|Forbes.com, Fall, 2014. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
Corporate inversions – where a U.S. company re-incorporates overseas typically to avoid America’s highest-in-the-developed-world 35% tax rate – have been in the news. Recently Medtronic and both Chiquita and Burger King each have one foot out the door. Meanwhile, Walgreen’s rejected such a move, even though it had all the parts in place [and was severely punished in the stock market for its decision].
Depending on one’s personal interpretation of patriotism, fairness and tax reform, the whole subject can become more emotional than rational. Add to that elections in November and it’s not hard to see why many in Congress have suddenly taken a vocal stance on the subject and U.S. Treasury recently introduced regulations to reduce the economic benefits such moves.
Here’s my take.
1. Chief Executive Officers have a responsibility to do what’s best for their shareholders, not what’s best for the country (or any other outside interests). When presented with the opportunity, a CEO would be remiss not to evaluate the option.
2. Given CEOs’ fiduciary responsibilities, it must be recognized that at least a portion of the taxes they have been paying go toward supporting the infrastructure that helped them build a great company. How can a firm that pays zero taxes (even if it’s domiciled in the USA and is using other loopholes) be said to have paid for their fair share of the roads, ports, telecommunications, internet, power and other infrastructure which helps them do their business?
3. Since 1994—two decades—the maneuver has been completely legal. Whether or not a re-located company “should” have to pay the same amount as their domestic counterpart isn’t a legal argument. Only a change in the law can “shut” this door.
4. What’s often lost in the debate is a rational consideration of what the systemic reasons are for companies to consider it at all. In my mind, a better idea is to just lower the corporate tax rate so that companies wouldn’t need to do inversions and let them have more money to invest in the U.S.
5. Unfortunately, those that do grasp the systemic reasons are divided about how the “difference” of a lower corporate tax rate could be made up. Furthermore, many of the targets of such potential tactics—higher taxes on oil and gas rights, taxes for use of government land, roads, ports, etc.—hardly want to take on a new expense.
In short, the subject is not as simple as “If you don’t like it, then support legislation to stop it.”
Among the complications are (1) disagreement on how any tax reform should be enacted that would address the problems in the U.S. tax code that lead to inversions in the first place and (2) the potential for unintended consequences, such as punitive action against inverting companies serving to encourage wholesale foreign takeovers of U.S. firms.
Meanwhile, here’s a final fact to think about courtesy of the Tax Foundation: Today U.S. corporate taxes are 2% of the GDP, while in 1979 they represented 2.8%—much closer to the current OECD average of 3%.