Gary Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
A seminal thinker and world-renowned expert on international trade, commerce, and taxation, for the past...
The corporate inversion debate continues to heat up, revealing a serious conflict between the Obama administration and the business community. Corporate inversions are cross-border mergers that allow U.S. companies to reincorporate abroad where corporate taxes are much lower.
Earlier this week, Abbott Laboratories and Mylan Inc., both U.S.-based drug makers, announced yet another inversion deal, this time a “spinversion” in which Abbott Labs will spin off part of its foreign operations and sell it to Mylan Inc. with plans to reincorporate the combined company in the Netherlands where corporate taxes are much lower. Then Treasury Secretary Jack Lew accused these and other companies of trying to “avoid paying taxes here, notwithstanding the benefits they gain from being located in the United States.” He went on to imply they are unpatriotic.
Now, in today’s Wall Street Journal, the CEO of Abbott Labs responds:
The raging debate about these decisions has been absurd, and people expounding on the topic are making wild claims that inversion is an abuse of the tax code, cheating and unpatriotic. It all makes for emotional and dramatic headlines and debate but ignores the facts.
First, inversion is legal. Period. It's allowed in the tax code. The tax code even specifies the terms and conditions under which it may be done. Reference 26 U.S. Code Section 7874.
Inversion doesn't change a company's tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion.
Inversion does not relieve any pre-existing tax burden. It does not reduce the tax that any company would ultimately have to pay on past earnings overseas that have been deferred under the U.S. tax system.
The tax law today views overseas earnings that have not been repatriated as part of the U.S. tax system, regardless of whether a company has inverted. Therefore, those past foreign earnings, if repatriated to the U.S., are still subject to full U.S. taxation.
What does change after inversion is a company's access to its future foreign earnings generated outside of the U.S. tax system. Those future earnings may be used for any capital allocation purpose the company may have, including investment in the U.S., without the additional U.S. repatriation tax. Foreign taxes will have already been paid on those profits earned outside the U.S. It is the additional repatriation tax, imposed by high corporate tax rate in the U.S., that is not paid after inversion.
It is important to note that the U.S. has the highest corporate tax rate in the world at 35%, while the tax rates in countries with territorial systems, where our competitors are based, are in the mid-20s or lower.
The U.S. is among only a handful of countries, and the only one in the Group of Seven, that taxes companies on world-wide earnings rather than the earnings in their home domiciles. It's a double whammy: the highest rate, by far, and it's applied worldwide.
In terms of global competitiveness, the U.S. and U.S. companies are at a substantial disadvantage to foreign companies. Taxes are a business cost. Our disproportionately higher tax rate puts foreign companies at a huge advantage competitively, and their lower tax burden amounts to a subsidy that encourages them to acquire American businesses.
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Update: An earnlier version of this post referred to Abbot Labs. The post has been updated to reflect the correct name of the company, Abbott Laboratories.
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