Want to stop inversions? Let U.S. companies invest their foreign profits here just like foreign firms can.
Yesterday, the U.S. Treasury announced new regulations aimed at stopping tax inversions, where U.S. companies merge with foreign counterparts and headquarter abroad, saving big on their tax bill. And today, the president reiterated his call for Congress to pass legislation preventing them. We’ve seen this news before. This marks the third set of new inversion regulations put forth by the Treasury in the last 19 months.
It’s understandable why the Treasury has been so active on this issue. More than a dozen inversions have been announced over the past year and half, many involving high-profile American companies.
This year, Milwaukee-based industrial and auto parts supplier Johnson Controls merged with Ireland-based Tyco. The combined company will headquarter in Ireland and take advantage of its tax system, saving it, at least, $150 million annually that can be used on research, expansion, and employee compensation. Also this year, Chicago-based rare drug manufacturer Baxaltawas taken over by Dublin-based Shire.
Last November, American drug giant Pfizer announced a planned merger with Irish drug company Allergen. Also last year, Medtronic, one of the world’s largest medical technology developers, merged with Covidien. These companies also chose to headquarter in low-tax Ireland.
American companies pursue foreign mergers, which may lead to inversions, not only to better service customers and shareholders but also to make them more robust to ward off takeover attempts.
At the moment, American companies can be takeover targets for foreign counterparts because of the United States’ burdensome corporate taxation that artificially devalues their market capitalization. Shareholders looking for the best returns, which could accrue from a takeover, trump the wishes of management who want to stay independent. So, in a defensive move, companies like Johnson Controls, Pfizer, and Medtronic can preempt such takeovers by pursuing their own mergers.
No matter how stringent the inversion regulations, business owners will always try to protect themselves from being taken over and do what’s best for their customers, employees and shareholders, many of whom are pensioners and retirees. Given the competitiveness of the global economy, this is not only a prerogative but also an imperative.
To truly protect American companies from foreign takeovers and stop them from moving overseas in tax inversions, American corporate taxes must be brought in-line with international norms.
Sensible corporate tax reform would reduce the U.S. corporate tax rate of 35% — the highest in the developed world — and end double taxation by moving to the “territorial” system used by other countries where companies only pay taxes on their domestic earnings.
At the moment, American companies that do business outside the country are taxed twice, once in the country where the profits are earned and then again at home. (Companies receive a rebate for the amount of tax paid abroad.)
Requiring American companies to pay taxes on their worldwide earnings before they can invest at home puts them at an unfair disadvantage with their foreign competitors, which can invest their worldwide earnings in the U.S. tax-free. Not exactly a tax system that looks after its own.
Ironically, then, inversions put companies in a better position to invest in the U.S. While the academic and business literature on the connection between inversions and U.S. job creation is thin, the anecdotal evidence is strong. Perhaps the best evidence comes from the big consulting firms Accenture and PricewaterhouseCoopers, which inverted to Bermuda in 2001 and 2002, respectively. U.S. jobs at these companies have skyrocketed in the intervening years — from 32,300 at Accenture and 29,100 at PricewaterhouseCoopers in 2009 to 44,000 and 37,500 in 2015.
Tim Hortons (the Canadian version of Dunkin Donuts), which was based in the U.S. as part of Wendy’s before repatriating to Canada in 2009, doubled its number of U.S. stores from 563 in 2009 to 1,107 in 2011, creating thousands of American jobs in the process. TE Connectivity, an industrial manufacturer that incorporated in Switzerland after a 2007 spinoff, increased its workforce in the Americas from 23,000 to 26,000 between 2010 and 2013.
And fashion icon Michael Kors Ltd., which expatriated to Hong Kong in 2003 when it had zero stores in the U.S., now has hundreds of U.S. locations employing thousands of Americans. Such anecdotal evidence suggests that inversions put companies in a better competitive position to invest and grow in the U.S.
On the other hand, U.S. companies are holding approximately $2.1 trillion overseas to avoid the double taxation that would occur if they were to reinvest it at home. This incentivizes companies to use this offshore income to invest in jobs, facilities and research in foreign markets rather than at home.
Rather than demonizing inverting American companies, which are looking for better ways to invest in the U.S. and bring more value to their customers, as — in Treasury Secretary Jack Lew’s words — lacking in “patriotism,” it’s time to pursue fair corporate tax reform. Such reform would level the playing field for American companies, protect them from foreign takeovers and keep them in America. That would be truly patriotic.
Brad Anderson is the former CEO of Best Buy and a member of the Job Creators Network.