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Few Things Seem Less Patriotic Than Corporate Inversion Schemes


You may have heard the term corporate inversion in the news lately, as every few days it seems another gigantic U.S. company is structuring some sort of merger with a foreign one that will allow it to stay in the United States, while escaping much of its corporate tax liability here. Anyway you slice it, the scheme seems like greedy corporations awash in profit, cheating the country who built the system they thrive in out of the very revenue that allows it to maintain such an economic empire.

In just the past couple of months, household names in the U.S. business world like Burger King, Medtronic and big pharma giants AbbVie and Mylan have flown the coupe – except not really. In reality, these companies go about business as usual, while simply diverting money from the U.S. Treasury into the pockets of their executives and shareholders. In fact, the money itself rarely ever leaves the country.

A corporate inversion is a strategic tactic by which an American company buys a foreign one and then makes itself a subsidiary of that new entity, which is no longer based in the United States, but in some corporate haven country, most commonly Ireland, which has made facilitating such maneuvers a major part of its economy.

The U.S. tax code imposes taxes on U.S.-based corporations for money earned abroad, though it credits any amount paid to the country where it was earned, eliminating any chance of double taxation. However, there's a giant loophole in which the taxes are deferred until they're brought back to the U.S. as “profit.”

Corporate inversions allow companies to set up convoluted money chains that seemingly make those profits shrivel. For tech and pharma corporations, it's particularly easy because companies can transfer the intellectual property rights for their products to the foreign entity, who can then charge them fees for every sale. Now they've got a tax deduction by way of the expense, while most of the profit goes to the untaxable entity – on paper at least. In actuality, it can be reinvested in U.S. markets without penalty.

While schemes for off-shoring corporate money go back more than a half of century, Washington used to do their best to close loopholes as they appeared. Both the Kennedy and Reagan administrations took action to ensure that money meant to be paid to the Treasury found its way there. The genesis for today's tactics can be traced back to President Clinton's Treasury Department with the Bush administration prying the openings even wider.
Not surprisingly, many of the Treasury officials responsible for creating the boondoggle are now profiting from it at the highest levels of the private sector. Last year, corporate profits reached another record high (which itself is expected to be eclipsed in 2014), yet corporate tax payments went down by more than $15 billion and will likely fall even further this year! The share of GDP coming from this source is down more than 40 percent since the last year before the Great Recession, despite the recovery in corporate profits.
Today, the bonanza is at an all-time high and is projected to cost tens of billions of dollars over the next decade. Trillions sit in offshore accounts, while companies find sophisticated ways to restore the earnings tax free, or else basically borrow it back in at almost no interest, while lobbying for more corporate repatriation tax holidays that allow them to bring the money back directly, tax free, like the one given in 2006.
The companies argue that the U.S. tax code is not realistic and that until it is made more competitive internationally, they owe it to their shareholders to take advantage of legal ways to reduce their liabilities. So be it. It has been proven time and again that sensible regulation is the only thing that will correct markets when rational self interest fails to offer an adequate incentive. But the landslide of cash that these corporations and their lobbyists are raining down on Washington is clearly preventing any reform from getting off the ground.
President Obama has spouted off some populist rhetoric on the issue when he campaigned for the office in both 2008 and 2012, as well as several speeches within both terms. But so far, tough talk is all he's offered. Congressional solutions range from basically lowering corporate taxes so much that it wouldn't matter (Democrats) to lowering them far enough to lose even more revenue (Republicans). Basically, we look poised to throw our collective arms up and give in.
Taxes have become a dirty word in our country because the very people who are paying Congress not to make them pay their fair share are also on a constant PR mission to convince the American people that tax revenue = job killer. However, everything from our highways to our public schools, along with the giant military industrial complex that focuses most of its foreign concerns not on protecting U.S. citizens but the profits of U.S. corporations, are paid for with tax revenue – or the debt we issue when we can't raise enough of it.
If these companies want all of the advantages of operating under the flag of the most mighty country this Earth has ever known, while conducting business in the largest economy in the world's history, they've got to contribute their fair share toward maintaining that empire. The United States cannot possibly compete with countries like Ireland and the Netherlands in offering low corporate tax rates, while still maintaining the infrastructure of the world's preeminent superpower. The math just doesn't work.
If these companies don't want to pay their share, they should move in earnest and see how well they fare without all of the advantages that our flag confers. There's a reason why they became the largest, most profitable companies in the world while they were here, and it's not their collective brilliance. However, we all know they will not be the ones made to suffer directly. It won't be Naval gunships protecting shipping routes that we cut back on. Instead, it will be things like public education or delaying much needed re-investments in our crumbling bridges and roadways. Maybe it's time for the American consumer to take a closer look at who's cheating Uncle Sam and make them pay the only way they know – at their bottom line by way of not buying their products.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. Click here to go to his bio page. You can also follow Dennis on Facebook.


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