President Obama called Thursday for an urgent end to a tax loophole that allows American companies to shift to a foreign address and lower their tax bill.
Because the loophole is legal, Mr. Obama appealed to “economic patriotism” to get companies to stop using it. And he called for quick passage of a law to halt the growing practice, separate from a larger reform of the corporate tax system. Under Obama’s proposal, the ban would be retroactive to May 2014.
The technique, called “corporate inversion,” involves an American company taking over a foreign firm and reincorporating in that country, allowing the corporate parent to avoid US taxes on foreign-earned profits. So far this year, nine US companies have undergone inversion, and the pace is picking up. This month alone, two US drugmakers, AbbVie and Mylan, have begun the process. In March, banana king Chiquita took over the Irish company Fyffes and is reincorporating in Dublin.
“You know, some people are calling these companies ‘corporate deserters,’ ” Obama said in a speech on skills training at Los Angeles Trade Technical College.
The president acknowledged that these techniques for tax avoidance are legal, but said they’re still wrong – and hurting the country.
“Economic patriotism says it’s a good thing when we close wasteful tax loopholes and invest in education, and invest in job training that helps the economy for everybody,” said Obama, speaking on the final day of a three-day trip to the West Coast that included six fundraisers.
The Obama administration wants to close the loophole in stand-alone legislation. Under the Democratic legislation Obama supports, any company that does half of its business in the United States would be deemed “US-domiciled.” Republicans want to address the matter as part of a larger overhaul of the corporate tax code and showed little sympathy for Obama’s plea Thursday.
“Under President Obama, the United States has the highest corporate tax rate in the developed world,” said Michael Steel, spokesman for House Speaker John Boehner (R) of Ohio, in a statement. “It doesn’t have to be that way: comprehensive tax reform would reduce deductions and lower tax rates for everyone. But until the White House endorses our tax reform plan or convinces Senate Democrats to act, every pink slip from companies moving overseas may as well be signed, ‘President Barack H. Obama.’ ”
Obama’s proposal to end corporate inversions isn’t new. It’s in his fiscal 2015 budget released earlier this year. On July 15, Treasury Secretary Jacob Lew sent a letter to the leaders of the congressional tax-writing committees, calling on lawmakers to “shut down this abuse of our tax system."
But less than four months before the November midterm elections, there’s a heavy political tinge to both Obama’s plea and the Republican response. Analysts see the chances of congressional action as slim to none.
Thus, the call to economic patriotism. A senior White House official said that companies that “invert” are still taking advantage of the services and benefits of being in the US, and therefore should pay for them through taxes.
“Now they are going to be funded by someone else’s taxes,” said the official, speaking to reporters before Obama’s speech. “Those companies still have access to our markets, to our infrastructure, and the education system that helps train our workers.”
Closing the loophole would save the US $17 billion over 10 years, the Obama administration estimates.
“That $17 billion is potentially savings for individuals, it’s savings for other businesses who have to make up for the lost revenue when they stay here in the United States, or it’s savings in terms of our budget deficit and the consequences that would have for our economy,” the White House official said.
The official added that there’s “nothing wrong” with cross-border mergers that are justified by economic efficiency.
“We recognize that it’s a global economy: You’ll have US companies that invest abroad and you’ll have foreign companies that invest in the United States, and we welcome that,” the official said. But the problem comes when companies do mergers just for tax reasons, the official added.
Critics of Obama say corporations that invert are behaving in their own interests, and that the answer is to lower the corporate tax rate.
“Slashing the rate would stop ‘inversions,’ encourage business formation in the United States, and increase tax revenue through other taxes such as sales, income, and even property,” writes Ross Kaminsky, a senior fellow of the Heartland Institute in Chicago, in The American Spectator.