Dean Barber

A Matter of Economic Patriotism

In Corporate Site Selection and Economic Development on July 27, 2014 at 7:52 am

It’s a free country or so they say.

Like every place, we here in the United States have our laws, regulations and taxes. That’s the nature of things where all governments reside, which is sometimes to the ire and discomfort of business people.

And while the U.S. remains a refuge and haven for foreign direct investment, which was the topic of our blog last week, it is somewhat ironic and interesting to note that some U.S. companies are reincorporating themselves overseas for tax reasons.

These corporate relocations, known as inversions, are becoming more common, and has both parties in Washington at least concerned. But whether lawmakers will actually act to remedy the situation, well, that’s another story.

Legal But Wrong

Speaking at Los Angeles Trade-Technical College last week, President Obama accused certain companies of “cherry-picking the rules” and damaging the country’s finances and the economy by this practice of inversion.

“My attitude is I don’t care if it’s legal, it’s wrong,” he said.

Mr. Obama is now echoing U.S. Treasury Secretary Jack Lew who has called for a new sense of “economic patriotism” and has urged Congress to take steps quickly to prevent U.S. companies from shifting their headquarters abroad to benefit from a lower tax rate.

Typically, these inversions are not causing U.S. job losses. Rather, this is a shell game in which a company sets up a tax domicile abroad which is often no more than a small office, all the while keeping the bulk of business operations here in the U.S.

Inversions take place when a large U.S. firm buys a smaller target company domiciled in a tax-friendly country like Ireland, which has a corporate tax rate of 12.5 percent compared to that of the U.S., which has an ostensible rate percent of 35 percent.

Minnow Swallows the Whale

The acquisition is structured in such a way that the U.S. company becomes on paper the subsidiary of the smaller foreign corporation. Edward Kleinbard, a professor of law at the University of Southern California, wrote in an opinion piece for Bloomberg news that such a deal is where “the foreign minnow swallows the domestic whale.”

The goal or purpose is to avoid paying the federal tax that applies when companies repatriate their low-taxed foreign earnings to the U.S.

In the past few weeks, two U.S. drug firms — AbbVie and Mylan – have moved forward with foreign takeover plans that would allow them to pay lower tax rates. AbbVie reported a global effective tax rate for 2013 of 22.6 percent, a roughly one-third discount off the U.S. statutory rate, largely as a result of its low-taxed foreign earnings.

Lew, who advocates lowering the U.S. headline rate and revamping the entire tax code, charges that companies that do inversions essentially want to keep the advantages of being in the U.S. – things like intellectual property protection, research support, financial security and reliable infrastructure — without paying for them.

Renouncing Their Citizenship

In a letter to Senate Finance Committee Chairman Ron Wyden, Lew wrote that Congress should act now to prevent even more companies “effectively renouncing their citizenship to get out of paying taxes.”

But because he is a cabinet member in the Obama administration, you can bet the Republicans are not going to dance anytime soon, even if they, too, recognize that there is a problem.

That is just the nature of Washington today, where true governance, based on give and take compromise and statesmanship between the two parties, is a very rare thing indeed.

Senior administration officials have been telling reporters that the president supports a long-term rewrite of the tax code to make the U.S. a more attractive place to locate businesses, jobs and investment. Never mind that is pretty much what the Republicans have been saying, too.

No Fix Soon

But most political observers doubt that anything will be done before the midterm elections in November, where the GOP stands a good chance to reclaim a majority in the Senate.

Mr. Obama apparently wants legislation that would essentially say that if more than half of the new firm is owned by the old U.S. firm’s shareholders, the inversion won’t be recognized for tax purposes. I think that makes a lot of sense.

The ultimate goal with any legislative fix is to keep the U.S. corporate tax base from eroding. Senior administration officials are particularly worried about “a bandwagon effect,” in which one firm in a sector inverts, raising pressure on other companies in the sector to invert as well.

One such potential decision to reincorporate overseas lies with Walgreen Co., which could raise pressure on CVS Caremark Corp. to do the same. Walgreen, which owns a 45 percent stake in European drug retailer and wholesaler Alliance Boots, could buy the remaining shares, thereby opening up the possibility of reincorporating in Europe and benefiting from a lower tax rate.

Riddled with Loopholes

Over the last 10 years, 47 companies have reincorporated abroad, compared to 29 over the previous two decades, according to the Congressional Research Service. As many as 30 inversion transactions could be moving through the deal-making pipeline right now, according to the Obama administration.

Kleinbard writes that inversions “are symptomatic of a corporate tax system that is highly distortionary, unstable and riddled with loopholes. The headline rate of 35 percent is well above world averages, effective rates imposed on investments vary wildly, and the international rules in particular are an incoherent mess.”

No argument from me on that, professor. He further writes:

“Inverting firms try to justify corporate self-help as the right response, but inversions both gut the domestic tax base and allow key players (those with international operations) to excuse themselves from the debate, while domestic firms are left holding the bag.”

Nobody likes to be left holding the bag. So let’s level the playing field with a bipartisan comprehensive tax code rehaul, which would make our nation more competitive on a world stage. We need to cut our statutory corporate tax rate by half, all the while closing loopholes for special interests.

Now you, Republicans, and you, Democrats. Get at it. Do your job. Quit talking around each other and start talking to each other. Is that too much to ask?

Saw One Coming but Not the Other

You know, I am fast coming to the conclusion that I should start calling myself an economic development “futurist” or maybe a “seer” so that I can charge more money.

Back on July 8, in my blog entitled “A Masterpiece of Economic Development,” I wrote that with the spate of recent U.S., German and Japanese automotive investment in Mexico, with new OEM assembly plants being announced with some regularity, that it was just a matter of time before the Koreans would follow suit.

Well, my prediction seems to be coming true, as Reuters reported this past week that Kia is in talks with Mexico to open a new auto assembly plant worth at least $1.5 billion.

The news service quoted Rolando Zubiran, secretary of economic development in Nuevo Leon, as saying that negotiations on the plant were under way and involved Nuevo Leon, the Mexican federal government and Kia, an affiliate of Hyundai Motor Corp.

“It’s more than $1.5 billion,” Zubiran said, referring to the planned investment. He said Nuevo Leon hoped the deal would be concluded during the first two weeks of August.
Reuters reported that sources said the plant will have an annual capacity of some 300,000 cars and will be built on the northeastern outskirts of Monterrey.

But before I get too much of the big head, I should fess up. I will admit that I was somewhat surprised that Volkswagen announced that it will invest $900 million to expand its plant in Chattanooga, Tenn., and add 2,000 jobs by 2018.

I say that because I had sensed a tension between VW management and the state of Tennessee, stemming from the company’s desire to essentially unionize its workforce so that it could get incorporate its vaunted works council business model.

There still may be some tension there, as the United Auto Workers will be establishing a local, much to the horror of some elected officials. We’ll see how this story plays out, but it apparently did not thwart VW’s plans to expand the Chattanooga plant in a big way.

So maybe if I was a real futurist, I would not be so surprised by such turn of events. Best I keep my consulting rates reasonable and not make such claims.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

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  1. Interesting that this administration, and its party, has demeaned Patriotism as jingoistic and detrimental to a broader view of the world and now appeals to it in a fundraising campaign. This administration has made every effort to paint business as evil, greedy and self-serving while treating them like an atm and now feign surprise when business seeks friendlier climes elsewhere.

  2. The first immoral consent is charging business owners 35% tax to do business here in California. So basically if you do business , have a business or are thinking of running one here in California plan on your cost to do business being 35% more then your estimating now due to taxes. Someone needs to cover college expenditures . I just saw a local bus (public transportation) in my town with an add campaign promoting that a local college has been funded over 15 million for this Fall in monies for tuitions ha ha and now they need to market for students to receive this money apparently. How much was this campaign I wondered, and then 15 million? Seems a lot to pay to keep the unemployment records fixed. Basically if we keep a majority of the unemployed in college the unemployment rate is fixed. These people get out with a degree and end up working retail at min. wage. Is the return on this funding adding up? I think not. Then we offer no rights, laws, or protection of the small business owners, who are paying these taxes and funding these projects such as with the extortion of small business owners caused by Yelp . Yelp a marketing company who is legally extorting small business owners for advertising dollars by manipulating online reviews, and getting rich doing so. Everyone seems to have a foot hold on the backs of small business owners. God bless the true pioneers who still remain patriotic enough to continue to desire the American dream and go into business for themselves. Then we outsource work to people in various countries such as in California with the 7.2 billion dollar bridge that was out soused to Chinese government firms for re-facing. As well as a 400 million dollar project in New York with the Alexander Hamilton bridge and in Alaska a 190 million dollar bridge re-facing project all were subsidized by the US government and outsourced to Chines firms, and Chinese workers. Apparently we here in America do not have enough graduates coming out of the IT schools who can weld. Crazy as last I checked tuition towards a welding certification from these schools will end up being about $80,000 upon graduation and then instead of a welders job you will likely work for min wage in retail as the weld jobs have just been outsourced to China and imported Chinese workers. And its not likely this will change anytime soon as the majority of active voters are all college students. You know the ones being paid to stay in school and to stay out of the declining work force, so we can keep up this false reality of a growing economy with this administration.

  3. Companies have a responsibility to shareholders to minimize and avoid taxes. So Obama is blaming dogs for barking. There are plenty of ways that corporations can shift the place they pay taxes. I worked with a client a while back who charged their Canadian subsidiary $250 for ever phone call to or from the US for administration. So this reduced exposure to Canuckistan taxes. The US Admin has to look within themselves to see why their policy incentivises this activity.

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