In a strange twist to what has already been a strange and tumultuous presidential campaign season, leading Democratic candidate Hillary Clinton and leading Republican candidate Donald Trump actually agree on an issue. Sort of.
The issue in question is so-called “corporate inversions,” in which a U.S. company re-incorporates overseas to reduce the tax burden on income earned abroad. Entirely legal, the strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. The idea is to re-incorporate in a country with a lower tax rate.
Sadly, there are plenty of countries to choose from, since our corporate income tax rate, 35 percent, is the highest in the world. The U.S. is also one of the few countries that makes its companies pay that rate on all their worldwide income—although they can defer paying taxes on profits attributed overseas until they bring that money home. Many nations, including the U.K. and Canada, tax only domestic profits. By inhibiting the repatriation of overseas profits, U.S. policy also inhibits investment of those profits in things like domestic assembly plants.
Corporate inversions captured headlines late last year, when pharmaceutical giant Pfizer Inc. announced that it would buy Irish company Allergan Plc for $160 billion in a deal primarily aimed at slashing Pfizer’s U.S. tax bill. (The “new” company would be based in Allergan’s headquarters in Dublin, rather than Pfizer’s home in New York City.)
Some 51 U.S. companies have reincorporated in low-tax countries since 1982, including 20 since 2012. And, neither Clinton nor Trump is happy about it.
During a recent campaign stop in Iowa, Clinton backed an Obama administration proposal to discourage inversion deals. Currently, U.S. companies can reincorporate overseas by buying or merging with a foreign company and then transferring more than 20 percent of shares to foreign owners. Obama has proposed raising that threshold to more than 50 percent foreign ownership. In addition, Clinton proposed an “exit tax” that would apply to companies that still seek to reincorporate overseas despite the higher threshold. It would tax foreign earnings at the time of the deal.
Not to be outdone, Trump called corporate inversions “one of the biggest problems our country has.” He has pledged to lower the corporate tax rate to 15 percent, “taking our rate from one of the worst to one of the best.” Trump would also institute a one-time deemed repatriation of corporate profits held overseas at a significantly discounted 10 percent rate, and he would put an end to deferral on taxes on corporate income earned abroad.
Who will come out on top? We’ll see at the ballot box.