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Fact Check of Pharmaceutical Company CEO's Op-Ed on Corporate "Tax Inversions"

Jul 18, 2014

On July 18, Miles D. White, CEO of the pharmaceutical company Abbott Laboratories, wrote an op-ed in the Wall Street Journal defending the practice of corporate "tax inversions." Inversions are transactions whereby American corporations re-incorporate in a foreign country to reduce their U.S. tax bill. Corporate inversion activity has increased in recent months, with two transactions nearing completion just this week.

According to the Congress's nonpartisan Joint Committee on Taxation, a failure to stop corporate inversions will cost the U.S. Treasury $19.5 billion in revenue over the next ten years – worsening our fiscal situation and making it more difficult to pay for needed investments. Budget Committee Ranking Member Chris Van Hollen and other members of Congress have introduced legislation to stop corporate inversions.

The following is Mr. White's op-ed, annotated with critical facts about corporate inversions that he omits.

Ignoring the Facts on Corporate Inversions

By MILES D. WHITE
Wall Street Journal
July 18, 2014

'I never let the existence of facts cloud my judgment." This comment was made to me years ago by a colleague at McKinsey & Company during a debate where his facts were wrong, but his opinion firm.

That remark sums up the debate about corporate inversions, deals in which companies reincorporate overseas. My company, Abbott Laboratories, announced this week that we would sell a portion of our generics pharmaceuticals business to Mylan Inc., which will organize their new firm in the Netherlands. U.S. drug maker AbbVie is working out a similar deal with the Ireland-based Shire, and many other companies have recently announced similar "inversion" deals.

The raging debate about these decisions has been absurd, and people expounding on the topic are making wild claims that inversion is an abuse of the tax code, cheating and unpatriotic. It all makes for emotional and dramatic headlines and debate but ignores the facts.

FACT CHECK: Many people have made insightful, reasoned arguments explaining why corporate inversions are unfair and economically harmful. For example, the renowed business reporter Allan Sloan, who is hardly known for ignoring the facts, wrote this powerful, highly informative essay in Fortune magazine. For other examples, see here and here .

First, inversion is legal. Period. It's allowed in the tax code. The tax code even specifies the terms and conditions under which it may be done. Reference 26 U.S. Code Section 7874.

FACT CHECK: True, our broken tax code allows corporate inversions. The question is whether it should.

According to the Joint Tax Committee, a failure to stop corporate inversions will cost the United States nearly $20 billion in revenue over the next ten years, allowing the companies that use this tactic to avoid paying their fair share of taxes.

Inversion doesn't change a company's tax rate. A company pays the same tax rate in the U.S. after inversion as it does before inverting. A company also pays the same tax rates in foreign domiciles before and after inversion.

FACT CHECK: Inversions clearly change a company's tax rate. For example, AbbVie is expected to reduce its tax rate from 22 percent to 13 percent by inverting. "Tax considerations appear to be the primary driver" of the deal, according to the Wall Street Journal.

Inverted companies would still face the same marginal tax rates in the U.S. and in the foreign countries where they choose to re-incorporate. But even more of their profits would likely wind up being reported in those countries and in tax havens throughout the world. The Congressional Research Service has observed that inversions can "make it easier to shift profits out of the United States (commonly referred to as earnings stripping), by techniques such as borrowing in a high-tax country and shifting intangible profits from high-tax to low-tax countries."

Inversion does not relieve any pre-existing tax burden. It does not reduce the tax that any company would ultimately have to pay on past earnings overseas that have been deferred under the U.S. tax system.

The tax law today views overseas earnings that have not been repatriated as part of the U.S. tax system, regardless of whether a company has inverted. Therefore, those past foreign earnings, if repatriated to the U.S., are still subject to full U.S. taxation.

FACT CHECK: This ignores that inverted companies would be extremely unlikely to ever repatriate past earnings to the United States. After an inversion, corporations would be able to pay dividends or make other cash outlays from the foreign-incorporated parent company. So effectively they would permanently avoid U.S. tax on their buildup of earnings.

What does change after inversion is a company's access to its future foreign earnings generated outside of the U.S. tax system. Those future earnings may be used for any capital allocation purpose the company may have, including investment in the U.S., without the additional U.S. repatriation tax. Foreign taxes will have already been paid on those profits earned outside the U.S. It is the additional repatriation tax, imposed by high corporate tax rate in the U.S., that is not paid after inversion.

It is important to note that the U.S. has the highest corporate tax rate in the world at 35%, while the tax rates in countries with territorial systems, where our competitors are based, are in the mid-20s or lower.

FACT CHECK: It is true that the U.S. has a high marginal rate, but several trading partners, including Japan, France, and Italy are all at 30% or higher. And many of the countries with territorial systems also have stronger anti-tax haven rules.

The U.S. is among only a handful of countries, and the only one in the Group of Seven, that taxes companies on world-wide earnings rather than the earnings in their home domiciles. It's a double whammy: the highest rate, by far, and it's applied worldwide.

FACT CHECK: This is only part of the story. Our tax system is "worldwide" but allows indefinite deferral of U.S. tax on earnings reported in foreign countries and a tax credit for foreign taxes paid. And other countries' "territorial" tax systems reach beyond their borders to prevent abuse in ways that our current system does not. For example, Japan taxes resident companies on foreign-source income at the full Japanese rates if they are paying an effective rate of less than 20% in the foreign jurisdiction. Many other countries also have "subject to tax" rules like this, designed to curb tax havens; the United States does not.

The United States loses tens of billions of dollars every year to tax havens. According to a recent research report , Mr. White's company, Abbott Laboratories, has disclosed 79 tax haven subsidiaries. It reports only 3% of its profits in the United States, even though 44% of its sales were in the U.S.

In terms of global competitiveness, the U.S. and U.S. companies are at a substantial disadvantage to foreign companies. Taxes are a business cost. Our disproportionately higher tax rate puts foreign companies at a huge advantage competitively, and their lower tax burden amounts to a subsidy that encourages them to acquire American businesses.

Furthermore, the U.S. enjoys the lower prices of products sourced from overseas. Mylan CEO Heather Bresch explained this on CNBC on Monday. Half of the generic medicines prescribed in the U.S. come from foreign manufacturers, which have numerous cost advantages, including a lower tax rate. Can you imagine the sales rep of any American company in any business suggesting that a customer in the U.S. should be willing to pay more for a product from a U.S. company because our tax rate is higher and it's patriotic to do so?

FACT CHECK: U.S. consumers would be surprised to hear that they are enjoying low prices for prescription drugs. But nonetheless, the tax rate on production in the United States compared to other countries is undoubtedly an important issue. Foreign and U.S. tax rates, however, must be balanced against the many advantages of doing business in the United States, which are enabled by public investments in areas like scientific research, workforce skills, and infrastructure. Those investments are not possible without a stable and sufficient tax base.

The problem with inversions is that they allow corporations to use all of the benefits that the United States provides without paying their fair share in taxes, undermining our tax base.

Legislation to block inversion is not tax reform. It would make the U.S. even less competitive globally. It would not stimulate economic recovery. It's an attempt to trap U.S. companies in an outdated and globally uncompetitive tax code that would benefit from fact-based, thoughtful, comprehensive reform.

Inversions are legal. Not abuse. Not cheating. To those spouting the histrionic rhetoric in opposition to inversion, I would suggest that some consideration of the facts would better inform your judgment, which might be more productively directed at how to make the U.S. and U.S. companies more globally competitive, including thoughtful and balanced reform of the tax code.

FACT CHECK: We agree that our tax code is broken in many ways. But the need for broader tax reform should not be an excuse to do nothing as more and more companies use the tactic of inversions to avoid U.S. tax. That is why several Members of Congress have introduced legislation to stop inversions. The legislation would protect our tax base, allowing us to consider broader tax reform.

The fact is that tax reform is not happening this year. In fact, when the chairman of the Ways and Means Committee released a comprehensive tax reform discussion draft, the Republican leadership essentially declared it dead on arrival. In the meantime, the parade of inversions has continued.

On Tuesday, Treasury Secretary Jack Lew urged Congress to act immediately , and his call for action was supported by many Members of Congress. On July 17, Senator Orrin Hatch, Ranking Republican on the Senate Finance Committee, acknowledged that "there may be steps Congress can take, short of comprehensive tax reform, to address corporate inversions and related issues."

Mr. White is chairman and chief executive officer of Abbott Laboratories.