WASHINGTON — You can thank Medtronic, in part, for giving new political life to one of those dense, jargon-drenched terms that are nonetheless oh-so-important to understand: corporate inversions.
Fridley-based Medtronic became just one in a string of American companies to acquire a foreign counterpart and move its headquarters to a friendlier off-shore tax climate in June when it bought Ireland-based Covidien. So many companies have sought such “inversions,” and the lower corporate tax rate they bring with them (in the U.S., the rate is 35 percent; in Ireland, for example, it’s 12.5 percent), that Congress has taken notice, and lawmakers have begun grappling with what they can do — legislatively and practically — to discourage these moves going forward.
Bloomberg News found eight companies that have announced inversions since May, and nearly 50 have completed deals in the last ten years, so Medtronic certainly isn’t the only company taking this approach.
The Senate Finance Committee called a panel of international experts on Tuesday to discuss what can be done to stop the spate of inversions. Senate Democrats want to pass a bill to retroactively block these deals and discourage similar ones in the future. Republicans, who worry about inversions as well, warn against moving too quickly to stop them, arguing U.S. companies need relief from an overly-burdensome tax code in order to convince them to keep their corporate headquarters at home.
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But so-called “comprehensive tax reform” is a long time coming, and with Congress staring down an election just more than three months away, it almost certainly won’t happen this session. And that means fixing inversions is probably delayed, as well.
Congress acted in 2004
Allowing inversions is bad politics for both Republicans and Democrats — no one likes to see an American company move overseas to lower its tax bill — and in the past lawmakers have moved to change the law and discourage these deals when they’re especially egregious, Citizens for Tax Justice legislative director Steve Wamhoff said.
After a series of inversions in the early 2000s, Congress passed a law in 2004 that continued to tax companies at American rates if current shareholders of the American firm involved in an inversion owned more than 80 percent of the new company.
But Wamhoff said the 80-percent threshold provided a broad loophole for companies. He said an outbreak of inversions like those we’ve seen this year could force embarrassed lawmakers to move toward tighter restrictions.
“Members of either party don’t want to take on corporate America until the situation is so bad, the house is on fire, we have to do something,” he said.
Since 2004, at least 47 companies have completed inversions, according to the Congressional Research Service. A bill offered by House and Senate Democrats meant to decrease inversions could save up to $20 billion in tax revenue over the next ten years, according to the Joint Committee on Taxation.
Republicans have said blocking inversions could only exacerbate the problem that sent companies overseas in the first place: they’re simply trying to improve their bottom line. They blame the United States’ 35 percent corporate tax rate, the highest in the world, and say an inversion crackdown should only be part of a bill to overhaul the whole system.
“That’s not to say some of these concepts couldn’t be combined into larger tax reform,” said Republican Rep. Erik Paulsen, Minnesota’s only member on the tax-writing House Ways and Means Committee. “That certainly could be the case, but if it’s only directing these anti-inversion proposals and that’s all you’re doing, that’s not the solution that will fix the problem.”
The main bill Senators are considering would allow newly-merged companies to avoid U.S. taxes only if the company’s original American shareholders maintain a stake in the new company worth less than 50 percent. That would tighten the threshold established in 2004. The legislation would also put a two-year moratorium on inversions, with the idea being that lawmakers could work out a larger tax overhaul in the meantime.
Sens. Amy Klobuchar and Al Franken had signed on to co-sponsor that bill even before Medtronic’s announcement, and the White House has endorsed the approach.
At Tuesday’s Finance Committee hearing, Sen. Ron Wyden (D-Oregon) said the “underlying sickness” of inversions is that “the American tax code is a mess,” and that Congress should reform it. But short of that, he said, lawmakers need to do something to discourage inversions right now.
“Let’s work together to immediately cool down the inversion fever,” he said. “The inversion loophole needs to be plugged now.”
Sen. Orrin Hatch, the lead Republican on the Senate Finance Committee, said Tuesday that he could be open to some type of short-term fix, but he has a list of wants out of step with what Democrats have proposed:
- it shouldn’t be retroactive,
- it shouldn’t be what he considers punitive,
- and it should be revenue neutral.
“Rather than incentivizing American companies to remain in the U.S., these bills would build walls around U.S. corporations in order to keep them from inverting,” he said.
Without Republican cooperation, it seems unlikely Congress could pass such a plan.
Paulsen on comprehensive tax reform
Whenever Congress gets around to the fabled “comprehensive tax reform,” what might that mean for corporations?
Paulsen suggested two main reforms: decrease American taxes on sales firms make overseas (so-called tax repatriation: Medtronic, for example, could access up to $14 billion in untaxed overseas profits if it moves to Ireland). And then lower the overall corporate tax rate to make the U.S. a more attractive place to keep a business.
Warnhoff, of Citizens For Tax Justice, noted that no matter how low lawmakers set the corporate tax rate, there are always going to be countries that offer one lower. But Paulsen said the U.S. only needs to have an average tax rate to have a leg up on other economies.
“Just get us down to the average, and we can compete on everything else, I think, and win, because of our talent, because of our education system,” he said. “When the tax code doesn’t keep pace with the modern economy, companies are going to make business decisions. So this isn’t about tax avoidance, this is about making smart business decisions, and competitiveness.”
Devin Henry can be reached at email@example.com. Follow him on Twitter: @dhenry