Skip to main content

How corporations skip tax with overseas maneuver

By Robert McIntyre
updated 4:15 PM EDT, Tue July 22, 2014
STORY HIGHLIGHTS
  • U.S. corporations merge with foreign companies, move their headquarters
  • McIntyre: Such "inversions" enable firms to greatly lower their U.S. corporate tax bill
  • He says government can lose billions of tax revenue from such maneuvers
  • McIntyre: Congress should pass administration proposal to bar inversions

Editor's note: Robert McIntyre is the director of Citizens for Tax Justice, a public interest research and advocacy organization focusing on federal, state and local tax policies and their impact. The opinions expressed in this commentary are solely those of the author.

(CNN) -- One can hardly read the news these days without learning that yet another American corporation has announced plans to invert, which is corporate-speak for restructuring as a foreign company to avoid U.S. taxes.

It's a trend that has increased exponentially over the past decade with barely a peep from Congress. Now that corporate giants such as Pfizer, Walgreen, Medtronic and Mylan have made bids to invert by merging with foreign companies and will be eligible to claim their headquarters are offshore to avoid U.S. taxes, Congress may finally act.

These large corporations have publicly asserted they are moving their headquarters, but they really won't change the way they do business. Medtronic, for example, is buying an Ireland-based company.

Robert McIntyre
Robert McIntyre

If the merger goes through, the company has said it will maintain "operational headquarters" in Minneapolis, where the company is currently based. In other words, not much will change except the company will claim to be foreign. (Medtronic officials say the move is not about avoiding taxes and that the firm will still face substantial taxes; the firm does have the right to cancel the deal if Congress changes the law in a way that removes the tax benefits of inversion.) Walgreen, the nation's largest drug retailer, has said it is considering moving its headquarters to Switzerland.

Inversions are just another ploy that corporations use to reduce or eliminate their U.S. tax bills. According to the Congressional Research Service, legislation to limit corporate inversions could provide an additional $19.5 billion in revenue over 10 years.

Even among corporations that aren't pursing inversions, shifting profits offshore to avoid U.S. taxes is a huge problem. For example, American corporations reported to the IRS that subsidiaries in Bermuda and the Cayman Islands collectively earned profits equal to 16 times the gross domestic product of those countries, according to recent data. It's clearly impossible for companies to earn profits in a country that are exponentially larger than that country's entire economy, further proving companies are using accounting gimmicks to avoid U.S. taxes.

American corporations engage in these tricks because they can defer paying U.S. taxes on alleged offshore earnings until they officially bring those profits to the United States, which may never happen. Corporations get a permanent break when they invert because the United States will not tax profits earned outside its borders.

Corporate inversions are often followed by earnings stripping, a maneuver that artificially shifts profits into lower-tax or zero-tax countries. A recent exposé explains how the highly profitable manufacturer Ingersoll Rand suddenly began reporting U.S. losses or very small profits each year after inverting to become a Bermuda corporation in 2001.

This did not reflect any actual loss of U.S. customers or business. Rather, the corporation accomplished this by loaning $3 billion to its U.S. subsidiary, which then deducted the interest payments on the debt to effectively wipe out its U.S. income for tax purposes.

Defenders of corporate inversions often argue the United States' 35% statutory corporate tax rate is too high compared to that of other nations and therefore puts companies at a competitive disadvantage, but most U.S. companies pay nowhere near that rate. Defenders also claim profits earned in the United States will always be taxed here. But the earnings stripping practiced by Ingersoll Rand and other inverted companies suggests this is not true. The ultimate goal of much multinational tax planning is making profits appear to be earned in countries with a zero or low tax rate.

Reducing the nation's corporate tax rate cannot address the fact that many corporations are employing various means to avoid U.S. taxes altogether.

Companies that have recently sought inversions continue to benefit vastly from public investments. The drugs and devices made by Pfizer and Medtronic, which are often sold by Walgreen, would have far fewer buyers if not for Medicaid, Medicare and other federal health programs. They would not exist without federal investments in research and education and in the infrastructure that makes commerce possible.

Taxpayers should be outraged that these companies have no qualms about benefiting immensely from the U.S. economic system without contributing their fair share.

But Congress can easily fix this by moving forward with a White House proposal to bar corporations that are obviously American from pretending to be foreign. The plan would sensibly treat newly merged companies as American if they are majority owned by shareholders of the original American company, or if they are managed and controlled inside the United States and have substantial business here.

There's much more to be done to reform America's tax code, but we can't afford to wait for lawmakers to settle how to approach that challenge. If Congress waits too long, there won't be much of a corporate tax left to reform.

Read CNNOpinion's new Flipboard magazine

Follow us on Twitter @CNNOpinion.

Join us on Facebook.com/CNNOpinion.

ADVERTISEMENT
Part of complete coverage on
updated 8:27 PM EST, Fri December 26, 2014
The ability to manipulate media and technology has increasingly become a critical strategic resource, says Jeff Yang.
updated 11:17 AM EST, Fri December 26, 2014
Today's politicians should follow Ronald Reagan's advice and invest in science, research and development, Fareed Zakaria says.
updated 8:19 AM EST, Fri December 26, 2014
Artificial intelligence does not need to be malevolent to be catastrophically dangerous to humanity, writes Greg Scoblete.
updated 10:05 AM EST, Fri December 26, 2014
Historian Douglas Brinkley says a showing of Sony's film in Austin helped keep the city weird -- and spotlighted the heroes who stood up for free expression
updated 8:03 AM EST, Fri December 26, 2014
Tanya Odom that by calling only on women at his press conference, the President made clear why women and people of color should be more visible in boardrooms and conferences
updated 8:12 AM EST, Fri December 26, 2014
When oil spills happen, researchers are faced with the difficult choice of whether to use chemical dispersants, authors say
updated 1:33 AM EST, Thu December 25, 2014
Danny Cevallos says the legislature didn't have to get involved in regulating how people greet each other
updated 6:12 PM EST, Tue December 23, 2014
Marc Harrold suggests a way to move forward after the deaths of NYPD officers Wenjian Liu and Rafael Ramos.
updated 8:36 AM EST, Wed December 24, 2014
Simon Moya-Smith says Mah-hi-vist Goodblanket, who was killed by law enforcement officers, deserves justice.
updated 2:14 PM EST, Wed December 24, 2014
Val Lauder says that for 1,700 years, people have been debating when, and how, to celebrate Christmas
updated 3:27 PM EST, Tue December 23, 2014
Raphael Sperry says architects should change their ethics code to ban involvement in designing torture chambers
updated 10:35 PM EST, Tue December 23, 2014
Paul Callan says Sony is right to call for blocking the tweeting of private emails stolen by hackers
updated 7:57 AM EST, Tue December 23, 2014
As Christmas arrives, eyes turn naturally toward Bethlehem. But have we got our history of Christmas right? Jay Parini explores.
updated 11:29 PM EST, Mon December 22, 2014
The late Joe Cocker somehow found himself among the rock 'n' roll aristocracy who showed up in Woodstock to help administer a collective blessing upon a generation.
updated 4:15 PM EST, Tue December 23, 2014
History may not judge Obama kindly on Syria or even Iraq. But for a lame duck president, he seems to have quacking left to do, says Aaron Miller.
updated 1:11 PM EST, Tue December 23, 2014
Terrorism and WMD -- it's easy to understand why these consistently make the headlines. But small arms can be devastating too, says Rachel Stohl.
updated 1:08 PM EST, Mon December 22, 2014
Ever since "Bridge-gate" threatened to derail Chris Christie's chances for 2016, Jeb Bush has been hinting he might run. Julian Zelizer looks at why he could win.
updated 1:53 PM EST, Sat December 20, 2014
New York's decision to ban hydraulic fracturing was more about politics than good environmental policy, argues Jeremy Carl.
updated 3:19 PM EST, Sat December 20, 2014
On perhaps this year's most compelling drama, the credits have yet to roll. But we still need to learn some cyber lessons to protect America, suggest John McCain.
updated 5:39 PM EST, Mon December 22, 2014
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
updated 8:12 PM EST, Fri December 19, 2014
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
updated 12:09 PM EST, Fri December 19, 2014
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
updated 6:45 PM EST, Thu December 18, 2014
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
updated 4:34 PM EST, Fri December 19, 2014
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT