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Obama Involves Ireland In 'Unpatriotic' Inversion Claim

by Mike Godfrey, Tax-News.com, Washington

29 July 2014


In remarks and statements made on July 24, President Barack Obama appealed for "economic patriotism" from those American corporations that are contemplating a "corporate inversion" as a means of avoiding the high United States corporate tax rate, whilst also dragging Ireland's lower tax rate into the controversy.

Corporate inversions have been used by US companies, when bidding for (generally smaller) foreign companies, as a means of moving away from the high American 35 percent corporate tax rate.

Under current law, a company that merges with an offshore counterpart can move its headquarters abroad (even though management and operations remain in the US), and take advantage of lower taxes, as long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger.

In an address to a college in Los Angeles, the President pointed to corporate inversions as a "threat" because, while the companies' businesses still remain in the US and have "all the advantages of operating in the US, they just don't want to pay for it." He added that, by technically renouncing their US citizenship, the companies are "cherry-picking the rules," and that: "I don't care if it's legal – it's wrong."

While admitting that rate-reducing corporate tax reform would be the longer-term solution, he plugged the measure that was included in his budget proposals, and in recent bills introduced into Congress by Democrat lawmakers, to restrict corporate inversions immediately by increasing the minimum foreign shareholding to 50 percent. The restrictions would also be retrospective and apply to inversions occurring after May 8, 2014 (when the change was first talked of in the Senate).

"Let's everybody get together, Democrats and Republicans, to deter companies from rushing to take advantage of this tax loophole," he concluded. "And let's make sure that we're rewarding companies that are investing and paying their fair share here in the US."

He would have been aware that the Republican Party in Congress has generally been against any short-term solution, and has insisted that the corporate inversion problem should be dealt with only within a comprehensive tax reform solution.

For example, Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) has recently warned that the current legislative proposals, "rather than incentivizing American companies to remain in the US, would build walls around US corporations in order to keep them from inverting," and could have unintended consequences.

In a Senate hearing, he confirmed that, while "there may be steps that Congress can take to at least partially address this issue in the interim, … whatever approach we take should not be retroactive or punitive. And, it should be revenue neutral. … Most importantly, it should not impede our overall progress toward comprehensive tax reform."

On the same day as his Los Angeles speech and in an interview with CNBC, President Obama also highlighted the reputational consequences of US corporate inversions that could descend on foreign jurisdictions, by singling out Ireland to name as a low-tax location that US companies are using.

During the interview, the President stated: "What we're trying to do is to say that if you simply acquire a small company in Ireland … to take advantage of the low tax rate, you start saying we're now magically an Irish company despite the fact that you may only have a hundred employees there, and you've got 10,000 employees in the US. You're just gaming the system. You are an American company. You continue to benefit in all kinds of ways from being an American company."

TAGS: compliance | tax | business | tax compliance | Ireland | tax avoidance | law | corporation tax | legislation | transfer pricing | United States | tax breaks | tax reform

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