U.S. Companies Are Finding Friendly Tax Codes Offshore

Stanley Works () is making a big change. Last month, the tool-making company's shareholders voted to reincorporate in Bermuda. Its workers will stay in New Britain, Conn., but its parent company will go abroad, a move called "corporate inversion."

Stanley isn't alone. Others have made similar moves in the last year. Now some members of Congress are calling them "unpatriotic," and pushing laws to stop the practice.

Others in Washington say the nation's antiquated and burdensome corporate tax code is the problem. They want it fixed to remove the incentive to relocate.

But nobody has a clear idea of how to reform it. So penalizing corporate inversions may be all that Congress does this year.

Last week, with bipartisan support, the Senate Finance Committee passed the Reversing the Expatriation of Profits Offshore, or REPO, Act. A similar bill is being weighed in the House.

Senate sponsors say their bill has the votes for passage. The House bill has 100 co-sponsors to date. On Friday, the full House rejected a motion to debate the bill in a near party-line vote. Supporters vow to bring it up again soon.

The Senate bill would give the Internal Revenue Service authority over reincorporated companies if most shareholders remain the same after the inversion. It would also place limits on the deductions domestic companies could take on interest owed to a foreign parent.

The House bill would let the IRS essentially ignore inversions if they are deemed to have no business purpose other than to avoid taxes.

"Bermuda should not be the address of these companies; America should," according to Rep. Richard Neal, D-Mass., a co-sponsor.

"U.S. companies would either move U.S. jobs offshore or be bought out by foreign companies," said House Majority Leader Dick Armey, R-Texas. "Neither option is a good outcome for U.S. workers."

Armey says that problem is in the tax code, which inhibits U.S. firms' ability to compete globally.

The U.S. corporate tax code was developed in the 1950s and 1960s. It uses worldwide taxation based on the concept of "capital export neutrality." No matter where U.S. firms make their money, they owe taxes on it here in the U.S.

When America had competitive corporate income taxes, U.S. firms prospered. But many industrialized nations have adopted rates competitive with the U.S. top rate of 40%. Germany's is 38.4%. Britain's is 30%. Ireland's is a mere 16%.

In addition, about half of the countries in the Organization for Economic Cooperation and Development, including Canada, Germany, France and the Netherlands, have territorial tax systems. Those don't tax income earned abroad.

Thus, a German multinational corporation would have its German business taxed in Germany and its U.S. subsidiary taxed in the U.S. A U.S. multinational would have its domestic business taxed by the U.S., but its German business taxed by both Germany and the U.S.

"From a tax perspective, the United States is now viewed less favorably as an industrial country in which a multinational corporation should locate," Glenn Hubbard, chairman of the president's Council of Economic Advisers, told Congress last week.

That has been the driving factor behind the corporate inversions, says Daniel Mitchell, a Heritage Foundation senior fellow.

"Some corporations are deciding that the only way that we can compete on a level playing field with their foreign competitors is to redomicile in a jurisdiction with better tax laws," he said. "Inversions are a de facto way of getting territorial taxation."

Besides Stanley, companies that recently have either incorporated abroad or plan to include Tyco International, the consulting firm Accenture () and industrial equipment manufacturers Ingersoll-Rand () and Cooper Industries. ()

Stanley Chief Executive John Trani has said inversion was the best of several tough choices. It will at least spare U.S. jobs. Otherwise, it faced losing out to competitors.

Congress has attempted to ease the burden on businesses. In 2000, it passed the Extra-Territorial Income Exclusion Act, known as ETI. The act gave domestic firms tax exemptions for certain transactions abroad.

But in April the World Trade Organization upheld a ruling that ETI was a prohibited subsidy. The U.S. is now facing up to $4 billion in tariffs on European Union goods.

Hubbard told Congress that merely tinkering with the corporate tax code would not be enough. He said fundamental changes are needed.

Hubbard suggested scrapping ETI and replacing it with a territorial corporate tax.

Despite requests from lawmakers, he did not put forth a legislative proposal. Instead, he said the White House would defer to Congress on the matter.

A basic problem is how to make up for the lost revenue. Politicians aren't willing to lose it, and businesses are sure to oppose any reform that raises taxes. But a decision can't be put off forever.

"If we don't fix the problems with our tax code, we are going to simply drive companies to go completely offshore or we are going to make them extremely vulnerable to being taken over by foreign companies," Mitchell said.

Rather than compete with these offshore tax havens by lowering or eliminating taxes, the thugs resort to threats.

I just wish they would get a clue and apply it to all taxes; if the tax is too low, you lose revenue, if it is too high, you also lose revenue as people find loopholes, resort to cheating, or just give up and quit trying. If they can justify a tax (since they all cause distortion), they should at least try to figure the rate that maximizes revenue and leave it there. I don't think that is asking too much.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.