’Tax Reform’ Cry Hampers Effort to Curb Inversions.

http://www.bloomberg.com/news/2014-09-12/-tax-reform-cry-hampers-effort-to-curb-inversions.html

Republicans and business allies such as House Ways and Means Chairman Dave Camp and the U.S. Chamber of Commerce say they know the way to stop companies from changing addresses to cut their tax bills: Reform the tax code.

Yet that call for the first major revision of the U.S. tax system in three decades hasn’t translated into action and won’t anytime soon. There’s no consensus on what changes would prevent companies from fleeing the system. And the inertia in Washington is opening the way to further deals, known as inversions.

“The people who are arguing that this needs to be done in the context of corporate tax reform are basically arguing that we shouldn’t stop it,” said Kimberly Clausing, an economics professor at Reed College in Portland, Oregon, who studies international taxation.

The act-now vs. go-big debate among lawmakers has left Congress in a deadlock on inversions, prompting Treasury Secretary Jacob J. Lew to say he will decide on possible administrative action in the “very near future.”

Lawmakers of both parties lament the trend that's leading companies such as Medtronic Inc. and Mylan Inc. to move their tax homes outside the U.S. President Barack Obama has labeled the practice an “unpatriotic tax loophole.”

Still, they can’t agree on what to do about it.

Republicans have resisted the stopgap law advocated by Obama, maintaining it would be punitive and counterproductive. Instead, they emphasize cutting the corporate rate and imposing lighter taxes on foreign income, to move the U.S. tax system closer to the codes in countries such as the U.K. that have attracted some companies.

Shifting Profits

So what, within that context, would make inversions unattractive?

A rate cut -- to Camp’s 25 percent or Obama’s 28 percent -- might not do it, because companies are already skilled at shifting profits from high-tax foreign countries into no-tax jurisdictions such asBermuda and the Cayman Islands.

“The aggressive players here are interested in getting way south of 25 percent,” Clausing said. “I don’t think you can wipe it out with rate changes alone.”

And because reducing the marginal rate just equalizes what are now disparate effective rates, many U.S. companies would face higher taxes in a changed system, giving them an incentive to leave now.

On top of the rate cut, Republicans and corporations want to switch to a territorial tax system, in which U.S. companies’ overseas profits would face minimal taxes upon repatriation.

Eliminating Incentives

The switch would eliminate the current system’s incentives for companies to stockpile profits outside the U.S. and shift to a foreign address so future overseas profits are beyond the reach of the Internal Revenue Service.

“It’s the more worldwide nature of our tax system, which is so much out of step with everybody else,” said Douglas Holtz-Eakin, a Republican economist and president of American Action Forum.

Administration officials, who prefer a global minimum tax that would be more burdensome to many companies than the Camp plan, say any revamp should include specific anti-inversion measures.

Namely, they want to prevent U.S. companies from buying a smaller foreign business and taking its address. Currently, if shareholders of the former U.S. company own less than 80 percent of the combined business, it can invert and not be treated as a domestic company.

Democrats want to apply the U.S. tax system to companies managed and controlled in the country, effectively upending the current system, which respects companies’ own arrangements.