US tax inversion crackdown to the test

A US tax inversion crackdown led by Treasury Secretary Jacob L. Lew will be put to the test as several US-based multinationals decide on whether to proceed with the acquisition plans of foreign companies.

Mr. Lew says comprehensive corporate tax reform that includes anti-inversion provisions is the best way to stop US companies relocating their headquarters abroad to avoid US taxes. He is urging Congress to pass anti-inversion legislation, which he believes is the only way to close the door on these transactions.

Economists, business leaders and a growing number of lawmakers argue that while the United States continues having the highest corporate tax rates in the world, the only solution is to bring them in line with those in other competing nations.

Mr. Lewis said in a press conference on Monday:

“Now that it is clear that Congress won’t act before the lame duck session, we are taking initial steps that we believe will make companies think twice before undertaking an inversion to try to avoid U.S. taxes. Inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans. It is critical that this unfair loophole be closed.”

“Today, in an important first step, Treasury is announcing targeted action to meaningfully reduce the economic benefits of corporate inversions, and when possible, stop them altogether. This action will significantly diminish the ability of inverted companies to escape U.S. taxation. For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”

Has the government gone too far?

The Obama Administration risks a huge backlash from companies and Republican lawmakers who believe the government has gone too far and will fail to address the root of the problem – America today is a high taxed nation.

US corporate tax the highest in the world:

Below is a list of corporate tax rates in the US and other OECD nations (Source: KPMG):

  • US: 40%,
  • Japan: 35.64%,
  • Belgium 33.99%,
  • France: 33.33%,
  • Italy: 31.4%,
  • Spain: 30%,
  • Australia 30%,
  • Germany: 29.58%,
  • New Zealand: 28%,
  • Norway: 27%,
  • Israel: 26.5%,
  • Canada: 26.5%,
  • Greece: 26.5%,
  • Netherlands: 25%,
  • Denmark: 24.5%,
  • Portugal: 23%,
  • Swede: 22%,
  • Slovakia: 22%,
  • UK: 21%,
  • Russia: 20%,
  • Iceland: 20%,
  • Finland: 20%,
  • Europe average: 19.68%,
  • Poland: 19%,
  • Czech Republic: 19%,
  • Switzerland: 17.92%,
  • Singapore: 17%,
  • Hong Kong: 16.5%,
  • Ireland: 12.5%.

Corporate tax rates in the United States are even higher than in socialist France. Whatever happened to the flagship nation of free enterprise and minimum government intervention?

US Chamber of Commerce response

The US Chamber of Commerce says the Obama Administration has just made it more difficult for firms to bring funds from abroad to invest in the US.

“How can the raising of barriers to investment in America be a good thing?” it asks. The only people it helps are politicians who “prefer election-year posturing instead of improving America’s business climate,” it wrote on Tuesday.

Hundreds of American companies earn profits abroad and want to invest them at home. However, the US system discourages that with its high corporate tax rates and a global system of taxing overseas profits, the Chamber emphasized.

The US Chamber’s Chief Economist, Dr. Martin Regalia, said:

“If companies want to use the accumulated cash in the former foreign subsidiary, they can still do so. They just must use the proceeds abroad to create income and jobs abroad. In fact, the administration just assured that deferred income in the once foreign subsidiary will never come back to the U.S. to help create income, jobs, and economic growth here.”

“Bad public policy produces bad economic results. Just look at what the policies of this administration have done to economic growth over the last five years. Capital flows to places where it is valued and well treated, and it avoids places where it is abused by onerous tax systems. The administration’s vain attempt to lock corporations in to an obsolete tax system will only serve to further lock capital out.”

“Rather than piecemeal, onerous actions, the administration should undertake comprehensive tax reform that lowers rates for all businesses and shifts to an internationally competitive system that welcomes investment and produces the economic growth this country needs.”