Corporate Inversions: Much Ado About Nothing?

Last Monday, Treasury Secretary Jack Lew stated that the Obama administration is close to reaching a final decision on what action can be taken to discourage U.S. companies from moving their legal address abroad to avoid domestic tax rates, a process known as “corporate inversions”. Lew said that the administration’s decision would come “in the very near future.” “Any action we take will have a strong legal and policy basis but will not be a substitute for meaningful legislation — it can only address part of the economics,” said Lew. “Only a change in the law can shut the door, and only tax reform can solve the problems in our tax code that leads to inversions.”

Tax inversions are to some unpatriotic and unethical; they speak to the need for more loophole-thwarting regulations and tax reform. To others, the real threat to the U.S. corporate tax base is our corporate tax code itself, with the third-highest overall rate in the world and a worldwide system that requires American companies to pay a toll charge to bring their profits back home. Thus, the solution to the inversion “problem” is to dramatically cut the corporate rate and to move to a territorial tax system, not add even more unnecessary rules to an already complicated tax code.

However, only targeted legislation that reduces the incentives and ability of firms to invert can truly protect the corporate tax base. Possible responses include allowing U.S. corporations to invert only if they truly become a foreign firm. This means current shareholders of the U.S. firm would have to own less than 50 percent of the new merged foreign firm, compared with the currently legislated 80 percent threshold. Additional measures that would likely be required to prevent inversions from further eroding the corporate tax base include preventing the practice known as “earnings stripping” and preventing corporations from using tax-deferred offshore cash in ways that benefit U.S. shareholders without paying U.S. taxes.

Despite the often vitriolic debate, when it comes down to the hard numbers, corporate inversions don’t appear to currently create a significant drain on U.S. tax revenue. The Joint Committee on Taxation projects that the U.S. would lose about $19.5 billion in tax revenue from 2015 to 2024 because of corporate inversions. Although that’s a considerable amount, that’s only 0.4% of the $4.5 trillion U.S. budget over the same time period, as the Tax Foundation notes. So is this “much ado about nothing”-at least not much?

Martin Milita is currently a Senior Director with Duane Morris Government Strategies, LLC, a full-service government affairs firm in DC, PA., NJ and Ohio. Duane Morris Government Strategies, LLC ., deals regularly with a myriad of complicated federal and state tax law matters, such as federal unrelated business income and compensation issues in the exempt organization realm, and state law sales and property tax exemption questions, which have gained national attention during the past few years.  The Duane Morris Government Strategies team is well-equipped to lead  clients through the maze of tax regulations and find solutions that add value, whether as part of routine tax planning or in connection with a change in public policy.

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Martin Milita

Martin Milita is a Senior Director at Duane Morris Government Strategies, LLC. Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Milita works at the firm’s Trenton and Newark New Jersey offices. Visit his blog at: https://martinmilita1.wordpress.com Follow him on twitter: @MartinMilita1 https://www.facebook.com/martin.milita http://www.dmgs.com/ BLOGROLL Martin Milita – About.me Martin Milita :: Pinterest Martin Milita @ Twitter Martin Milita at Slideshare Martin Milita on Google+ Martin Milita Yola Site Martin Milita | Xing

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