Andrew Kelly / Reuters / Landov

Lawmakers look to end corporate tax dodge

Analysis: Through inversion, American companies move billions in profits overseas

Leading Democrats inside and outside Congress have hit upon a strategy to curtail a recent epidemic of corporate tax dodging, which if left unchecked could cost the government tens of billions of dollars. It begins today with a closely watched hearing in the Senate Finance Committee, a prelude to a whirlwind of horse trading and demand-setting among policymakers.

As analyst David Cay Johnston observed, corporations like AbbVie, makers of Adderall, use a process known as inversion to merge with smaller companies located in tax havens like Ireland, Luxembourg or the Cayman Islands. Then, the domestic firm changes its corporate billing address to that of the overseas company, adopting their lower tax rate and reducing or eliminating their U.S. corporate tax burden.

AbbVie shares almost no business overlap with the small Irish company, Shire, with which it merged earlier in July. Shire’s CEO admitted last month, “I think the main strategic rationale here is tax inversion.” The new company will be re-incorporated on the island of Jersey, a notorious tax haven located in the English Channel. But its corporate headquarters will remain in America, along with its production, sales and research offices. The Jersey re-incorporation exists only on paper. “It will be domiciled in the UK for tax purposes,” said AbbVie’s chief executive, Richard Gonzalez, in announcing the deal.

These inversion deals have increased lately, with 14 announcements this year, from drug companies Mylan and Actavis to the medical device company Medtronic. According to an analysis by Goldman Sachs, completed and pending inversions in 2014 outpace all of those performed between 2002 and 2013.

This has caught the attention of lawmakers, especially because of the money at stake. The Joint Committee on Taxation estimates that inversions will cost the federal government $19.6 billion in tax revenue over the next 10 years. “As long as these inversions are legal, companies are going to do them,” said Rep. Keith Ellison, D-Minn., co-chair of the Congressional Progressive Caucus. “If they didn’t, their shareholders might even sue them.”

Currently, a foreign entity need only control 20 percent of the merged company for the billing address to shift overseas to the tax haven. The Obama Administration has proposed to increase that to 50 percent, in an effort to make the deals less attractive. Treasury Secretary Jack Lew wrote to House Republican leaders last week urging them to “shut down this abuse of our tax system.”

Republicans have said that they would rather deal with inversions in the context of overall tax reform, and with precious little time between now and the midterm elections, rapid action on the issue appears remote. However, activists working to stop inversions believe they have a wild card: the tax extenders bill, a large set of mostly corporate tax breaks typically passed on an annual basis.

The latest round of tax extenders expired at the end of 2013, and Congress has until the end of this year to enact them retroactively. The Senate Finance Committee advanced a bill earlier this year, but it stalled in the full Senate over an argument about amendments. Meanwhile, the House’s tax extender packages look very different from the Senate’s. Observers believe the matter will not get resolved until the lame duck session after the elections.

Battle of tax breaks

That’s when Democratic strategists believe they will have some power to force changes. “The business guys are desperate to get tax extenders passed,” said Frank Clemente of the coalition Americans for Tax Fairness. As a condition of passing them, Democrats could demand changes to inversions or an end to deferral, the process by which corporations can defer earnings produced overseas by stashing it there, rather than returning it to the U.S. and paying corporate taxes.

Corporations have stockpiled roughly $2 trillion abroad using this technique, and some believe that ending deferral and forcing corporations to pay taxes on all earnings would make inversion less relevant. “If the tax advantage is high enough, they’re still going to be inverting, right?” said Congressman Keith Ellison. “So I think we should end deferral. An American company should be an American company.”

Demanding changes to inversion or deferral to allow tax extenders to pass would force corporations to play one set of tax breaks against another, the activists say. And the months spent waiting give them a chance to call more attention to the issue, including in the 2014 midterm elections.

Rick Weiland, a Democratic Senate candidate from South Dakota, has made inversions and corporate tax dodges a central part of his campaign. “I have nothing against corporations, but they’re not paying their fair share,” Weiland said. “They’re using their money and their influence to create a tax code that’s to their benefit at the expense of everyday folks in this country. I call it economic patriotism.”

Another threatened merger could raise the profile of inversions. Walgreens, the pharmacy chain, is considering a deal with Swiss health and beauty retailer Alliance Boots, having already acquired 45 percent of the company in 2012. “Walgreens is key because it’s America’s drugstore,” said Frank Clemente of Americans for Tax Fairness. Others pointed out that Walgreens receives over one-quarter of its income from taxpayers through prescription drug sales routed through government programs like Medicare and Medicaid.

“These companies, they benefit from our courts, our military, our cops, our food inspection, everything, and yet they’re willing to re-incorporate with another company in another country so they can pay lower taxes,” said Congressman Keith Ellison.

Inversions will likely come up in today’s Senate Finance Committee hearing on the international tax system. Democrats have urged committee chairman Ron Wyden, D-Ore., to take up the issue, but this is the first hearing on it. Wyden has said he is “talking with … colleagues and exploring options for addressing this.” As long as Democrats control the Senate, and if Wyden considers inversion a condition for passing tax extenders, the gambit has a chance of success.

That’s no guarantee in a Congress that appears to pay more attention to the needs of corporations than those of average citizens. Indeed, the companies most likely to use inversion now — technology firms, pharmaceuticals and medical device makers — give substantial campaign contributions to politicians, and much of that largesse goes to Democrats.

But the appeal to patriotism and the basic value of fairness may resonate, alongside the hard-nosed politics. As Frank Clemente from Americans for Tax Fairness puts it, “We call them Benedict Arnold companies.”

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