It looks like the Obama administration has finally thrown down the gauntlet with companies moving their headquarters overseas. For years, companies have been buying smaller businesses abroad and, in turn, evading good old Uncle Sam and his taxes. This practice is called inversion, and President Obama seems to be at the end of his rope with it, going so far as to call it an unpatriotic practice.
The U.S. Treasury Department has changed the rules governing companies engaging in inversions this week, and though it will not have too drastic of an effect on companies that have already inverted, it will most definitely impact companies in the process of doing so or contemplating it.
"Inversion deals now are clearly going to be very difficult to pull off," said Navid Malik, head of life sciences research at Cenkos Securities.
Typically the benefits of an inversion are lower U.S. and global tax bills, but the government has targeted these practices. For example, one of the Treasury’s newest rules directly attacks the practice of “hopscotch” loans, which allow companies to “avoid divided taxes when tapping tax-deferred foreign profits.”
Through newly instated decontrolling methods, the Treasury will be able to deny inverters access to offshore profits by making foreign subsidiaries no longer U.S. controlled.
The Treasury also changed the limits of ownership that U.S. investors can have in companies that have inverted and still remain eligible for foreign tax policies.
With big companies like Burger King moving to Canada, and AbbVie planning on buying Shire – a company based out of the U.K., consequently lowering their U.S. tax rates – I can understand the frustration of the Obama administration and many Americans. These new policies appear to be a step towards making sure the grass really isn’t greener on the other side of American borders.
But this crackdown also marks more restrictions on business owners, and is that necessarily fair? Or is it more important to simply hold businesses accountable? For example, Apple has avoided U.S. taxes by shifting profits to overseas subsidiaries, all the while benefiting from U.S. resources and infrastructure. Apple’s headquarters are in the U.S., two thirds of their workforce is domestic, as well as most of their research and development teams. Are these regulations a step in the right direction, simply to ensure companies are paying their fair share?
Perhaps it’s an issue of the definition of “fair” that has caused this debate to flourish – and it all centers on the U.S. corporate tax rate. According to the 2013 OECD Tax Database, the U.S. corporate tax rate is 39.1 percent, while the global average is around 25 percent. This discrepancy highlights why companies may find inverting an appealing practice, making the practice simply a symptom of a larger problem. Perhaps a change in the corporate tax rate would be a more effective solution to the problem of American companies going overseas. Do you think a lower corporate tax rate would be more effective at deterring companies from inverting than these newly instated regulations?
Overall, the question begs to be asked – are these new regulations limiting inversions the solution? Or, as a nation, do we instead need to examine different ways to incentivize staying domestic? And what are some ways you believe this could be done effectively?