By Joseph Horch,
International Business Writer
Tax inversion has long been a problem for the Internal Revenue Service (IRS). Tax inversion commonly involves an American company buying a majority of shares in a foreign company or merging with a foreign company and changing the address of the headquarters to said foreign country in order to avoid paying the high corporate in the United States. The Treasury Department and the Internal Revenue Service, the US tax collection agency, unveiled the third round of measures since September 2014 aimed at limiting overseas mergers involving US companies shifting their headquarters overseas to avoid American taxes.
Irish-based corporations have been among the most popular inversion targets of American companies because they allow the firms to benefit from the lower Irish corporate tax rate of 12.5 percent, versus the 35 percent rate American corporations pay.
These new regulations were aimed directly at the merger between American based pharmaceutical company, Pfizer, and Irish pharmaceutical company, Allergan. The merger would have made Pfizer the largest pharmaceutical in the world, but after the Treasury Department changed policy last week, Pfizer backed out on the deal.
United States secretary Jack Lew has warned that the only way to stop US corporations from going aboard would have to come from new legislation being passed by congress. That being said, both parties support reform, however the passing of bills has been at an all-time low thanks to the political gridlock between the democrats and republicans, and new legislation is unlikely until a new president is sworn in next year.
Tax inversion has been a popular subject on the campaign trail. Republican front runner and real estate mogul Donald Trump has openly criticized the US corporate tax saying that “it is too high.” One can only assume the business friendly and isolationist Trump would aim to lower the corporate tax.
On the other side of the campaign trail, democratic front runner Hillary Clinton, has openly opposed the $14 billion merger between Johnson Controls, a US maker of car batteries, and Cork, Ireland based Tyco International.
President Obama has openly asked the Republican backed Congress to pass new legation to limit tax inversion, however little has been done. Many attribute this due to the fact that Mr. Obama will be leaving office within the next 9 months. However, the Treasury has announced that it will impose a three-year limit on foreign companies bulking up US companies’ assets to avoid ownership limits for later inversion deals.
Globalization is growing trend and it is hard to see the US retaining ‘home-grown’ companies if a new tax code is not passed. In fact it is hard to criticize US companies for wanting to invert. The root of the problem lies in the broken American tax code. The release of the ‘Panama Papers’, leaked information revealing where the ultra-wealthy have hid their money in tax havens, may slow the trending tax inversion crisis. However, this will not stop it. The only way to stop tax inversion is for legislators to pass new laws either enforcing harsher penalties, or more business friendly tax codes.
Although change is unlikely during the remainder of the Obama administration, there is hope that regardless of which party the next president is from, the broken tax code will be rewritten.
A version of this article appeared in the Tuesday, April 12th print edition.
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