Theres been a lot of talk about inversion lately. Miles D. White, chairman and chief executive officer of Abbott Laboratories, wrote this letter to the Wall Street Journal to debunk some of the hysterics being put into the air. The bottom line? If our corporate tax werent 10% higher, and it didnt apply worldwide (even on money already taxed in foreign countries), thered be no incentive to invert. Reform our tax code, inversions go away. ----- I never let the existence of facts cloud my judgment. This comment was made to me years ago by a colleague at McKinsey & Company during a debate where his facts were wrong, but his opinion firm. That remark sums up the debate about corporate inversions, deals in which companies reincorporate overseas. My company, Abbott Laboratories, announced this week that we would sell a portion of our generics pharmaceuticals business to Mylan Inc., which will organize their new firm in the Netherlands. U.S. drug maker AbbVie is working out a similar deal with the Ireland-based Shire, and many other companies have recently announced similar inversion deals. The raging debate about these decisions has been absurd, and people expounding on the topic are making wild claims that inversion is an abuse of the tax code, cheating and unpatriotic. It all makes for emotional and dramatic headlines and debate but ignores the facts. First, inversion is legal. Period. Its allowed in the tax code. The tax code even specifies the terms and conditions under which it may be done. Reference 26 U.S. Code Section 7874. Inversion doesnt change a companys tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion. Inversion does not relieve any pre-existing tax burden. It does not reduce the tax that any company would ultimately have to pay on past earnings overseas that have been deferred under the U.S. tax system. The tax law today views overseas earnings that have not been repatriated as part of the U.S. tax system, regardless of whether a company has inverted. Therefore, those past foreign earnings, if repatriated to the U.S., are still subject to full U.S. taxation. What does change after inversion is a companys access to its future foreign earnings generated outside of the U.S. tax system. Those future earnings may be used for any capital allocation purpose the company may have, including investment in the U.S., without the additional U.S. repatriation tax. Foreign taxes will have already been paid on those profits earned outside the U.S. It is the additional repatriation tax, imposed by high corporate tax rate in the U.S., that is not paid after inversion. It is important to note that the U.S. has the highest corporate tax rate in the world at 35%, while the tax rates in countries with territorial systems, where our competitors are based, are in the mid-20s or lower. The U.S. is among only a handful of countries, and the only one in the Group of Seven, that taxes companies on world-wide earnings rather than the earnings in their home domiciles. Its a double whammy: the highest rate, by far, and its applied worldwide. In terms of global competitiveness, the U.S. and U.S. companies are at a substantial disadvantage to foreign companies. Taxes are a business cost. Our disproportionately higher tax rate puts foreign companies at a huge advantage competitively, and their lower tax burden amounts to a subsidy that encourages them to acquire American businesses. Furthermore, the U.S. enjoys the lower prices of products sourced from overseas. Mylan CEO Heather Bresch explained this on CNBC on Monday. Half of the generic medicines prescribed in the U.S. come from foreign manufacturers, which have numerous cost advantages, including a lower tax rate. Can you imagine the sales rep of any American company in any business suggesting that a customer in the U.S. should be willing to pay more for a product from a U.S. company because our tax rate is higher and its patriotic to do so? Legislation to block inversion is not tax reform. It would make the U.S. even less competitive globally. It would not stimulate economic recovery. Its an attempt to trap U.S. companies in an outdated and globally uncompetitive tax code that would benefit from fact-based, thoughtful, comprehensive reform. Inversions are legal. Not abuse. Not cheating. To those spouting the histrionic rhetoric in opposition to inversion, I would suggest that some consideration of the facts would better inform your judgment, which might be more productively directed at how to make the U.S. and U.S. companies more globally competitive, including thoughtful and balanced reform of the tax code.
Posted on: Fri, 18 Jul 2014 12:57:13 +0000
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