Even corporations are renouncing U.S. citizenship

Introduction – International business in the modern world

It’s tough to be a U.S. Corporation and compete with non-U.S. companies

This is the question posed by Robert Wood in his recent post about the rise in U.S. companies wanting to NOT have a U.S. domicile. The attempts on the part of the United States to control and tax the activities of “U.S. persons” is resulting in renunciations of U.S. citizenship. People (of the flesh and blood type) are renouncing. Corporations are merging with “foreign” companies in a way that ensures that they cease to be “U.S. persons” for tax purposes.
As you know, the United States laws subject people and companies to U.S. taxes on income earned anywhere in the world. U.S. citizens abroad live with this reality every day of the week.
In fact, U.S. citizens abroad are required to pay tax on their foreign source income at the point it is received – before it is brought back to the United States.
U.S. corporations have a better deal than U.S. citizens (of the DNA people) type. In the case of corporations:
1. Although they are subject to U.S. taxation on business activities/profits outside the U.S.;
2. They are NOT required to pay the U.S. tax until the profits are brought back to the U.S.
This is why U.S. corporations often do NOT bring their profits back (repatriate profits) to the U.S. They will be hit with a massive tax at the point of reentry. (Obviously not a good thing for America, but …) For example, in the Senator Carl Levin inquisition of Apple, Apple CEO Tim Cook made it clear that Apple had no intention of bringing it’s “offshore profits” back to the U.S.
Of course, these rules apply only to corporations that are “U.S. persons”. If a corporation is NOT a U.S. person then the corporation would pay tax only profits earned in the United States.
Mr. Wood explains the process as follows:

The latest deal involves Generic drugmaker Mylan Inc, which announced its purchase of Abbott Laboratories’ branded specialty and generics business outside the United States. The value? $5.3 billion. In a familiar pattern, the deal is being promoted as bolstering the company’s product line. Oh, by the way, it will also cut the company’s tax bill. By moving its tax address outside the United States, Mylan is joining the ranks of companies doing inversions. Abbott will transfer assets to a new publicly-traded company in the Netherlands that will include Mylan’s existing businesses.
In exchange, Abbott will receive 105 million shares of the combined company. That tallies to an ownership stake of 21 percent, worth $5.3 billion. In concept, the deals are simple, not unlike a marriage. Suppose you could stop paying U.S. taxes by marrying a non-U.S. person not subject to tax filings with the IRS?
If  that were the law, a foreign fiancée would bring an astounding dowry: not paying U.S. taxes. Taxes can be strong motivators, taking an increasing share of your earnings and wealth. Of course, marrying a foreigner doesn’t change your own U.S. tax status. But consider that a merger or acquisition is a type of corporate marriage.
Pfizer was unsuccessful in combining with Britain’s AstraZeneca. Many U.S. companies are trying to get hitched to corporate spouses abroad. Odds are that a lot of modern corporate-style singles ads are being penned right now. The goal is for a U.S. company to move its domicile outside the U.S. so that it is no longer subject to U.S. corporate taxes.
Of course, companies cannot just up and move their headquarters to Ireland since there’s no marriage involved in that. Even with the appropriate deal with a foreign company, the tax avoidance move doesn’t work for the actual U.S. earnings of the company. Yet an inversion can shield all the combined companies’ income sourced outside the U.S. from the high 35% U.S. corporate tax rate.
Without the inversion, it would all be taxed in America. U.S. tax law started cracking down on inversions in 2004. U.S. companies looking for a foreign partner usually stress business synergies, not taxes. Still, the foreign nature of the partner can be pretty alluring. If you can locate and buy a foreign company, that’s a start.
But be sure to arrange it so the foreign company acquires the American one, or a holding company is formed to merge the two suitors. Make sure that more than 20% of the post-marriage combination is owned by the foreigners when the smoke clears. If so, a not terribly attractive American company can effectively start sporting a beret.
Pre-inversion, the American company had its feet firmly planted in the U.S. tax code. Post-inversion, with a sophisticated, global spouse, the company can stop being domiciled in the U.S. That means U.S. taxes go down materially.

The perspective of the corporations

The U.S. is the creator of the problem
The U.S. has created this problem by insisting on maintaing a tax system that is incompatible with the global world. Whether in relations to humans or corporations, the U.S. insists it has the right to tax income that is not connected to the United States.
The U.S. Inquiry into the problem – The Levin Investigation into Apple Offshore Profits

The U.S. response to the problem
The theory being that:
The U.S. owns its citizens and it’s corporations and therefore owns the fruits of their labor no matter where earned. This principle is confirmed by a July 14, 2014 from U.S. Treasury Secretary Jacob Lew in which he asks Congress to enact legislation designed to prevent the corporate “inversion”. Note the reference to “economic patriotism“.
Lew letter to Congress imporing them to pass laws preventing corporate inversions
An excellent commentary on Mr. Lew’s letter …

which includes:

As with every complaint about inversion so far, Lew’s letter comes off as a flag-wrapped serving of patriotic mush. Like other non-fans of inversion, he fails to acknowledge that, maybe, the United States just isn’t that competitive in some areas (such as corporate taxes) and should try something smarter than chanting “USA!”
Incidentally, according to rankings released last year by the consulting firm PricewaterhouseCoopers, the U.S. ranks 64 out of 189 for ease of paying business taxes. This country also has a total tax rate that’s above average, and barely seems to be trying to compete with other countries that Americans once mocked as overtaxed and overgoverned.
Ease of paying business taxesPwC
Canada ranks at 8, the U.K. at 14, and Australia at 44—with burdensome bureaucracy as big a concern as the government’s take. Ireland, where several U.S. firms recently relocated their headquarters, comes in at 6.

What about economic patriotism? What does this mean anyway?

On the one hand we have the Senators Schumer, Levin, Reed, et al who seem to believe that the success of any Corporation with it’s head office in America is a success because of circumstances offered by America. For example:

I wonder if Mr. Wasson is ready for the public reaction implicit in Senator Carl Levin’s (D-Mich.) recent statement: “Average taxpayers are fed up with profitable U.S. corporations using tax haven gimmicks to dodge their tax obligation, while still benefitting from this country’s laws, infrastructure and workforce.”

Senator Levin’s statement is disingenuous. A change of domicile to a non-U.S. domicile means only that the company does not pay tax on profits earned outside the United States. It will still pay full tax on profits earned in the United States.
The question for corporations is the same as the question for people (of the DNA type):
Why should the U.S. be able to tax the profits and income of people/corporations:
– not resident in the United States
– that is not connected to the United States
There is a reason that no other country attempts to do this. It’s philosophically and morally unjust.
Speaking of patriotism

The article referenced in the above tweet includes:

Heather Bresch grew up around politics. Her father is Joe Manchin, the Democratic senator from West Virginia and a former governor. She has heard him say repeatedly, “We live in the greatest country on Earth,” as he did in countless political advertisements. And it appeared to rub off on her: Ms. Bresch was named a “Patriot of the Year” in 2011 by Esquire magazine for helping to push through the F.D.A. Safety Innovation Act.

Ms. Bresch is the chief executive of Mylan, the giant maker of generic drugs.

Until now, Ms. Bresch ran an unabashedly proud American company based in a Pittsburgh-area suburb, one of a handful of success stories that kept the once-thriving steel city relevant.

But on Monday, Ms. Bresch announced plans to renounce her company’s United States citizenship and instead become a company incorporated in the Netherlands, where the tax rates are lower. She did so by agreeing to acquire Abbott Laboratories’ European generic drug business.

“Food for thought” for the U.S. Congress?

Appendix and Update – July 21, 2014

A reader of this blog forwarded the following comment which appeared on the Isaac Brock Society blog. It explains how the U.S. taxes the foreign operations of its corporations in way that explains why it is in the interest of U.S. corporations to NOT be “U.S.”. I addition, today July 21, 2014, Robert Wood wrote an additional post on the possible inversion of Swiss Walgreen.

Let me try to help demystify a bit:
1. Tim Horton’s was merged into Burger King a long time ago – I would guess about 20 years – when Ron Joyce sold the company and took back cash plus shares of BK. He had a fight with BK and sold his shares some time ago (lucky him – I think his timing was pretty good). Subsequently, BK “spun off” shares of Tim Horton’s to its own shareholders co-incident with a re-listing of Tim Horton as a public company with shares on Toronto and NY. I’d be shocked if its legal HQ were not in Canada – its business HQ certainly is as is most of its business.
2. Yes, corporate tax is complex, but the basic building blocks can be grasped. As you might expect, the US has largely followed the Fleetwood Mac “Go Your Own Way” school of tax policy: just because what you are doing doesn’t work, is harming your economy to the tune of billions a year according to every sensible observer and is followed by virtually nobody else in the world doesn’t mean that you shouldn’t keep shooting yourself in the foot if enough lobbyists can make it electorally painful to change. America’s uniqueness stems from the fact that the US taxes corporate groups as a whole vs Canada, for instance, who taxes each corporation separately. As a result, you guessed it, the US tries to tax its corporations on their consolidated worldwide income (parent and all the children, if you will). Canada taxes only the parents and children who are resident in Canada, albeit on their worldwide income as if they were real people). Since most companies incorporate separate companies (or even groups) in every country they do business in, the net result is that we generally only tax on profits earned in Canada. Overseas profits are taxed where they are earned and tax treaties governing the repatriation of dividends and profits from affiliates usually allow those already taxed funds to come “home” with little to no additional tax. In order to stay half-way competitive (and only just) the US stubbornly insists on full taxation of re-patriated overseas profits (with some deductions for foreign taxes paid) but defers payment until the money actually comes into the US. The obvious if perverse and totally counter-productive result is that US companies prefer to borrow money in the US (tax deductible) for their cash needs at home (including dividends – see Apple) and park their money offshore waiting for an amnesty. About every 15 years or so Uncle Sam’s begs for the money to come home and gives a partial amnesty or tax break eventually. The last such amnesty I believe was under Clinton and resulted in a vast windfall of taxes for the government, helping him balance budgets). Apple has something like $100B that it could bring home to the US tomorrow but for punitive taxes that it prefers not to pay (and who wouldn’t, given the choice). Instead, Apple borrows money it has no use for to pay dividends. Insane. Why Apple has not inverted years ago is a mystery to me.
3. The root cause of all of this – both the money parking and the temptation to undertake inversion transactions even where there is a stiff tax penalty to pay up front – is the US having a combination of the highest rates in the world on corporations plus their inflexible insistence on taxing both US and non-US income of US companies at that same high rate. Other countries apply their own rates – high or low – to all companies operating in their country but generally do not punish overseas earnings with double taxation. Apple risks worldwide tax at 35% by being American, Samsung is only required to pay that high rate on its US operations. Apple avoids it by aggressively pushing profit centres off shore and parking the resulting profit outside of the US until it becomes a veritable mountain. The clever reader will note that the high US rate results in US companies doing LESS in the US, investing LESS in the US and paying even LESS tax in the US, not more. Crazy stupid stuff. From a narrow point of view, the high rate is only tangentially important since ALL businesses in the US are subject to it – Apple and Samsung both – as regards their US business. The real difference, in effect, is whether the US gets to impose its high rates, you guessed it, on the rest of the world through its stable of multinationals. Given that nobody else is doing that, the not surprising result is that the US stable of multinationals is inexorably shrinking and the rate of shrinkage is growing. Those that are not actively seeking to leave are doing what Apple does – aggressively pushing all possible profit-centres outside of the US to the maximum extent possible with the best tax advice money can buy and thus employing fewer Americans and paying LESS to the US than a simpler system would doubtless raise The simple fact is that if you look at two identical companies with the same revenues and profits, the one unfortunate enough to be incorporated in the US will pay HIGHER taxes (higher taxes means lower after-tax earnings and thus share price). If you keep hitting people on the head with a bat for as long as they stay in the US, eventually some will get the bright idea of moving. Not rocket science to any but US politicians apparently. As for the idea of punishing all foreign companies who invest and do business in the US – see Great Depression, Smoot Hawley and collapse of world trade for impact on domestic US economy.
4. The subject matter of “loopholes”, corporate welfare, give-aways, lobbyist perqs etc.: none of this is unique to the US although they are arguably most afflicted by the disease. An ideal tax system is one that is “neutral” – in a perfect world it raises the desired amount of revenue from the economy while distorting the economy (impairing its efficiency at creating wealth and growing the collective pie) as little as possible. That ideal is shared by left and right, Liberal and Conservative etc While they all disagree about how to get there, few are foolish enough to imagine they have created tax utopia anywhere on earth today. In the matter of international corporate tax, the biggest issue is called “transfer pricing”. If Ireland has lower taxes than New York State, why not locate a call centre there? Why not put the international accounting department there? Any multinational business will have dozens if not hundreds of discrete segments of its business that can be located wherever seems most opportune. The issue then becomes what price does one affiliate charge the other for providing the service to them? What price does the US business pay the Irish business for running the call centre to take warranty calls for Maytag dishwashers (an invented example – I don’t know where theirs is!). Clearly the prices are not set at arm’s length. If the price is set too high, of course, the impact is to shift profit from high tax USA to low tax Ireland. This problem exists EVERYWHERE and all governments everywhere employ armies of auditors and play a game of regulatory whack-a-mole trying to stay up to date with the latest “technology” in the area developed by imaginative tax lawyers and accountants. At the end of the day, the higher the tax rate gap, the greater the incentive to engage in such profit-shifting games. Many countries have concluded that more investment, more jobs and more taxes are to be had by making that incentive as low as possible (hopefully inducing a response of “it’s not worth it” from the CFO when the next scheme is proposed). The US is not, needless to say, one of those countries. It prefers to hemorrhage head offices (and associated high-value jobs, etc to say nothing of investments and tax revenue) and to complain about lack of patriotism.

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