my original commentary, I questioned the whole idea of retroactivity, and added:
When it comes to the inversion debate, here's what I'd like to see - someone needs to come up with a simple chart that explains where corporate taxes go, and why it is good business for someone to stay here rather than go abroad. I'm willing to accept on faith the idea that the US is a better place to do business than anywhere else in the world, in terms of having a culture of innovation, greater levels of freedom, more access to capital, etc… But markets don't do much on faith…and so someone has to make this case persuasively.
Except that last night, on "The Daily Show," that's pretty much what Jon Stewart did. If you're interested in that side of the argument, just click on the screen at left.
One other thing. Immediately after "The Daily Show" last night, Stephen Colbert on "The Colbert Report" addressed precisely the same issue, interviewing writer Allan Sloan of Fortune - not exactly a Commie rag - about his recent cover story criticizing companies using this strategy. You can read the whole story here, but let me offer you a relevant excerpt:
Sloan says that these companies are practicing "a new kind of American corporate exceptionalism: companies that have decided to desert our country to avoid paying taxes but expect to keep receiving the full array of benefits that being American confers, and that everyone else is paying for.
"Yes, leaving the country–a process that tax techies call inversion–is perfectly legal. A company does this by reincorporating in a place like Ireland, where the corporate tax rate is 12.5%, compared with 35% in the U.S. Inversion also makes it easier to divert what would normally be U.S. earnings to foreign, lower-tax locales. But being legal isn’t the same as being right. If a few companies invert, it’s irritating but no big deal for our society. But mass inversion is a whole other thing, and that’s where we’re heading.
"We’ve also got a second, related problem, which I call the “never-heres.” They include formerly private companies like Accenture, a consulting firm that was spun off from Arthur Andersen, and disc-drive maker Seagate, which began as a U.S. company, went private in a 2000 buyout and was moved to the Cayman Islands, went public in 2002, then moved to Ireland from the Caymans in 2010. Firms like these can duck lots of U.S. taxes without being accused of having deserted our country because technically they were never here. So far, by Fortune’s count, some 60 U.S. companies have chosen the never-here or the inversion route, and others are lining up to leave.
"All of this threatens to undermine our tax base, with projected losses in the billions. It also threatens to undermine the American public’s already shrinking respect for big corporations.
"Inverters, of course, have a different view of things. It goes something like this: The U.S. tax rate is too high, and uncompetitive. Unlike many other countries, the U.S. taxes all profits worldwide, not just those earned here. A domicile abroad can offer a more competitive corporate tax rate. Fiduciary duty to shareholders requires that companies maximize returns.
"My answer: Fight to fix the tax code, but don’t desert the country. And I define 'fiduciary duty' as the obligation to produce the best long-term results for shareholders, not 'get the stock price up today.' Undermining the finances of the federal government by inverting helps undermine our economy. And that’s a bad thing, in the long run, for companies that do business in America."
Which is sort of the point I was trying to make from the beginning, though I did not make it nearly as eloquently as either Sloan or Stewart.
I think that when companies are only focused on getting the stock price up today - a policy that often linked to the practice of rewarding CEOs based on today's stock price - they tend to make tactical and short-term decisions, not strategic long-term plans. That's sort of what bothered me about the pro-inversion argument - that it seemed to be viewing taxes in a vacuum, as opposed to seeing them within the context of received services, accessible customers, and all the other financial arrangements that companies make with local, state and federal government agencies.
So, yesterday was an Eye-Opener … if for no other reason, because Jon Stewart and Fortune seem to agree on something.
- KC's View: