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US Business Sees Tax Rate Cut As Solution To Inversions

by Mike Godfrey,, Washington

06 June 2014

The businesses and associations that make up the RATE (Reforming America's Taxes Equitably) Coalition have written to Ron Wyden (D – Oregon), Chairman of the Senate Committee on Finance, and Orrin Hatch (R – Utah), its Ranking Member, to insist that the solution to United States corporate tax inversions lies in reforming its "uncompetitive tax code."

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 thereby 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.

Bills introduced into the US Congress would follow closely a proposal made by President Barack Obama in his 2015 budget proposals to restrict corporate inversions by putting the minimum foreign shareholding at 50 percent.

However, the letter from the RATE Coalition points out that the above proposal to restrict the practice of inversions "will be counterproductive and fail to address the real issue – the US's outdated and uncompetitive tax code. Since 1986, America's federal corporate tax rate has remained at a standstill – 35 percent – while other nations have continuously lowered theirs to compete for jobs and growth. Indeed, the weighted average corporate tax rate of the OECD nations is now 25 percent – a full 10 points lower than that of the US. … This is ultimate source of the inversion phenomenon."

The Coalition believes that "short-term solutions are shortsighted and protectionist, and will surely drive investment overseas and cause venture capital to look outside the US before starting a company. Any true tax reform must also address the underlying issues, not just the symptoms."

It concludes that the time has come for revenue-neutral US tax reform to bring down the corporate tax rate: "The data show that approximately 50 inversions have occurred up to last year. Since 2011 alone, 20 have taken place; most of those were done through mergers. Furthermore, these companies are no longer moving to so-called tax havens; instead they are re-domiciling in countries like the United Kingdom and Canada, whose tax codes are more modern, efficient, and competitive."

TAGS: compliance | tax | investment | business | tax compliance | law | corporation tax | offshore | legislation | transfer pricing | United States | tax reform | Tax

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