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 9:42 PM EST, Fri December 19, 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
updated 2:51 PM EST, Thu December 18, 2014
Jeff Yang says the film industry's surrender will have lasting implications.
updated 4:13 PM EST, Thu December 18, 2014
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
updated 7:55 AM EST, Wed December 10, 2014
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
updated 12:34 PM EST, Thu December 18, 2014
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
updated 8:42 AM EST, Thu December 18, 2014
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
updated 12:40 PM EST, Tue December 16, 2014
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
updated 11:00 AM EST, Wed December 17, 2014
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
updated 4:54 PM EST, Tue December 16, 2014
Gayle Lemmon says we must speak out for the right of children to education -- and peace
updated 5:23 AM EST, Wed December 17, 2014
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
updated 1:39 AM EST, Wed December 17, 2014
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
updated 3:20 PM EST, Fri December 12, 2014
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
updated 9:56 AM EST, Mon December 15, 2014
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
updated 4:01 PM EST, Mon December 15, 2014
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
updated 9:53 AM EST, Mon December 15, 2014
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
updated 5:53 PM EST, Sun December 14, 2014
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
updated 10:50 AM EST, Sun December 14, 2014
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
updated 4:23 PM EST, Sat December 13, 2014
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
updated 9:26 AM EST, Fri December 12, 2014
Anwar Sanders says that in some ways, cops and protesters are on the same side
updated 9:39 AM EST, Thu December 11, 2014
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
updated 12:38 PM EST, Sun December 14, 2014
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT