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| Source: alextom.com |
According to the Wall Street Journal, the new rules would try to stop "companies that have engaged in multiple inversion transactions" by "disregarding three years of past mergers with U.S. corporations in determining the size of the foreign company. By subtracting the value of U.S. assets a foreign company had acquired, the foreign company would become smaller in relation to the U.S. company." Additionally, the new rules would try to stop a practice called "earnings strippings," which is when "the US arm borrows money from what is now its foreign parent and then sends large interest payments back overseas. This reduced profits declared in the US and increases the profits declared in the lower tax jurisdiction abroad" (The Irish Times).
This move is expected to impact the originally planned merger of Pfizer, an American based pharmaceutical company, and Allergan, an Irish based pharmaceutical company. Pfizer initially wanted to merge with Allergan in order to invert to Ireland to take advantage of their lower tax rates. Since the new rules would remove some of the planned tax benefits, it's unclear whether Pfizer and Allergan will still go through with the deal.
Obama praised the new rules and called on Congress to take legislative action against corporate tax inversions, stating, "Only Congress can close it for good and only Congress can make sure that all the other loopholes that are being taken advantage of are closed" (CBS News). However, others believe that increasing regulations is not the right way to stop corporate tax inversions. Instead, they believe that the best method would be to lower the U.S. corporate tax rate, which would encourage companies to stay in the U.S.
Questions:
What impact do you think the new rules will have on corporate tax inversions, such as Pfizer's planned merger with Allergan?
Do you think increasing regulations is the best method to stop corporate tax inversions, or is decreasing the corporate tax rate itself a better solution?
Sources:
3 comments:
I think if it were possible, decreasing the current corporate tax rate is a better solution. There are always ways to skate around the law, and with new regulations come new loopholes that are waiting to be discovered and exploited, even if they cannot be foreseen yet. Thus, if we encourage companies to stay inside our borders, that holds more ground and is a solution that will likely work in the long run. Get companies to stay here with lower rates and they will feel no need to break the law to evade taxes. After all, everyone just wants to make more money.
The U.S.'s tax rate is currently 39.1%, the highest "statutory corporate income tax rate" in the world (http://taxfoundation.org/blog/us-has-highest-corporate-income-tax-rate-oecd). While I'm not aware of the details of how, I'm sure there would be ways to cut this tax down (let the GOP have some say and a way will be found). Hopefully there's a viable compromise for decreasing this rate while not losing (significant) income based on these revenues in a way that garners higher amounts from corporate taxes; this will come as companies feel less cheated and more of them begin staying on American soil/quit evading the law.
I agree with Caroline that a lower corporate tax rate is a better solution. This may encourage businesses not to merge with foreign companies to have to pay lower tax rates. With more corporations based in the United States paying lower taxes, they may have higher production and thus the federal government would have higher revenue. I think the new rules will decrease the corporate tax inversions, but there are other reasons that US corporations might also merge with other foreign corporations. So, the Pfizer and Allergan merger might still take place.
I see where Caroline is coming from and even agree that it would help prevent this issue but instead I feel that the United States should not have to lower current corporate tax rates. There will always be large corporations that are profit-driven who want to pay as few taxes as possible. If we lower corporate tax rates, it will just give the corporations in question the idea that they have the power to force the government to lower taxes even more with threats of leaving. The United States is the country that allowed these corporations to succeed as they have and they should pay the due taxes. In my option, merging with a small, foreign corporation for tax purposes is a shady business action that should not be allowed. If a company still has a "majority of the company in the U.S.," it should be paying taxes to the United States. These corporations do not want low taxes, they desire no taxes.
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