The Obama administration is mobilizing to address the relocation of American corporations that are looking overseas for lower tax rates, and the Treasury Department may tighten rules to make the moves, called inversions, less attractive.
If government and corporate tax attorneys have been misinterpreting the law, then by all means, a second look at the rules is in order. But caution is as well. The administration can’t simply rewrite the tax code to serve its policy goals. That’s the job of Congress.
For that matter, while an administrative fix may slow corporate flight, it also could make investment in this country less attractive. The real solution involves restructuring the corporate tax code to eliminate a variety of loopholes, lowering the tax rate to bring it more in line with the rest of the world, and moving to a system where the U.S. doesn’t try to impose its tax rate on income earned abroad.
Unfortunately, prospects for an overhaul seem dim even though it should be a high priority.
The New York Times quoted Treasury Secretary Jacob Lew as looking for ways to "materially change the economics of inversions so that companies will make different decisions." It seems unlikely, however, that he can simply accomplish this by fiat.
Whether the timing is coincidence or not, Walgreens, the nation’s largest drugstore chain, has announced it is abandoning inquiries into moving its tax residency abroad. The tactic involves a larger U.S. company being bought by a smaller foreign company so as to reduce tax bills.
Walgreens move would have been a significant loss. Though there have been 22 inversions since 2011, most have been in the pharmaceutical industry and have not involved a retailer with the prominence of Walgreens.
The heat is not off, however. Companies will continue looking at a lucrative change of location until lawmakers pass genuine reform of the nation’s corporate tax code.
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