This is a follow-up to the earlier blog post, Corporate Inversion: Fleeing from the Terrifying Tax Code.
The fervor for inversion is not slowing down, especially now that Congress is in recess until September. With two bills left behind, H.R. 4679 in the House and S. 2360 in the Senate, Congress could address the issue during their short September session or in the subsequent lame duck session. While President Barack Obama and Treasury Secretary Jacob Lew condemn businesses as “unpatriotic” for trying to relocate, few policymakers attempt or even suggest specific comprehensive reforms to the tax code, despite admissions that the rate is the real problem. Instead, both bills retroactively change the IRS requirements for inversion to trap businesses in the U.S.
The high corporate tax rate reduces competitiveness for U.S. companies, causing many to analyze the costs and benefits of moving their headquarters abroad. Under the current law, some not-yet-incorporated, fledgling businesses will also decide that the U.S. is not an ideal country in which to open shop. The U.S. corporate income tax rate sits at 35 percent, considerably higher than the European Union average rate of 21.34 percent or the OECD average of 24.11 percent. Operating with at least a 10 percentage point tax advantage leaves foreign competitors with significantly more income for future investments, higher wages, or lower prices, with which U.S. companies struggle to compete.
With their additional expendable revenue, foreign corporations are increasingly viewing U.S. companies as valuable investments. They can buy U.S. competitors to take advantage of American resources and infrastructure, yet maintain their headquarters abroad. As a recent Wall Street Journal article reported, foreign businesses use their additional cash after paying taxes to outbid their U.S. counterparts trying to buy U.S.-based businesses. The article specifically cites a situation in which Emerson, a manufacturing and technology company based in St. Louis, attempted to acquire American Power Conversion (APC) in Rhode Island. Despite an offer of over $5 billion, France-based Schneider Electric outbid Emerson by about $1 billion, turning once-American APC into a French company.
Without true tax code reforms, Congress will continue to see erosion of its tax base. Congress’s misguided attempts to stop inversions could actually expedite the erosion by preventing new companies from incorporating in the U.S. President Obama has threatened unilateral action to stop inversions, but only comprehensive tax reform will rectify the problem that Congress has created with the complicated tax code.