Fantastic. The Treasury Department last month began establishing rules to make it significantly harder for U.S. companies to re-locate offshore for tax purposes by taking over foreign companies and registering out-of-country under the smaller entity with access to tax havens or lower corporate taxes. Earlier this year, both on this site and in The Globalist, I criticized Pfizer’s efforts to initiate a tax avoidance merger like that.
This practice, known as an “inversion” (or sometimes “offshore reincorporation”), had rapidly accelerated recently, to the point where the overall number of all such mergers ever attempted by American companies doubled in the past two or so years. While the new rules are just a small step forward — the much bigger problem of European-controlled tax havens, allowing such mergers to make sense in the first place, remains unchanged — it’s a step much more in the right direction than the constant Republican calls to slash corporate taxes to compete with the tax havens, when sensible reforms and regulations are really what’s needed.
There was also another sign that this Treasury Department action was having the intended deterrence effect. A bunch of companies who were in talks or seen as potentially likely to pursue such mergers took a pummeling in the stock market on September 23rd in response to these regulations being announced the day before, since the companies were less likely to make gains than expected.
That’s well deserved punishment, in my opinion, and more still needs to be done. As I argued in my oped in The Globalist in May of this year:
As a matter of fact, U.S. corporations — as profitable as they are — have taken their home nation for a nearly tax free ride for too long. The U.S. tradition of the rule of law that allowed business to flourish cannot be permitted to devolve into a “rule of loopholes” system that just barely stays inside the lines.
Tax avoidance is a cancer on democratic societies. It both undermines confidence in the fairness of the taxation system and erodes the government’s ability to invest in infrastructure and provides services. In the end, that reduces any government’s credibility with its people.
Without the U.S. government’s help, big American corporations would never have been so successful in the first place. We cannot let them get away with chipping away at the country’s tax base even further.
And the corporations should tread lightly for their own good. If such mergers as the one Pfizer proposes are the future of globalization, the American people will continue to feel very abused. Such schemes may eventually produce a backlash strong enough to erase any of the positives.
