Pfizer and the Inversion Debate.
/
As everyone is aware, America will lose another company in 2016 to Ireland with the closing of the Pfizer – Allergan inversion. See Bloomberg article. With the inversion (See this Fortune article for more information about inversions), Pfizer will relocate its corporate headquarters to Ireland and continue its long standing policy of transferring profits from the U.S. to a lower tax jurisdiction. Pfizer’s move will continue a trend of U.S. companies playing the shell game with its U.S. sourced profits through transfer pricing. See these Bloomberg articles regarding profit shifting to avoid taxes and the U.S. corporate tax-dodge
The obvious question about such a move is: What happened to President Obama’s and Treasury Secretary’s, Jacob J. Lew, position that the US would try and prevent future inversions (See Forbes article for more information of the Treasury Regulations) in response to Pfizer’s first failed attempt to invert by purchasing Astra Zeneca? (Note: see Bloomberg article about Pfizer’s attempt to acquire Astra Zeneca). As stated by the Wall Street Journal, the Treasury’s efforts failed to prevent US inversions or foreign corporations from acquiring US corporations.
So how does the U.S. solve the problem given the ineffectiveness of the changes to the Treasury Regulations? Possible solutions could be: 1. To lower the corporate tax rate in the United States; or 2. A Tax Holiday. See Congressional Research Service’s article: Corporate Expatriation, Inversion and Mergers: Tax Issues for a discussion of the solutions proposed to solve the inversion problem.
The first solution would be to de-incentivize corporations from changing their home jurisdiction by matching the corporate rates in other countries. However, that might not stop the mass exodus of corporations or generate job in the U.S. See Sam Becker’s article about Kansas’ attempt to lower tax rates for businesses and the negative impact on jobs in Kansas.
The second solution might be to declare a tax holiday and allow the companies to bring back money to the United States at a reduced rate or without paying tax. As stated in Jaimie Woo’s Huffington Post article this might not be the best idea, because it is rewarding the companies that shifted its profits offshore through transfer pricing by allowing them to bring the profits home at a much lower rate. Also, the tax holiday would not address the problem of inversions, because the reason the companies are inverting is to avoid all U.S. taxation, not just at a reduced rate.
Another possibility, but rarely discussed is an expatriation tax. This solution wouldn’t solve the corporate inversion problem, but would provide a huge incentive to not invert. What is an expatriation tax? If you are a U.S. Citizen and want to renounce your citizenship (or are ordered to renounce your U.S. citizenship), the IRS treats that situation as an expatriation and imposes a tax on all your assets. See Internal Revenue Code Section 877A. As stated by the IRS, the Expatriation Tax would treat the individual as having sold all of his/her assets the day before expatriating their citizenship, and would impose a tax on the sale of those assets (with a sizable exemption).
The Expatriation Tax Model could be implemented to include Corporations and not just U.S. individuals. This would require the U.S. Corporations to pay the tax on the deferred earnings of their offshore subsidiaries, and all other assets prior to inverting to the foreign jurisdiction. This would make sure the company pays its fair share of U.S. taxes before utilizing the foreign jurisdictions tax benefits.
Could this unique solution work? It might not stop the inversions, but it would at least cause the corporations to pay their fair share of taxes for choosing to relocate (on paper) its corporate headquarters in another jurisdiction. Unfortunately, as with the proposed legislation (changing the tax rate and a tax holiday) it is unlikely that Congress will implement this solution to prevent corporations from avoiding U.S. taxes.
If you feel strongly about inversions and have specific/credible information about corporations avoiding the payment of tax, something that you can do now to limit the tax avoidance is to utilize the IRS tax whistleblower program. The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (either through an inversion or other methods, such as transfer pricing, or sham transactions). Contact us if you want to file a tax whistleblower claim.