CFP Says Congress's 'Inversion' Amendments Are Political

Tax-News.com, New York

16 September 2002

The Center for Freedom and Prosperity says that moves in Congress to punish companies that establish themselves in Bermuda by excluding them from Federal contracts are motivated by upcoming Congressional elections, and are bad tax policy in any event.

Chairman Dan Mitchell, Heritage Foundation Senior Fello, writes:

'The House and Senate recently approved amendments to the Homeland Security bills that would punish companies that are incorporated in so-called "tax haven" countries. Offered by Rep. Rosa DeLauro and Senator Paul Wellstone, these amendments prohibit companies from competing for contracts with the new Department of Homeland Security. Several Members of Congress may offer similar amendments to other pending Appropriation bills.

'These proposals are bad public policy. Anti-competitive tax law is the cause of the problem, and anti-expatriation provisions simply create an additional disadvantage for U.S.-based companies that do business in international markets. American workers and shareholders are the ones who ultimately bear the costs of these misguided policies. Instead of resorting to fiscal protectionism, lawmakers should fix the portions of the tax code that hinder U.S. competitiveness.

'Most other nations use a "territorial" system to tax resident corporations, which means the foreign-based firms pay tax to each country where they earn income - but they do not have to pay a second layer of tax to the nation where they are chartered. By freeing a company from having to pay US tax on income earned in other nations, "inversion" enables a company to maintain factories and headquarters in the U.S. and yet still compete on a level playing field in world markets.

'This explains why corporate "expatriation" is a process that benefits the American people. It is American workers who benefit when a company is a stronger competitor in world markets. It is American shareholders who benefit when a company is on a level playing field with foreign competitors. And it is American consumers who benefit when a company can charge lower prices because of better tax treatment.

'The Wellstone and DeLauro amendments are designed for political rather than legislative goals. Looking forward to the November elections, sponsors hope to demonize corporations by creating a public perception that firms are engaged in a shady form of tax evasion. This demagoguery is false. The actions taken by these companies were (and are) in complete compliance with U.S. tax laws and regulations. These companies continue to pay taxes to the IRS on all income earned in the U.S., and they pay all applicable tax to other governments on income earned in all the countries where they do business.

'As the U.S. Chamber of Commerce noted in a letter sent to Congress in opposition to the Wellstone Amendment: "Rather than alleviating the disadvantage foisted upon our corporations by inequities in the U.S. tax code, Congress proposes to supplement it with a non-tax disadvantage. This doesn't fix the system - it only makes it worse."

'The Wellstone/DeLauro amendments are not just about tax policy. They also will have important - and negative - consequences on budget policy, trade
policy, employment, mergers, and exports:

• For the first time, the Congress will use listing on a U.S. exchange as a test to apply the U.S. tax code to foreign companies. The chilling effect this will have on non-U.S. companies as they consider whether to list on the U.S. exchanges is clear.
• Banning certain companies from competing for government contracts reduces the pool of potential competitors for government work. Reducing competition
  will lead to higher costs for taxpayers.
• The Wellstone and DeLauro initiatives are poorly crafted. The amendments supposedly target companies that "expatriate," yet the proposals fail to distinguish between companies that "inverted" and those that received their original charter in low-tax jurisdictions.

'US Senator Phil Gramm (R-Texas) summed it up very well during the debate in the Senate: "Even if your product is better, even if your product would save lives, even if your product would save money, if anyone cares about saving money-then you cannot sell it to us if, in 1812 you were domiciled in Boston and you moved to
London and you did not change your ownership by moving."'

'Wellstone and DeLauro are appealing to xenophobic sentiments, allowing people to believe that their amendments will encourage the government to buy American. This is ironic, since their initiatives likely will reduce American jobs. Companies that expatriate keep their headquarters and factories in the United States, but they will be barred from providing goods and services to the Department of Homeland Security. Companies with foreign workers and foreign headquarters, by contrast, will be allowed to bid on government contracts.

'More than anything else,' concludes Mr Mitchell, 'this demonstrates that Wellstone and DeLauro are motivated by a political agenda. They are willing to sacrifice American jobs in exchange for a campaign issue, when the right approach is fixing a tax code that is hindering America's competitiveness.'

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