Congress fiddles while Treasury burns
Thomas L. Hungerford, director of tax and budget policy at the Economic Policy Institute and a former economist at the General Accounting Office: “This would stop a lot of companies from even thinking about inversions.”
The Levin bill is effective precisely because it is multi-layered, said Steve Wamhoff, legislative director for Citizens for Tax Justice, a nonprofit advocacy group in Washington, D.C., and a policy analyst at the Institute on Taxation and Economic Policy.
“Under these rules, you’ll have to hand over the ownership of the majority of your company, do less than a quarter of your business in the United States, and move your management overseas.” The headquarters test — which would put the United States more in line with how many foreign governments define the nationality of companies for tax purposes — is, in Wamhoff’s view, the nail in the coffin for those tax-motived inversions he describes as “offensive.”
The bill would force top executives and senior managers of corporations that sought to change their tax status to pack up and move abroad themselves, he says. That “is such a dramatic step for many companies that I just don’t see it happening.”
Michael L. Schler, a partner in the tax department at Cravath, Swaine & Moore LLP in New York City, says the headquarters and business activities tests are so broadly worded that foreign multinationals could conceivably fall into the U.S. tax net in a way the bill likely never intended.
Right now, Schler told Remapping Debate, the bill “seems to say that if you’re a pre-existing foreign company that is already managed from the U.S. and already has some business activities in the U.S., and you buy a U.S. company, no matter how small, for cash in a deal that has nothing to do with an inversion, then you, the foreign parent, could now get treated as a U.S. company for tax purposes.”
That, he said, would unnecessarily restrict routine business activity. “The bill literally tells foreign companies, ‘It’s okay to keep all your existing management in the U.S. as long as you don’t buy any U.S. corporation regardless of its size, but if you do, then you the foreign parent automatically becomes a U.S. corporation for tax purposes.’ Well, that’s a pretty extreme result, and it doesn’t make a lot of sense.”
One solution, Schler said, would be to drop the U.S. management test altogether. Another: Keep the management test but not have it apply if the acquired U.S. corporation was purchased for cash or was sufficiently smaller than the foreign corporation.
Kleinbard, the University of Southern California professor, disagreed. “I believe that foreign companies whose management is substantially in the United States should be considered U.S. firms tax-wise going forward — full stop. If Michael doesn’t — fine, we can have that argument.”
But that debate, Kleinbard said, should come later when Congress at last takes up large-scale tax reform. “Deal with the immediate abuse of the inversions law now and protect the tax base, while still maintaining the pressure on getting fundamental reform done.”
On balance, the provision “probably is on the aggressive side,” said Tello, the international tax attorney in Washington, D.C., “but it does show how strongly the Levins feel about this issue. And I guess there is some indignation that you would take your company offshore for tax purposes and yet keep your headquarters here.”
Bad for competition?
The Levin bill’s most outspoken critics say they oppose the legislation because it doesn’t address what they say is the real reason corporations renounce their U.S. citizenship — that America’s tax system makes them less competitive against rivals based in foreign countries with lower rates.
As the Alliance for Competitive Taxation, a coalition of multinationals including Google Inc., Cisco Systems, Inc., the General Electric Co., Pfizer, Inc., and The Coca-Cola Company, declared in a statement issued the day the Levins introduced their bill: “The U.S. has the highest corporate tax rate in the developed world and still uses an outdated system of international taxation…If we want to encourage companies to locate, invest, and create jobs in the U.S., then we have to address the root cause — America’s broken tax code.”
The Levin bill, “would do nothing to address the competitive disadvantages inherent in our tax code,” the statement added, “and could lead to even more jobs and businesses leaving America.”
The United States is one of only six industrialized nations that taxes domestic corporations on worldwide income, and its statutory corporate rate, 35 percent, is the highest in the developed world. However, the effective corporate rate for large corporations is considerably less — 12.1 percent in 2012, the nonpartisan Congressional Budget Office says — because of tax breaks unique to the U.S. code. (In 2011, America collected less in corporate tax relative to its Gross Domestic Product — 2.3 percent — than the 3 percent average collected by the 33 other members of the Organisation for Economic Co-operation and Development, the Paris-based club of leading market economies, according to a February report by the Congressional Research Service.)
Americans should worry less about how corporate titans such as General Electric, Boeing, and Microsoft are faring against foreign competitors and more about tax fairness between large and small U.S. businesses, says Frank Knapp, Jr., co-chair of the American Sustainable Business Council, a coalition of 70 business organizations that advocates for 200,000 U.S. companies and 325,000 executives, owners, and investors.