"Inversion": Another Tax Loophole

Four years ago, a bunch of Wall street lawyers took a cycling tour through Southern France - but it wasn't just to sample du vin, dine on le canard a l'orange and flirt avec les jeunes filles.  No, they had a grander purpose in mind - saving their corporate bosses from American federal income tax.  They called it "tax inversion"  and here's how it works.  An American corporation buys a smaller foreign company in a country with a lower tax rate.  It adopts the foreign address as its "corporate headquarters"; which of course is simply cosmetic since the real executives and operations stay in the U.S.  Through this legal tactic (loophole), companies can protect their overseas profits from the American taxman.  At the heart of this clever scheme is the huge gap between corporate tax rates in the U.S.  and other countries.  In fact, the American rate at 35% of profits, is the highest among all developed economies.  (Britain is 21%;  Ireland is 12.5%)

Last month, President Obama called these companies "corporate deserters", "unpatriotic", "not paying their fair share".  Of course, with the national debt approaching $18 trillion, he would love to close this loophole but he can't get legislation passed through a divided Congress.  The Republicans say don't call us unpatriotic - this "inversion" scheme wouldn't have started in the first place if the Democrats lowered taxes to a reasonable level - then our companies would stay home.

So the deadlock continues while the exodus gets worse.  Between 2011 and 2013,  16 large American corporations moved their tax  bases offshore (according to the Congressional Research Service).  So far this year, another 14 inversion deals have been struck - and more negotiations are in the wings.  But President Obama is fighting back.  Last week, the Treasury Department said it would use existing laws to stop further defections by "meaningfully reducing the tax benefits after inversions takes place".  What this really means is unknown but we're all aware of the power of big government and the scandalous bulldog behaviour of the IRS (Internal Revenue Service)  when it targeted "conservative" groups in America.  No one wants the taxman after him / her.

Case in point is Walgreens, the giant pharmaceutical chain.  It negotiated the purchase of Alliance Boots, an international pharmaceutical chain headquartered in Switzerland.  But the decision to buy was made simply on the merits of it being a good takeover.  Then it dawned on Walgreens - hey, if we do this deal, we can move headquarters from Chicago to Switzerland and save a ton of tax!  Until reality set in.  What about our customer base?  We could be accused of being tax cheats!  So last week, Walgreens sealed the deal on the Boots takeover, but HQ would - remain in Chicago.  Greg Wesson, Walgreen's Chief Executive, said the company could have faced a "consumer backlash" and jeopardized its relationship with the federal government - their biggest customer.  (Through its Medicare and Medicaid programs, Washington purchases millions of dollars of Walgreens products every year)

Even if the 4 year-old inversion program loses popularity, other Wall Street lawyers will concoct other loophole schemes to save their clients income tax.  It's the nature of the beast.  Why doesn't President Obama simply endorse a competitive tax system that encourages U.S. firms to invest in America and stay in America.  The economy would grow faster, workers' incomes would rise and the government would get more tax revenue.  Ah, if only the president had studied economics instead of Constitutional law.