Published on -7/22/2014, 8:10 AM
The myriad strategies businesses employ can be simple as remembering great customer service or complex as having distribution automatically initiated by transactions at the point of sale. But the maxim of maximizing shareholder profit generally guides almost everything in the corporate world.
Nobody is surprised, then, when companies focus on tax strategies that minimize their obligations to governmental collection agencies.
As many large multinational corporations in particular drive tax liabilities negative, which means the government pays them, when do we say enough is enough?
There are some in Washington, D.C., who believe that time has come. With the current rash of U.S. companies reorganizing as foreign entities, a practice known as tax inversion, Treasury Secretary Jacob Lew is speaking out.
"We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes," Lew said in testimony before Congress last week.
The Treasury secretary was referring specifically to AbbVie Inc., a drug-making company based in Illinois. AbbVie is planning to buy a competitor, Shire, for $55 billion. Part of the deal will include reincorporating as a British-based corporation, allowing AbbVie to avoid paying the higher U.S. tax rate.
Others are doing the same thing. Pennsylvania-based Mylan Inc. is purchasing part of Abbott Laboratories and will reincorporate in the Netherlands. North Carolina's Salix Pharmaceuticals is buying part of an Italian rival and reincorporating in Ireland. Medtronic is paying almost $43 billion for Covidien PLC so it can use an Ireland address as well.
The pharmaceutical industry is awash with such inversions, although others are catching on. Many retail and manufacturing companies are getting into the merger/acquisition mode for the lower tax rates before Congress acts -- assuming this Congress could do anything, much less an anti-business move.
There reportedly have been approximately 50 such inversions during the past decade, with 14 already this year alone. The deals save up to hundreds of millions of dollars for the companies -- money that would have been paid in appropriately assessed taxes to the U.S. government had the reincorporations not taken place. On top of that, there is an estimated $2 trillion stashed overseas that American companies have earned via foreign operations that won't come back to the United States so it won't be taxed.
"The thing is spiraling out of control," said Rep. Sander M. Levin, D-Mich., who is pushing legislation to make the tactic more difficult. "This development accelerates the attention of Congress."
Both attention and action is warranted. It also would be with precedent. U.S. companies used to be free to simply reincorporate in foreign countries by filling out the appropriate paperwork. Congress did put an end to that loophole, with the latest rule tweaks passing in 2012. The sharp increase in foreign takeovers and mergers the past two years has been the result.
If Congress doesn't have the stomache to put the brakes on the latest tax-avoidance scheme, they should at least prohibit Big Business from taking from both sides. If a U.S. firm chooses not to pay its taxes, that firm should not be allowed any other form of taxpayer assistance. Pharmaceutical companies in particular receive massive grants, low-interest loans, patent protections and all sorts of goodies by virtue of their presence in this country. That double-dipping should stop immediately.
Unfortunately, it will take an act of Congress. We won't hold our breath to see if common sense prevails.
Editorial by Patrick Lowry