Hillary Clinton’s proposals on tax inversions are the latest in a long line of promises from US politicians to “ do something” to cut down on legal tax avoidance by big business. Tax inversions happen when a US company merges with a company overseas and moves its headquarters to where that company is based.
Even if she does get elected, it remains to be seen whether the support of the US legislature can be got on board to actually make some changes.
The target of Clinton’s ire is the proposed merger between Pfizer and Allergan, which would lead to a pharma giant with its headquarters in Ireland, where Allergan is currently based. This has stirred controversy in Washington because it will lead to a loss of tax revenue to the US. This is mainly because it will allow the merged entity to engage in tax manoeuvres which will lead to more profits being reported outside the US, where the corporate tax rate of 35 per cent if high by international standards. It will also allow Pfizer to avoid tax on a pile of cash it holds overseas. The main points of the Clinton plan are the following:
1.
Take action to make it more difficult for companies to perform these tax “inversions”. Clinton wants to ensure that if companies want to give up their US identity, then at least half the shares in any merged entity must be held by the foreign company’s shareholders. In the past, the US company has typically been much bigger than the overseas company with which it was merging. The law currently states that the overseas company has to have a stake of at least a fifth in the combined entity. The Obama administration has moved to increase the threshold to 40 per cent. In the Pfizer deal, Allergan shareholders will hold some 44-45 per cent of the merged company (one of the limiting factors for Pfizer in choosing a target was finding a company that was big enough to have a holding of more than 40 per cent post-merger) – but under the Clinton plan this would not be enough.
Clinton is also proposing that the change should be retroactive, which would scupper the Pfizer/Allergan move.
2.
Impose an “ exit tax” on profits moving offshore. Typically big US companies keep large amounts of cash earned outside the US offshore. This is because, under current rules, it is exposed to the higher US taxes - but only when it is repatriated to the US.
A big attraction of inversions is that the new entity can get access to these piles of cash without exposing them to tax. Clinton is suggesting that, when this happens, a once-off charge is imposed on the money concerned. This would undermine the advantages of big inversions.
3.
Limit the ability of multinaitonal companies to engage in “profit stripping”. Profit stripping involves legal manoeuvres within a company, which allow more profits to be reported in a lower tax jurisdiction, cutting the tax payable in the US.Typically, a US subsidiary after an inversion is loaned money be a parent and has to repay interest overseas , lowering its reported profits in the US. How exactly tax law could be changed here is not clear, as multinationals typically will arrange their affairs including transactions between different subsidiaries.
4.
If Congress does not act, get the US treasury department to crack down. Clinton said she hopes Congress would move but, if not, and if she was elected president, she would get the treasury department to act more aggressively in areas like profit stripping. How much this could change things without actual legal moves is not clear.
Overview:
The Clinton plan is part of a global move – including the OECD Beps initiative – to clamp down on legal tax avoidance and get big multinationals to pay more tax. The problem is that effective action requires moves across a number of jurisdictions. Central to this is change in the US itself, not only in relation to inversions but also its wider corporate tax code, which is a key factor in the global chain of legal tax avoidance.
