This week the U.S. Senate Committee on Finance held a hearing entitled "The U.S. Tax Code: Love It, Leave It, or Reform It!" where the focus was on the corporate tax maneuver called inversions.
Inversions occur when corporations purposely renounce their American citizenship, usually by merging with a foreign corporation and reincorporating in a low- or no-tax country (also called a tax haven) in order to be treated as a foreign corporation and escape U.S. tax liabilities. However, in reality, the move is just on paper -- these corporations can in fact be owned by up to 79 percent of the former shareholders of the U.S. company and keep their business operations here in America.
U.S. Senator Ron Wyden (D-Oregon), chairman of the Finance Committee, referred to tax inefficiencies and loopholes like inversions as "chronic diseases," "infections" and "contagions" since they are eroding the U.S. tax base and allowing these multinational corporations to escape paying their fair share of government services. The exact words of Sen. Wyden were: "The inversion virus now seems to be multiplying every few days."
There has definitely been a growing rash of attempted inversion deals. The largest inversion deal to date, the drug maker AbbVie (formerly Abbott Laboratories) recently agreed to purchase a European competitor, Shire, with the goal of reincorporating in Britain. Other health-related companies have announced plans to invert such as Medtronic, Pfizer and Mylan.
Even "America's drugstore" - Walgreens -- may soon be a Swiss company, as it is in the process of determining whether to reincorporate there. This decision is particularly virulent since Walgreens receives around a quarter of its income from taxpayer supported health programs like Medicare and Medicaid. (The full list of companies that have inverted can be found here, which is much broader than the recent spate of health-related defections.)
What's most sickening about all of these corporate defections is that U.S. corporations that have reincorporated in another country to take advantage of that country's lower corporate taxes are still spending significantly on lobbying in the United States, our new analysis shows. Our research reveals that of 76 companies that have undergone tax inversion since 1983, 29 of those companies have spent more than $120 million combined on lobbying expenses since undergoing inversion.
Corporations choosing to reincorporate in foreign countries should be required to follow the existing stricter disclosure requirements of the Foreign Agent Registration Act that is used for foreign governments and foreign political parties. Foreign corporations should not be able to exempt themselves and choose to register under the less robust disclosures under the Lobbying Disclosure Act. It's stomach-turning that these corporate defectors are able to have their cake and eat it too.
Congress should also take swift action to limit the ability of corporate defectors to escape paying U.S. taxes by passing the Stop Corporate Inversions Act (S. 2360). Though inversions themselves are harmful, when companies that revoked their citizenship are classified as "inverted" under the tax code, it's a good thing since it means they will still be treated as domestic for tax purposes and not be able to escape paying their fair share.
S. 2360 will help slow the recent flare-up of corporate inversions by reducing the legal threshold for characterization as an "inverted corporation" under the tax code to 50 percent ownership by previous U.S. shareholders. It also would add an additional layer of analysis to capture as inverted those companies where management and control and significant business activities remain in the United States.
There is bipartisan support in Congress for attacking the outbreak of inversions. President Obama and Treasury Secretary Jack Lew are also calling for a return to "economic patriotism" an end to this practice that's decimating our country through lost tax revenue.
However, the clock is ticking on the window of opportunity to pass policies to stop companies from inverting. It's time for our congested Congress to come to agreement and settle on a prescription to remedy the virus of inversions.
Susan is Deputy Director of Public Citizen's Congress Watch division.
This blog was cross-posted to Citizenvox.org