Domestic Matters

Obama's Fight Against Corporate Tax Flight to Raise U.S. Business Costs, Helping Germans

Richard Gonzalez, CEO of AbbVie, has come under fire for tax evasion: Source: NYSE Euronext
Richard Gonzalez, CEO of AbbVie, has come under fire for tax evasion:
  • Why it matters

    Why it matters

    Because of the tax advantages of so-called ‘corporate inversions,’ U.S. firms were able to offer more money, independent of business considerations, for takeovers.

  • Facts

    Facts

    • Tax consultants and investment bankers are advising U.S. clients to buy competitors in countries with little or no corporate tax and set up headquarters.
    • Inversions are a way to escape paying the relatively high nominal U.S. corporate tax rate of 35 percent.
    • The inversion strategy hurts German companies’ ability to compete against U.S. rivals.
  • Audio

    Audio

  • Pdf

At first glance, it seems to be purely an American issue. President Barack Obama wants to make it harder for U.S. companies to evade taxes. But his stance impacts Germany, too, and we should be grateful.

It is all about so-called corporate “inversions,” a tax dodge advocated by many U.S. tax consultants and investment bankers. They advise clients to buy a competitor in a country with as little corporate tax as possible and move their corporate headquarters there. Now they won’t have to pay the relatively high U.S. corporate tax rate of 35 percent.

Many companies are on board. Consider Ingersoll Rand, which combines brands such as the heating and air conditioning systems maker Trane and the small-wheel, electric vehicles manufacturer Club Car under one roof. Ingersoll Rand has a special place in American history. About 80 years ago, workers used the company’s tools to carve the likenesses of four famous U.S. presidents in the rock of Mount Rushmore. Now, Ingersoll Rand is officially an Irish company and pays the tax rate there of 12.5 percent.

The list of similar companies is longer. And it would have gotten a whole lot longer if Mr. Obama hadn’t stepped in. The pharmaceutical giant Pfizer, for example, wanted to ditch its New York roots and take over its English rival, Astra-Zeneca, to take advantage of more advantageous tax rates. The U.S. pharmacy chain retailer Walgreens also planned a tax dodge through the acquisition of Europe’s largest chain of drugstores, Alliance Boots. But Pfizer cancelled the deal, and Walgreens said recently it would refrain from a corporate inversion.

Outrage over the tax evasion is immense and comes from all U.S. political camps. As usual, Congress has proven itself incapable of taking action. The Republicans want to abolish tax inversions only if the move is linked to a reduction in corporate taxes, and Democrats are opposed to this. So Mr. Obama reached into his bag of executive tricks. He said his administration would use its power to battle the corporate inversions. This threat helped convince companies such as Walgreens to reverse course.

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