What do Mallinckrodt, Fruit of the Loom and Sara Lee have in common? They’re all on Congress’ list of American companies that have utilized tax inversions to avoid paying U.S. income taxes. The latest one — as of this writing — is Burger King, which is selling itself to Tim Horton’s, a Canadian purveyor of coffee and doughnuts.
Inversions are transactions in which American corporations engineer their own buyout by a foreign firm in order to move their tax nexus — supposedly their global headquarters — to a country with a lower corporate income tax rate. Basically, everything stays the same; they just have a different mailing address.
According to the Congressional Research Service, 47 American companies have utilized this process over the last decade. It used to be that companies set up phony residencies in places like Bermuda and the Cayman Islands, but that began to change when Congress allowed companies to relocate their headquarters overseas if foreign shareholders owned 20 percent of the stock — a pretty low threshold.
The President and Congress are upset about these tax inversions — Obama called the companies “corporate deserters.” I don’t know that I can argue with that. Essentially, they want to take advantage of everything this country has to offer but shirk responsibility to pay for it — kind of like the worker in a right to work state refusing to join the union but enjoying the same salary and benefits as his “sucker” union coworkers.
But, I can also understand where these corporate travelers are coming from (or should it be going to?). Take, for example, Procter & Gamble and Unilever. P&G’s headquarters is in Ohio and, because of it, the IRS tries to tax all of its profits — whether earned here or around the globe — at a 35 percent rate. Because Unilever is based in the UK, it’s not subject to that same tax levy, giving it an advantage in the marketplace. Management has a fiduciary responsibility to maximize profits and return on investment for their shareholders and leaving money on the table is bad business.
Perhaps we think that corporations should voluntarily pay more taxes than they absolutely have to under the law, but that’s not realistic. It’s like expecting a company to pay its employees more than their competitors. It won’t happen unless they all have to do it — which is why we need to increase the minimum wage.
Under U.S. tax law, it doesn’t make any difference where in the world an American corporation makes its profits. When it brings that money home, it’s subject to the corporate tax, which is why American firms are hiding an estimated $2 trillion overseas. That way they only pay tax on their income earned right here in the good old US of A. So, I think the more inversions that take place the more will take place, as one will begat multiple others. Obviously, we need to do something about it.
Congressman Sander Levin, a Michigan Democrat, has introduced a bill called The Stop Corporate Inversions Act of 2014, which basically redefines foreign ownership of American companies. But, even if he could get it passed — a huge long shot in this comatose Congress — I doubt that it would do any good. Big corporations have teams of attorneys to find ways to get around tax law.
I have another idea that I’ve espoused in these pages before — eliminate the corporate income tax altogether. After all, C corporations are the only ones that pay it. Most corporations in this country are S corps, LLCs and the like in which the profits pass through to the owners who then pay income taxes at personal income tax rates. Let’s do the same with C corps. No more cat and mouse, hide the money games with these multinational corporations. The shareholders should pay taxes on their dividends and they should pay them at the same rates as those who pay on salary and wages. No more 15 percent capital gains tax rate, which has only served to widen the wealth gap. Everyone pays on the graduated personal income tax scale regardless of whether they are punching a clock or picking stocks.
Do this and then we’ll see if Tim Horton’s still wants to buy out Burger King, eh.
Alan J. Ortbals is president and publisher of the Illinois Business Journal