Today’s Accounting Today has an article entitled “Obama Blames Accountants for Inversion Trend.” During a press conference yesterday, President Obama said the following: “You have accountants going to some big corporations – multinational corporations but that are clearly U.S.-based companies – and these accountants are saying, you know what, we found a great loophole – if you just flip your citizenship to another country, even though it’s just a paper transaction, we think we can get you out of paying a whole bunch of taxes. Well, it’s not fair. It’s not right.”
Let’s see what is wrong with President Obama’s reasoning.
First, why do corporations want to invert or move their legal domicile out of the U.S.? According to the Tax Foundation, the U.S. combined Federal and State statutory corporate income tax rate of 39.1% is the highest among developed nations in the world. The U.S. taxes the worldwide income of U.S. corporations. Almost all, if not all, other developed nations tax only income earned in that country. Thus, U.S. companies operate at a financial disadvantage to their competitors from around the world: they have less after-tax dollars to reinvest and to pay their shareholders. Come to think of it, the more they pay in taxes, the less they can pay to workers, too, assuming that they need to reinvest and pay returns to shareholders. Well, it’s not fair for U.S. corporations and it’s not right for U.S. corporations, to paraphrase (with some license) a certain President of the United States.
Second, while the foreign tax credit is not a perfect offset, the U.S. foreign tax credit is meant to stop double taxation of foreign income of U.S. taxpayers. It generally reduces Federal income tax by $1 for each $1 of foreign income tax paid. So, the U.S. is not collecting its entire statutory rate on foreign income taxed by other countries.
Third, even inverted corporations pay Federal and state taxes at normal rates on their income earned in the U.S.
Fourth, the amount lost to inversions is a drop in the bucket. The Joint Committee on Taxation estimates that stopping inversions would save $20 billion over the next 10 years. To be fair, that amount must be compared to the amount of corporate taxes collected. In 2013 alone corporate income tax brought in $274 billion. $20 billion over 10 years? It is a rounding error. Also, there is a good chance that the $20 billion is not a very good estimate. Among other shortcomings, it does not seem to take into account the tax collected on taxable corporate inversions.
Fifth, and I can’t actually prove this, it is probably the lawyers’ fault. That’s according to yesterday’s Wall Street Journal.
So, why is this matter on the front burner and in the headlines? It is an election year and corporations don’t vote.
Mr. Obama, please get off my back and the backs of my fellow accountants.