More Companies Escaping America’s Masochistic Corporate Tax System (Medtronic is the latest)

Townhall ^ | 06/17/2014 | Daniel J. Mitchell

[SeekAndFind]

Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

[headstamp 2]

Good panel on Cavuto yesterday about this. Including an extremely hot Republican candidate from NY.

[DannyTN]

Restore the import tariffs and lower the corporate and individual income taxes.

Raising the import tariffs, means they can leave, but they can’t sell to the U.S. market, without incurring taxation.

[SeekAndFind]

How much would medical equipment cost after the tariff is in place?

[Enterprise]

If corporations imposed a harsh tax system on themselves then it would be masochistic. But it is the Government which imposes a regressive tax system on the corporations, so I would call it a sadistic tax system, not masochistic.

[TheDon]

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system.

Straight out of "Atlas Shrugged".

[Georgia Girl 2]

“Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system.”

Because it would just be insane to lower the corporate tax rate to 5% and watch billions flow back into the country.

[DannyTN]

How much medical equipment do we import?

If we restored the tariffs from 1% to 10% then you’d see about a 9% increase in the cost of imported equipment. Equipment that we don’t currently import shouldn’t be impacted.

Assuming of course that the manufacturer didn’t absorb some of the tariff to remain competitive against U.S. manufacturers.

[DannyTN]

Of course if U.S. manufacturers start producing for the price of ImportCost + 9%, then the big cost picture changes dramatically.

If we assume 50% of the product cost is labor, then government reaps (ImportCost + 9%) * 50% * 15% in income tax. Even better government avoids the outlay for supporting the unemployed which we’ll guess at 25% of the cost of the labor.

So now between income taxes generated and unemployed cost avoidance, government reaps a benefit of 50% * (15%+25%) or 20% of the product.

So the cost to the consumer on imported medical goods is 9% but government reaps a 20% windfall from income taxes and safety net avoidance costs.

This the real cost of raising the tariff and putting Americans back to work is -11%.