Corporate Inversion

 
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The Last Domino to Fall Resulting in Corporate Tax Reform?
Authored By: Brian Jessen & Stanley Jozefiak

‘Erosion of the U.S. Tax Base’, ‘Corporate Deserters’, and ‘Tax Evaders’—are unavoidable phrases in today’s media.  It’s clear that the concept of corporate inversion, where a U.S.-based multinational corporation restructures to be replaced by a foreign parent potentially reducing its U.S. taxes, has found itself in the crosshairs of the Treasury Department, the Internal Revenue Service, Capitol Hill, and the White House.  It has even reached outside of our borders, causing the OECD to put forth an action plan dealing with international tax avoidance techniques. With these major players all throwing their hats into the ring, the ring suddenly finds itself crowded, holding the heaviest of heavyweights, all with a propensity and desire to be the last one standing.  While the President has spoken publicly against corporate inversions, the first punch was thrown by the Treasury Department on September 22, 2014, where proposed regulations would alter the Internal Revenue Code in hopes of stemming corporate inversions (altering Internal Revenue Code Sections 956, 7701, 304, and 7874). The repercussions were immediate; in late October, pharmaceutical giant AbbVie reversed its course of action to buy Ireland’s pharmaceutical giant, Shire, in light of the new tax rules imposed by the Treasury Department.  While effective, the Treasury Department’s actions only made an arcane complicated corporate tax Code more convoluted. As mid-term elections come to an end, and presidential hopefuls hit the campaign trail, the climate is ripe for an ultimate delving into the real problem—the burdensome corporate tax Code.
 
As punches are thrown and problems and solutions are exchanged, the political inertia is rolling towards an inevitable conclusion.  “Fix” the corporate tax Code to make the U.S. corporate taxing regime more globally competitive, and corporate inversions will become transactions undertaken for non-tax motivated reasons.  Among industrialized countries, the U.S. has the highest tax rate in the world at a combined 40%, factoring in state and local taxes. In contrast, the average for developed nations hovers around 25%. But it’s the marginal tax rate that drives business decisions; if a company is growing, would it rather grow in an environment that is taxed 60% higher than the average for developed countries?  Further, the U.S. taxes foreign income earned outside its borders, a/k/a the worldwide tax system, when those profits are repatriated back to the U.S. A multinational company living in this regulatory environment feels pressure to become more competitive at all costs, even if that means giving less to Uncle Sam.
Which road to take? Soon enough, with the mid-term elections behind us and presidential hopefuls being forced to put on the gloves and enter the ring, the competitors will pause between bouts and realize that the fight should not play out in the form of complex tax regulations but rather a simplification and a change in the foundation on which the fight is had.  Simply put, tackle fundamental tax reform instead of tackling each other.
 
When corporate tax reform is seriously undertaken, the ultimate goal will be to make the Code simpler for corporations and individuals alike, but also make the U.S. tax regime more globally competitive to retain its corporate citizens and attract foreign investors.  But, there is one universal truism that cannot be avoided: within the Treasury Department’s financial balance of income and deductions, if the corporate tax rate is lowered to be more competitive, there will be less revenue available and, thus, deductions will need to be eliminated. The Joint Committee on Taxation has published reports outlining the most attractive provisions (e.g., deductions, deferrals, credits, etc.) that may be targeted for the Treasury Department to maintain its balance.  Whether one pours through these Reports, or the Office of Management and Budget or the National Center for Policy Analysis Reports, it is clear that there are a few corporate deductions that can be limited or eliminated if the corporate tax reform opportunity presents itself.  The deferral of income from controlled foreign corporations and deductions for U.S. production activities and accelerated depreciation would all be considered low-hanging fruit if the complex corporate tax Code is reformed.  The U.S. could also be heading towards a national VAT tax, thus, passing the corporate tax reform burden onto the individual.  
 
Food for thought:  since the last major corporate tax reform happened in 1986, the Internal Revenue Code and Regulations have grown from 25,000+ pages in 1986 to well over 70,000 pages today. The momentum is finally shifting, and politicians (aspiring and otherwise) can utilize the corporate inversion debate to bring meaningful corporate tax reform to the table for the first time in almost 30 years.  All the necessary players have entered the ring, and if the past inaction does not dictate the future, reform is inevitable and thought must be had on whether corporate tax departments and those in forecasting can rely upon the current self-serving intricacies of the Code going further.
 
With the last potential domino falling before comprehensive reform, focus needs to be shifted to examine a company’s future tax footprint.  Projected deferred utilization and valuation allowance analysis, along with managing C Suite and shareholder expectations relying heavily upon targeted provisions are difficult tasks that need proper examination, if meaningful reform takes center stage.  Even though forecasting tax analysis is performed on enacted law, prudent business decisions must consider a diverse set of future scenarios.  
 
The pertinent question is—have these political trends been given proper attention in your organization’s future?


Roger Audino
Director of Business Development Midwest/West
312.235.3319
Roger.Audino@TPCtax.com
 

Greg Majors
Director of Business Development South/Southwest
813.434.4021
Greg.Majors@TPCtax.com

Kristin Mauer
Director of Business Development Northwest
408.625.5069
Kristin.Mauer@TPCtax.com
 

John Shipley
Director of Business Development Northeast
646.356.7214
John.Shipley@TPCtax.com


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