Jack M. Mintz: Ending corporate tax inversions is ill-advised. The answer is tax reform
Retroactive legislation curtails tax-avoidance schemes but undermines faith in a government that changes the rules of game after an investment is made
The temperature is rising in the United States over corporate inversions. U.S. Treasurer Jacob Lew is looking to pass retroactive law to undo recent corporate restructurings and, with little time left before the fall election, political posturing is the main aim, not serious tax reform.
The list of pending corporate inversions includes many well-known American companies: Chiquita to Ireland, Medtronics to Ireland and Burger King to Canada. Some past inversions include McDermott (1982), Helen of Troy (1994), Tyco (1997), Fruit of the Loom (1998), Transocean (2008) and Liberty Global (2013).
The Democrats, seemingly near panic over the issue, want a quick fix to put an end to these tax-avoidance schemes. Corporate inversions enable U.S. companies such as Burger King to move their headquarters outside the United States by merging with a foreign corporation like Tim Hortons. With the parent converting from a U.S. to a foreign residence, the effect is to achieve a self-made dividend exemption system to bring tax-free cash back to the United States. Global taxes are also reduced by shifting costs into the new U.S. subsidiary.
How much tax is actually lost if any? We just don’t know
Meanwhile, the Republicans push for corporate tax reform that would cut the U.S. federal rate from 35% to 25% and broaden the tax base, taking the pressure off corporate inversions. Such tax reform will undoubtedly lessen the corporate tax’s drag on the economy. While this is entirely sensible policy, the Republicans know full well that it will take quite some time before U.S. corporate tax reform will happen, especially with a President who has been so disinterested in the whole file.
The Republicans will thus try to make the case that both the Obama administration and Democrats are at fault for not taking corporate tax reform seriously. Of course, the Democrats hope another high profile corporate inversion will put the Republicans to shame for dragging their feet.
Whether corporate inversions will have any impact on U.S. election is debatable. The whole episode seems to becoming a hill of Del Monte beans since few inversions are being announced in fear of retroactive legislation.
Let’s face it. Corporate inversions are difficult for voters to comprehend. The argument made against these transactions is that it will export jobs to other countries as well as reduce corporate revenues.
