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Monday, April 4, 2016

Strategic CSR - Patriotism

I have noted before that I am constantly surprised that patriotism on the part of companies (paying their ‘fair’ share of taxes) is not more highly valued. This is particularly true in the U.S., but also elsewhere. The recent trend in inversions, particularly in the pharmaceutical industry, is evidence of the willingness of U.S. citizens (and politicians) to allow firms to avoid (bordering on evade) U.S. taxes:
 
“… the use of inversions [by U.S. corporations] is now entering its third year. Pfizer is trying the biggest one yet, a $152 billion deal for Allergan, the maker of Botox, which is based in Dublin.”
 
According to the article in the url below, however, the real value of inversion for firms lies in the associated policy of “earnings stripping”:
 
“A company completes an inversion deal and moves its headquarters for tax purposes outside the United States. The now-foreign company still has operations in the United States. These American operations are still taxed in the United States and pay taxes here. The point of the inversion, of course, was to reduce taxes as much as possible. So, the company arranges for the United States parts of its operations to borrow large amounts of money from the now-foreign parent. The indebted American subsidiary will pay interest on that debt to the parent. Under the United States tax code, the interest payment can be used to offset the American earnings. VoilĂ ! The earnings of the company are now offset by these interest payments. What used to be a significant tax bill disappears.”
 
In other words, while inversion allows firms to pay tax on its foreign earnings at the rate of its new foreign home, it still requires firms to pay U.S. taxes on revenues earned in the U.S. Alternatively, earnings stripping allows the firm potentially to avoid paying any U.S. taxes at all, which only increases my surprise that this lack of patriotism (a willingness to support the country that enabled the firm’s success and in which it is largely based) is not more of an issue:
 
“If you are an American taxpayer, it means the burden of making up lost revenue falls more heavily on you. It also creates an uneven playing field for other companies that end up feeling like fools for staying put. All in all, it highlights the problems of the United States tax code, which shows again and again how it just does not work in an increasingly global world.”
 
While the U.S. tax code certainly needs reforming, the real reason these avoidance practices continue is that stakeholders do not care enough to do anything about them.
 
Take care
David
 
David Chandler & Bill Werther
 
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If You Think Corporate Inversions Are Bad, Brace Yourself
By Steven Davidoff Solomon
February 10, 2016
The New York Times
Late Edition – Final
B5