Investors
interested in the American economy have a new hurdle to take into consideration. The issue this time is know as corporate inversions. That is having domestic companies reincorporating overseas to lower their overall tax bill. Once again, the American government spearheaded by the Administration of Barack Obama, has decided to politicize individual business and corporate decisions. In what this writer deems to be the war on economic development and business expansion in America continues apace. An investor at this point, has to wonder when will the assault against business activity in the United States finally cease?
Corporate taxes are already scheduled to be the highest in the world. Federal and state levels combined are close to 40% compared to a rate at least half that elsewhere in the developed world. The increasing burdens of mandates and regulatory rules continue to rise as well. Next will be the cost and burden of implementing health care to employees, due to finally be implemented after delays motivated by politics, in January of 2015.
When the government of the United States begins to talk about the fair share of taxes that businesses and companies should pay, a business owner can only assume corporate costs will be increasing.
United States Capital Building
The American President called the corporate re-locations or inversions wrong. He urged the American Congress to take quick action to prevent private industry and companies from exercising individual business decisions.
Although the President admits it is legal he states that it is simply wrong. For those companies wishing to use inversion Mr. Obama claims these firms as damaging the country’s finances and the economy at large.
As more companies choose this option to relocate, there will be a rising chorus to do something legal to prevent it or to make the action much more financially punitive. Although it may become part of the 2014 political narrative it is doubtful there will be any changes before the election in November. It is also unlikely that as Republicans gain more power that any kind of action will be taken.
However, as part of a tax deal to gain bipartisan support in 2015 and 2016 there might be some movement on the issue. At the moment most Republicans (Conservatives) in the United States are skeptical of quick fixes and have stated that it will only make firms in the United states less competitive. They also fear it will encourage a rush of companies, that will leave before a new law passes. In addition, it could lead to even more foreign takeovers.
American President Barack Obama
The American President and fellow members of his party (Democrats) has even gone as far as questioning the loyalty of the companies who might wish to consider inversion. They consider it to be economically unpatriotic. Travelers and investors coming to the United States might find this kind of talk quite puzzling and not very business friendly, to say the least.
Since Republicans will not agree to immediate legislation to make inversion more difficult there are accused by the President of stopping policies that would help millions of Americans. Mr. Obama has his own ideas how to overhaul the tax code and claims that the opposition only wishes to preserve tax breaks for big business and wealthy individuals.
The position of the American President is that since these companies are able to take advantage of the infrastructure and services in the United States, they should not be permitted to take their profits elsewhere.
The issue of inversions has become newsworthy recently because of the number of companies who are now making it a business consideration. In the last decade there were about 50 such moves. Recently the pace has quickened substantially. The majority of the inversions now, is having a much larger American firm merge with a smaller foreign firm. This still permits the company to have extensive operations in the United States, but has the company being taxed at the corporate level overseas. This ends up being a substantial tax savings for the company.
Tyco World
Chiquita, Another Company Ready To Leave The United States
Over the past few years both political parties have attempted to deal with this problem to no avail. President Obama and the Democratic Party are worried that the the increase in companies leaving the United States will move dramatically up, as the cost of implementing national health care is fully felt.
The President and his allies has proposed legislation that if half of the new company is still owned by U.S. shareholders, the government of the United States will not recognize the inversion for tax purposes. That is what has already been proposed in the budget submitted by the President earlier this year.
Although the Administration will insist that are committed to tax reform they favor anti-inversion legislation to prevent the corporate tax base from eroding in the territory of the United States. They assert that as more companies invert more will be tempted to join the movement as a cost cutting measure. The best example given is that if Walgreens an American drug retailer makes the move to invert, it will increase the pressure for CVS, another company in the industry to follow suit.
The Treasury Secretary of the United States this month, reiterated the push to have Congress pass inversion legislation this year. They are also pushing for a retroactive date to forestall a mad rush by companies attempting to beat a change in the tax law.
American Senate In Session
There is a rising concern among both political parties what the long term trend indicates but there is disagreement about how to slow the movement or even possibly stop it. Republicans favor a comprehensive rewrite of the tax code that will make the inversion move less profitable. They also are not generally in favor of unlimited retroactive legislation. Lawmakers continue to mention the date of January 01, 2015 as the date when new inversions will be held under a different standard.
Fruit Of The Loom Corporate Headquarters No Longer An American Company
Investors in American companies that are planning an inversion in the near future need to consider if the deal can be achieved in 2014 because it is likely 2015 will bring about changes to what is permitted with the corporate tax obligation.
Some potential buyers of United States owned companies are insisting on what is called a walkaway right if tax laws change that will effect the original investment.
Another government proposal calls for efforts to hamper the free flow of capital from the U.S. portion of the company to the new corporate headquarters located outside the country. Thus it is felt will take some of the appeal out of the inversion movement. Some other government ideas include that the new company will need to be more than 50% owned by foreign investors and less than 25% of the new companies assets and sales can be still located in the United States.
It is true that inversions will cost the government of the United States billion of dollars in lost revenue.
For businesses in the United States it is another move by the American government to try to control the flow of capital. Money traditionally flows where it is most welcome. That is where it will find the best place for investment.
Regardless of opinion or what the overall effect of inversion has on the United States economy as a whole it is important to remember that the leaders of a company have a responsibility to maximize returns to their shareholders. It is nice to point to companies that take on more patriotic activities involving local community efforts, charities, or the environment for example. However, these activities are not the responsibility of a business or company beyond what is required by law. It must also be noted that these kinds of things although they may provide good will for the company, often result in lower returns to the owners of these companies. That would be the shareholders and investors in the company.
More limitations and restrictions on investment will only damage the American economy in the long run. Americans on the whole will need to determine whether they wish to make the country more friendly to business, which will lead to more economic expansion. Investors both domestic and international, will naturally go where there are profits to be made.