Policy Responses to Corporate Inversions Close the Barn Door Before the Horse Bolts

http://www.epi.org/publication/policy-responses-corporate-inversions/

The U.S. corporate tax base is slowly leaking out of the country. U.S. multinational corporations have increasingly begun to merge with much smaller foreign corporations so as to move the corporation to a lower-tax country—a maneuver known as a corporate inversion. In essence, the corporations are giving up U.S. “citizenship” to avoid paying U.S. taxes.

A number of firms have been in the news recently for pursuing inversions, including Medtronic, a Minnesota firm, which wants to become an Irish firm; AbbVie, a Chicago-based firm, which wants to become a U.K. firm;1 and Mylan, a Pittsburgh firm, which wants to become a Dutch firm. Walgreens toyed with the idea of becoming a Swiss firm, but ultimately decided against the move, almost surely in part because of the public outcry that ensued.

This report examines some of the issues and policy options regarding corporate inversions. It explains what corporate inversions are, explores common tax features of proposed inversions, analyzes why many corporations are now pursuing inversions, and assesses various policy options to prevent inversions. The report’s main conclusions are:

The primary reason for a corporate inversion is simply to lower the tax liability faced by the firm.

Inverting firms generally argue that they are trying to escape the world’s highest corporate tax rate. The U.S. statutory corporate tax rate is 35 percent. Few firms, however, actually pay this statutory tax rate. The average effective U.S. corporate tax rate—the rate paid after various deductions and credits are applied—is about 27 percent. This is not much different from the effective tax rate paid by corporations in many advanced industrial countries that are not tax havens.

Most of the firms seeking to invert have a large stash of tax-deferred earnings sitting offshore. These earnings are subject to the U.S. corporate income tax (with a credit for foreign taxes paid) but only when they are repatriated to the U.S. parent as dividends. By inverting and then using a variety of tax avoidance schemes, the firms can have access to these earnings virtually free of U.S. taxes. This is undoubtedly the primary motivation to invert.

Changes in tax regulations (which the U.S. Treasury Department could promulgate without congressional approval) are a necessary stopgap measure to reduce the outflow of the U.S. corporate tax base.

However, only targeted legislation that reduces the incentives and ability of firms to invert can truly protect the corporate tax base.