BUSINESS
09/10/2014 02:02 pm ET Updated Dec 06, 2017

Turns Out Ditching America To Dodge Taxes Isn't Always Great For Business

ASSOCIATED PRESS

We've been doing it wrong. Instead of trying to shame American companies into not buying foreign companies to avoid taxes, we should tell them it's bad for business.

sadobama
President Obama is disappointed in you, tax inverters.

Tax-dodging deals known as "tax inversions" could hurt the credit ratings of the companies that do them, Standard & Poor's Rating Services warned in a note on Wednesday. When humans have lower credit ratings, they have a harder time borrowing money for new Camaros or iPhone 6 Pluses or whatever. When companies have lower credit ratings, they have a harder time buying computers or private jets or whatever.

But wait, you might be thinking, isn't the whole point of dodging taxes to get more money, which usually means better credit ratings? Sure, but it doesn't always work out that way!

Here are three ways S&P thinks inversions -- which involve buying a foreign company and then moving your headquarters to the lower-taxed foreign country -- might not be such a sweet deal for companies:

1. Companies will do kind-of-stupid things just to dodge taxes. Companies will often borrow a bunch of money today to buy a company to get that sweet tax-free cash in the future. That's not good for credit ratings. And sometimes they'll buy another company just for the tax break and then realize, too late, that merging with that other company makes no actual business sense. Everybody suffers, business suffers, credit ratings suffer, and those tax breaks don't seem so sweet any more. Dumb. Dumb, dumb company.

kardashian
This is just like a dividend payment.

2. Companies will also do kind-of-stupid things once they get their hands on money. We've all been there. We get a bonus, or the ponies run right one day, and suddenly we've got a wad of cash in our hands. It's all going to the baby's college fund, we tell ourselves. But on the way to the bank to open a college fund, we blow all our cash on the Kim Kardashian game. Oops! Tough luck, baby. Companies do something similar. Tax-inversion deals let them tap all the cash they've been hiding offshore from Uncle Sam. Then they give it all away to shareholders and their executives. Next thing you know, the money's gone. Oops! Tough luck, credit rating.

3. People hate tax inversions and the companies that do them. Yeah, yeah, companies usually couldn't care less whether you hate them or not. But if a company becomes the target of angry speeches by President Obama, or gets hit with boycott threats, as recently happened to Walgreen, then it starts to care, a little. Because that kind of stuff can be bad for business.

In fact, Walgreen's inversion plans got scuttled because of a boycott threat. And now it looks like Chiquita's planned inversion with British company Fyffes could be in trouble, too, as investors start to realize a different deal would probably be better for business.

Obama and politicians and HuffPost writers have decried tax-inverting companies as unpatriotic. Inversions could cost the U.S. government $20 billion in tax revenue, House Democrats have warned. Obama et al. have threatened executive orders and new laws to stop them.

That has not bothered companies, who have racked up a record $140 billion in inversion deals so far this year, according to a Forbes tally. In many cases, in fact, all the angry talk has only encouraged them to hurry up and do deals while they still can. If they won't listen to Obama and the Huffington Post, maybe they will listen to humble S&P.

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