Abbott Labs CEO Miles White is shocked that anyone would see the recent wave of U.S. multinationals seeking to renounce their U.S. citizenship as a tax dodge.
In a July 18 Wall Street Journal op-ed, White suggests that there are no tax benefits to inversion: “Inversion doesn't change a company's 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,” he wrote.
While it is technically true that inverted companies should continue to pay the 35 percent U.S. tax rate on any U.S. profits, the experience of previous inversions tells us that U.S. tax rates will likely become mostly irrelevant to these companies post-inversion because they will move aggressively to make their U.S. profits appear to be foreign.
For example, the manufacturer Ingersoll-Rand, after inverting to become a Bermuda corporation in 2001, immediately went from reporting annual U.S. profits of hundreds of millions to reporting losses or very small profits each year, while it’s reported profits outside the United States expanded dramatically. This did not reflect any actual loss of U.S. customers or business. Rather, the corporation accomplished this by loaning $3 billion to its U.S. subsidiary, which then deducted the interest payments on the debt to effectively wipe out its U.S. income for tax purposes. It seems likely that this practice, called earnings stripping, would be aggressively used by Walgreens, Medtronic, Mylan, and each of the other large U.S. companies that are currently contemplating an inversion.
It’s sad, but understandable that White would want to make this absurd claim. When Treasury Secretary Jack Lew called for a new “economic patriotism” among Fortune 500 corporations earlier this week, he was tapping into a growing public outrage over offshore corporate tax-dodging. Leading into next week’s U.S. Senate hearing on the ongoing inversion problem, White and other CEO’s are understandably nervous that Congress may take away their new favorite tax-avoidance tools.
But Congress should see White’s claim for what it is: a ruse. Corporate inversions are a brazen effort by large multinationals to avoid paying U.S. taxes. At a time when the nation finds itself with no ability to pay for vital transportation infrastructure, it should be obvious that the billions in tax revenue these companies refuse to pay are billions that must be made up by working families not to mention millions of small businesses that don’t have the luxury of creating a paper headquarters in Ireland.