Peter Jones/Reuters/File
Tim Hortons employees prepare coffee before the company's annual general meeting in Toronto in 2014. Tim Horton's and Burger King merged in 2014 and moved the new company's tax base out of the United States.

Can Democrats and Republicans stop corporate tax inversions?

Corporate tax inversion, in which companies merge and move headquarters overseas to take advantage of lower tax rates, is a huge problem. Both parties agree on that, but not on what to do about it. 

This week was a big one for corporate tax geeks. We saw a corporate tax inversion that comes with a long, Baroque history; an estimate by Reed College economist Kim Clausing that inversions and other income-shifting techniques reduced Treasury revenues by as much as $111 billion in 2012; and a new Congressional Budget Office projection that corporate base erosion will continue to cut corporate tax receipts over the next decade.

In case you hadn’t noticed, corporate income-shifting is a real problem. The related real problem is that while Democrats and Republicans agree that something is seriously amiss, they profoundly disagree on what is wrong and what to do about it.

Let’s start with the inversion, which is just one form of tax planning aimed at reducing the U.S. corporate tax base. This one was a $14 billion deal between Ireland-based Tyco International and Wisconsin-based Johnson Controls. The firms estimate that by moving the legal headquarters of the combined business to Cork, the new company will save $150 million annually in taxes. They argue that the transaction makes good business sense on its own, but there is little doubt that, whatever its merits, the deal was structured to maximize tax savings.

This would be just another tax-advantaged merger except that one of the partners is Tyco, a firm that is legendary in the peripatetic world of income shifting. Describing Tyco as an Irish firm can only bring a smile to the faces of those who have been watching its tax-driven comings-and-goings for two decades.

Briefly, here’s simple version of the story (summarized from a blog I wrote about back in 2014). There were even more deals involving other spinoffs but you’ll get the drift.

In 1997, Tyco did an early inversion by turning itself into a subsidiary of a small Bermuda-based security firm, ADT Limited. ADT took Tyco’s name. Tyco took ADT’s Bermuda address. And the new firm was firmly ensconced in a tax haven.

By 2007, Tyco spun off its health care unit into a new publicly traded firm, Covidien Ltd., also legally headquartered in Bermuda.

In 2009, with Congress pursuing legislation to crack down on tax havens, Covidien moved its headquarters to Ireland, though it operates out of an office park in Mansfield, Massachusetts. The legacy company, Tyco, changed its legal address to Switzerland.

In 2014, Tyco decamped to Ireland. The same year, Minneapolis-based medical device maker Medtronic paid $42.9 billion to acquire Covidien, largely to benefit from the tax savings the newly merged firm would achieve as an Irish company.

Now, Johnson Controls is marrying Tyco, with the nuptials carefully designed to benefit from the tax savings of its new Irish address.

It all sounds a little like the corporate tax version of Wolf Hall. It isn’t easy trying to keep track of who is marrying whom and why, whether it’s Henry XIII or some multinational firm.

But there are real consequences to all this drama, including significant revenue losses to the Treasury—which the rest of us will somehow have to pay for.

To better understand the fiscal cost of this income shifting, Clausing used publicly-available government data to see where US-based multinationals report income and where their overseas physical operations are located. She found that half of the foreign income of those firms was reported in tax havens, although only 5 percent of their foreign employment was in those countries. The article, published in the journal Tax Notes(paywall) finds that Treasury revenue loss from international tax planning grew from essentially zero 20 years ago to between $77 billion and $111 billion in 2012, depending on she measured the phenomenon. For the world as a whole, the revenue loss may have exceeded $280 billion in 2012, she calculates.

While Clausing looked at the consequences of base erosion in 2012, CBO is projecting this trend forward. In its annual long-term budget forecast, the agency warned of several trends likely to reduce the corporate income tax base relative to the size of the economy over the next decade. Overall, CBO figures that income shifting will erode the corporate tax revenues by 5 percent, or about 0.1 percent of Gross Domestic Product, from 2016 to 2026.

About half will occur as more business activity occurs in pass-through firms rather than C corporations. Pass-throughs, such as partnerships, and S corporations, are taxed at the individual tax rates of their owners but avoid the corporate-level tax. Some of that corporate revenue loss would be picked up on individual returns.

The other half of this revenue loss, however, will be driven by inversions and other tax minimization techniques aimed at shifting income to low-tax foreign countries while allocating costs to the U.S., where high tax rates make deductions more valuable. That money is gone.

The problem is real. The question is can Democrats, who see it as a matter of corporate abuse, and Republicans, who see it as a consequence of unreasonably high U.S. corporate tax rates, ever agree on what to do about it.

The post Tyco, Tax Inversions, Income Shifting, and Lost Revenue appeared first on TaxVox.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to Can Democrats and Republicans stop corporate tax inversions?
Read this article in
QR Code to Subscription page
Start your subscription today