A Step Forward in the Battle Against Corporate Inversions

A Senate hearing this week revealed a broad consensus on the need for short-term action against “inversions,” an increasingly used corporate tax-dodging tactic.

The Senate Finance Committee’s chairman, Sen. Ron Wyden (D-Ore.) indicated at its hearing on Tuesday that he is firmly committed to some kind of action on inversions in the short term. Indeed, all of the panelists (the roster and their full testimony can be found here) were asked if they thought immediate action was required as opposed to waiting to change inversion rules as a part of a comprehensive corporate tax reform package. The panel was nearly unanimous in its answer: Yes.

The inversion frenzy began several months ago in April when pharmaceutical firm Pfizer attempted to merge with the smaller, UK-based, AstraZeneca and then present itself as a foreign corporation for tax purposes. Medical device maker Medtronic, and drug companies Mylan and AbbVie quickly followed suit. But perhaps the most egregious example has been Walgreens. Despite having over 8,000 location in the US and Puerto Rico and having been the recipient of $16.7 billion in Medicare and Medicaid funds, it still looking to flee the country for Switzerland. At least on paper.

One of the panelists at the hearing, panelist and Fortune magazine writer Allan Sloan, compared the need to curb inversions to intervening to stop an injured person from bleeding out. (Sloan recently authored a fantastic op-ed for The Washington Post on inversions, and was also the author of a cover story on how inversions are un-American. The pieces can be found here and here.)

But Wyden faces an immediate hurdle: the opposition of Finance Committee Ranking Member Senator Orrin Hatch (R-Utah). While trying to present himself as supportive of legislation to stem the tide of inversions, he actually made clear his opposition to the Stop Corporate Inversions Act by Sen. Carl Levin (D-Mich).

Hatch set several preconditions for legislation:

  • that it not be “punitive” (though he didn’t really define the term);
  • that it not be retroactive;
  • that it is revenue-neutral;
  • that it move the U.S. tax system toward a territorial system.

It seems peculiar that Hatch would oppose legislation that would still deem the newly restructured company a U.S. firm if it is majority-owned by the exact same owners of the original U.S. company, if its management remains in the U.S. and still has substantial business here.

If it is reasonable and not punitive to require a candidate to get 50 percent of the vote plus one to win an election, surely the same applies to a U.S. multinational corporation seeking to avoid paying U.S. taxes.

Further, a move toward a territorial system would be nothing more than a race to zero and seriously diminish the tax base. This became quite clear when the panelists were asked about the United Kingdom and Japan, both of which lowered their corporate rate and adopted a territorial system. Few firms that previously left the UK have returned, panelist Peter Merrill of PricewaterhouseCoopers admitted, and he offered no real information regarding Japan.

Finally, one of the more interesting points came when the panel was asked about the costs that went into U.S. multinationals working so hard to shift profits around the world in pursuit of tax avoidance. Contained in the testimony of Leslie Robinson, Associate Professor at the Sloan School of Business at Dartmouth, was the finding that there is an implicit cost to be paid in these actions and in that the basic economic principle of allocating resources in the most efficient manner has been turned on its head.

While Wyden offered no specific timetable for action, we can take his commitment as a positive sign. Nonetheless, the fight is far from over.

Nick Jacobs is Communications Director for the the Financial Accountability and Corporate Transparency (FACT) Coalition, which unites representatives from small business, labor, government watchdog, faith-based, human rights, anti-corruption, public-interest, and international development organizations on corporate tax and governance issues.

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