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Hatch Calls on Congress to Address Inversions by Creating an Internationally Competitive Tax Code
In Speech on Senate Floor, Utah Senator Says, “Long story short: our system of worldwide taxation places us at a competitive disadvantage and makes the U.S. a less than optimal place for companies to locate their businesses. That being the case, as important as it is to get the corporate tax rate down, no matter how low we get the rate, we still need to scrap and replace our outdated worldwide taxation system.”
WASHINGTON – In a speech on the Senate floor today, Finance Committee Ranking Member Orrin Hatch (R-Utah) called on Congress to address inversions by creating an internationally competitive tax code that would make the United States a more desirable location to headquarter one’s business. Hatch also highlighted how the punitive taxes in the President’s own signature health care law, Obamacare, have caused medical device companies to move overseas.
“As it stands, it appears not to alarm my friends on the other side when business activity flees the country as a result of a punitive tax under Obamacare. Yet, if a company with a large revenue base takes taxes into account when considering mergers and acquisitions, the alarm bells sound and legislation is put forward in no time. I’d say there is a bit of inconsistency on the part of some of my colleagues who claim that they want keep jobs and business in the U.S,” said Hatch.
Below is the text of Hatch’s full speech delivered on the Senate floor today:
Mr. President, last week, I came to the floor to talk briefly about the news reports we’ve all been seeing surrounding the proposed merger between Pfizer and Astra Zeneca and the legislative proposals we are seeing from members of Congress in response to the merger.
As you know, one of the key details in this merger is that when Pfizer – a large American company – acquires Astra Zeneca – another large, but somewhat smaller U.K. company – they plan to incorporate the new merged company in the United Kingdom, not here in the U.S.
As I said last week, I was concerned to learn of these plans, as were many of us here in Congress.
After all, Pfizer is an iconic American company, with over a hundred thousand employees. It ranks in the top 200 of global companies by revenue, according to the Fortune Global 500 list. It would be a great loss to our country to see it incorporated offshore.
Still, it’s difficult to blame them for this decision.
According to sources, a desire to escape the high U.S. corporate tax is part of the motivation for this merger.
This type of transaction where a U.S. corporation merges with a foreign entity and incorporates elsewhere to escape the US tax net is sometimes referred to as an inversion.
Inversions are a growing problem here in the United States. Indeed, large companies are leaving our country at an alarming rate.
If you count the number of American corporations in the worldwide list of Fortune 500 companies, you’ll see that the number has declined dramatically over the past decade, which is very unfortunate.
This decline means less capital and investment in the U.S.
It means a smaller U.S. tax base.
And, most importantly, it means more jobs that should be created here in America are being created elsewhere.
So, make no mistake, Mr. President, inversions are a big problem. And, the problem seems to be growing every day.
As I mentioned here on the floor last week, there are, broadly speaking, two different ways Congress could act to address this problem.
The first way would be to make it more difficult for a U.S. corporation to invert.
That’s the approach my friend, the Chairman of the Senate Finance Committee, endorsed a few days ago in an op-ed in the Wall Street Journal.
As the Chairman noted in his opinion piece, current law requires companies moving overseas to have at least 20 percent new ownership to avoid some very bad tax consequences. His proposal – the one he outlined in this article – would be to increase that benchmark to 50 percent for all inversions taking place after May 8 of this year.
That means his proposed restriction would be retroactive for all inversions that happen between last Thursday and the date his proposal is signed into law.
Of course, this is hardly a new idea. President Obama included a similar proposal in his budget.
Given the amount of hand-wringing we’ve seen over just the Pfizer-Astra Zeneca merger and the subsequent erosion of the U.S. tax base from my friends on the other side, you’d think that a proposal like the one the Chairman floated in his op-ed would raise a significant amount of revenue.
However, if you did think that, you’d be wrong.
All told, this proposal would raise roughly $17 billion over ten years. That’s about $1.7 billion a year.
Now, that’s not really an insignificant sum. But, it does demonstrate that the scope of the problem is hardly worth the draconian solutions some of my friends want to impose in order to solve it.
Let me be clear, I share my colleague’s concerns about the number of inversions that have taken place over the last few years. However, I do not believe that imposing confusing and arbitrary retroactive restrictions on U.S. companies is the answer.
There is an alternative approach, which brings us to the second way Congress could act to prevent more inversions.
The second way to address the problem of inversions is to make the United States a more desirable location to headquarter businesses.
While it will require a lot more work and compromise, this is, by far, the better approach.
This approach, of course, means lowering the corporate tax rate. It also means replacing our antiquated worldwide taxation system.
Under current law, U.S. corporations are taxed on their worldwide income. But foreign corporations are subject to tax only on income arising from the U.S. In other words, we subject our own corporations to a worldwide tax system, while subjecting foreign corporations to a territorial tax system. On top of that, most of our major trading partners tax companies domiciled in their own countries on a territorial basis as well.
Long story short: our system of worldwide taxation places us at a competitive disadvantage and makes the U.S. a less than optimal place for companies to locate their businesses. That being the case, as important as it is to get the corporate tax rate down, no matter how low we get the rate, we still need to scrap and replace our outdated worldwide taxation system.
That is why tax reform is so important.
Tax reform, if it’s done right, will get at the root problem, rather than simply dealing with symptoms.
I should note that inversions are only one symptom of our dysfunctional international tax rules. Other types of transactions further illustrate why the entire system is problematic.
For example, there are strong incentives currently for a U.S. parent company to sell its foreign subsidiaries to foreign corporations in order to escape the U.S. tax net.
There are strong incentives to set up a start-up business as a foreign corporation.
Neither of these transactions are inversions, but they do show the point that it is – for tax purposes – often better not to be a U.S. corporation or to be controlled by one. While these other sorts of transactions don’t grab headlines like inversions do, they are nonetheless indicative of real problems in our tax code.
That being the case, a proposal to restrict or eliminate inversions would really only go after one particular type of problem, leaving the rest of the fundamental flaws in our tax system firmly in place.
Proposals to restrict inversions or to impose of some sort of management and control test are like trying to plug the dyke with your fingers to keep capital and jobs from flowing overseas. These proposals are not long-term solutions. They’re not even good short-term fixes.
Another example of business activity flowing overseas that readily comes to mind is the problem we’re facing with the medical device industry.
We know that, thanks to Obamacare’s medical device tax, some of America’s most innovative companies in an industry that’s vital to our health care system are moving jobs overseas.
Yet, where is the call from the leadership on the other side to do something about this?
As it stands, it appears not to alarm my friends on the other side when business activity flees the country as a result of a punitive tax under Obamacare. Yet, if a company with a large revenue base takes taxes into account when considering mergers and acquisitions, the alarm bells sound and legislation is put forward in no time. I’d say there is a bit of inconsistency on the part of some of my colleagues who claim that they want keep jobs and business in the U.S.
There is, of course, bipartisan legislation that would correct the problems we face with the medical device tax, namely a bill introduced by Senator Klobuchar and myself. Sadly, the Senate Democratic Leadership has, thus far, refused to allow an up-or-down vote on the measure, even though we know it has broad, bipartisan support. My hope is that this will change with the upcoming debate over tax extenders, but, I’m not holding my breath.
Given our ongoing experience with the medical device tax, I have to say I’m a little skeptical when my colleagues on the other side say they are concerned about American companies moving addresses and operations out of the country. Indeed, if they were really so bothered by this, we’d have repealed the medical device tax long ago.
Finally, Mr. President, I would just like to give a brief aside on the topic of retroactive changes to our tax laws.
In my view, stability and predictability are bedrock principles of the law.
When it comes to our tax code, we’ve gotten away from that over the years. Restoring these principles to our tax system should be one of our main goals in tax reform.
Put simply, retroactive changes to the law – the kind envisioned by my colleague’s op-ed – are the antithesis of stability and predictability and will only make tax reform that much harder.
No matter how well intentioned, and no matter how large the short-run revenue gains are to be had from retroactive changes, I believe the long-term effects are harmful and, in my opinion, such proposals should be viewed with a healthy dose of skepticism.
Once again, Mr. President, the effort to prevent tax-motivated inversions can be boiled down and separated into two basic camps.
One side would have us simply address the problem and impose arbitrary and perhaps costly restrictions on American businesses to prevent them from leaving the country.
The other side would make the U.S. a better place to do business, preventing companies from wanting to leave in the first place, and inviting new ones to form and prosper here.
Only one of these approaches will actually fix the problem.
Only one of these approaches will help create jobs and grow the economy.
And, only one of these approaches will put our nation on a path to greater prosperity.
That approach is, of course, comprehensive tax reform. That is what is needed. That is where our focus should be.
As I said last week, as the Ranking Member of the Senate’s tax-writing committee, my focus, when it comes to the problem of inversions, is to fix the underlying problems, not to tinker on the edges, focusing on the symptoms.
I hope that, eventually, that is the approach we take.
Thank you, Mr. President.
I yield the floor.
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