Will Congress Ever Crack Down on Corporate Tax Abuse?
Policy + Politics

Will Congress Ever Crack Down on Corporate Tax Abuse?

The merger mania that has American companies buying foreign companies so they can move their headquarters and lower their tax rates has spurred repeated calls for reforms to the U.S. tax code. Whether, or when, Congress might actually take action remains an open question.

The latest high-profile prodding for legislative action came from Treasury Secretary Jack Lew, who on Wednesday urged Congress to crack down on companies seeking to relocate to avoid paying U.S. taxes. Lew sent a letter to leaders of the congressional tax-writing committees pushing for legislation to shut down so-called corporate tax inversions, the increasingly common transactions that allow companies to move their official headquarters abroad in a quest for lower tax rates. Roughly 50 U.S. companies have done such deals in the last ten years, including a string of transactions in recent months. 

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“The best way to address this issue is through business tax reform that lowers the corporate tax rate, broadens the base, closes loopholes, and simplifies the tax system,” Lew wrote. He added, though, that there are smaller steps Congress could take, too. “Short of undertaking a comprehensive reform of the business tax system, there are concrete steps that Congress can take now that would address this urgent issue,” he wrote.

Lew called such inversions “an abuse of our tax system” and he called for legislation that would end the practice — and for that legislation to be retroactive to May, meaning that it would affect corporate deals that have been announced since then, such as AbbVie’s pending $53 billion takeover of Irish company Shire and drugmaker Mylan’s move to the Netherlands after purchasing Abbott Laboratories.

House and Senate members have floated legislation that would clamp down on inversions, and President Obama had similarly proposed tightening the rules for such deals in his budget earlier this year. Congress’s Joint Committee on taxation has estimated that the federal government could gain nearly $20 billion in revenues over ten years by halting inversions. But those proposals have yet to

Yet the chances that Congress will take immediate action, especially during an election year in which inertia may rule, remain slim. The prospects may be better in 2015. 

David Kautter, American University’s Department of Accounting and Taxation Executive in Residence, said he expects Congress to give a serious attempt at tax reform within a year.

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“When companies that engage in global activities start to erode that global tax base, it’s pretty serious,” Kautter said. “There hasn’t been enough of a movement yet to say it’s dire. But if every multinational decided they wanted to (invert), it could become dire in a hurry.”

In his letter, the Treasury Secretary called for a “new sense of economic patriotism,” but Kautter explained that corporate management is more typically driven by the need to deliver strong return to shareholders. 

“You get varying degrees of opinon,” Kautter said. “Some have the opinion that their sole fiduciary responsibility is to return to shareholders. All the way on the other side are people that have the opinion that their fiduciary responsibility encompasses not only shareholders but employees, community and country.”

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Despite that range of views, simply counting on corporations to stay in the U.S. and keep paying taxes here isn’t likely to turn the trend toward inversions, meaning the pressure will be on Congress to enact comprehensive reform or a smaller solution.

Business groups and top executives have long urged legislators to simplify the tax code, lower the corporate tax rate and revise the current worldwide system that requires U.S. companies to pay taxes on money earned outside the U.S., a provision they feel puts them at a disadvantage in the global marketplace.

“It’s going to be tough to really reach a compromise here,” University of Pennsylvania Law School professor Michael Knoll said. “The two sides are really far apart.” 

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