Tax Analysts Blog

Demagoguing the 'I' Words

Posted on Aug 15, 2014

The political discourse this summer has been dominated by three “I” words—impeachment, immigration, and inversions. True to form, Democrats have sought to raise funds off each of the three. And equally true to form, Republicans have sought to weave all three into their developing narrative of a lawless presidency.

Impeachment and immigration being above my pay grade, let’s limit this discussion to inversions and the political rhetoric surrounding them. That rhetoric leaves one despairing of a reasoned debate on a proper policy response to the seeming wave of U.S. corporations engineering inversion transactions to relocate their headquarters offshore.

Democrats, from the president on down, have decreed that these corporations are exploiting a “loophole” that enables them to evade their “fair” share of taxes. Devoting his weekly address of July 26 to inversions, President Obama bemoaned that “a loophole in our tax laws makes this totally legal – and I think that’s totally wrong.” And he underlined the need for urgent remedial action: “Stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait.”

As if on cue, his fellow Illinoisan, Sen. Dick Durbin, wrapped himself in the flag to block Walgreens’ inversion to Switzerland by way of a merger with Alliance Boots: “Walgreens uses taxpayer-supported transportation infrastructure to stock its stores and deliver its products.” That keen insight into the obvious was accompanied by a rare flash of wit -- “Is ‘the corner of happy and healthy’ somewhere in the Swiss Alps?” Shortly after the deal was derailed came an e-mail blast soliciting campaign contributions of “$10, $25, $50, $100 or another amount.” It’s unclear how much Durbin managed to mop up. What’s clear is that Walgreens shareholders had 14 percent of their wealth wiped out.

Consider the many circles that this rhetoric squares.

Loophole? Really? Each successful inversion transaction since 2004 has been structured to comply with section 7874 and the sundry IRS pronouncements. If an inversion exploits a loophole, then so does every other corporate reorganization that painstakingly adheres to the requirements of the code and regs.

Free-riding on taxpayer-supported infrastructure? Really? Does anybody ask that question of Toyota as it wheels out Sequoias and Tacomas? Or of Unilever as it scoops out pints of “Vermont’s Finest,” Ben & Jerry’s? Aren’t they, like all foreign-owned businesses, inverted or otherwise, liable for taxes on income from their U.S. operations?

Which brings us to the ultimate irony. One side of the mouth denounces inversions as paper transactions, devoid of economic substance. The other, typified by Delaware Sen. Christopher Coons, laments, “We are losing corporate headquarters, we're losing jobs, and we're losing resources." So which is it? Are inversions mere tax lawyers’ tricks that leave ground realities unchanged? Or do they embody substantive economic dislocations, leading to redeployment of capital and loss of employment?

For their part, Republicans have left alone the many contradictions inhering in this unabashed appeal to corporate responsibility, social equities, and the travails of the middle class. Instead, they have attempted to deflect the conversation to, alternatively, the need for comprehensive tax reform and the imperative of preserving legislative prerogative in this area. Rather than penning op-eds railing against yet another impending breach in the constitutional wall of separation of powers, House Republicans would do better by exercising their power.

Eschewing the pipe dream of comprehensive reform, they should narrowly address the two discrete “tax gaming” opportunities that become available to an erstwhile domestic corporation upon inverting: earnings stripping and tax-free repatriations.

Tackling the first will entail nothing more than replicating the well-received proposal, contained in House Ways and Means Chair Dave Camp’s plan, for amending section 163(j) to limit excess domestic indebtedness of U.S. members of a worldwide affiliated group. The second could be addressed via a two-pronged approach. A demand-side fix for tax-free repatriations will require amending section 956(c) to define as U.S. property loans from a controlled foreign corporation to an inverted parent. Accompanying that should be a supply-side incentive—a repatriation tax holiday. Bipartisan bills for such a holiday are now languishing in both chambers, and one could be revived and made part of the new inversion legislation.

There is zero chance of any such House bill passing the Senate and becoming law. But like the immigration legislation that the House passed before going on recess, this bill will immunize Republicans from campaign-trail accusations of doing nothing about a burning problem. It may even help them turn the tables—by charging Democrats of standing in the way of billions of dollars of new domestic investment. Most important, the bill will represent an ideological counterweight to the Levin brothers’ approach, which, by ratcheting down on the ownership thresholds of section 7874, seems to give legislative utterance to the demagoguery of economic patriotism.

Read Comments (1)

Lee JonesAug 16, 2014

That keen insight into the obvious ... Hah! That's Dick Durbin for you.

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