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Treasury Department Continues Attack on Inversions, Businesses

Yesterday, The Treasury Department made more changes to rules with regard to inversions. The driving force behind the constant meddling into this legal practice is the retention of tax revenue.

“Under the new rules, there will be a three-year limit on foreign companies bulking up on U.S. assets to avoid ownership requirements for a later inversions deal, Treasury said in a statement.”

In an inversion, a U.S. company typically buys a smaller foreign rival and reincorporates to the rival’s home country, which moves the company’s tax domicile, though core management usually stays in the United States.

The Treasury, which had last introduced new rules in November to curb inversions, also is proposing tackling the practice of post-inversion earnings stripping with new limits on related-party debt for U.S. subsidiaries.”

This continued attack on inversions is ridiculous and companies are being targeted unfairly because they represent a possible loss of revenue for the government. Inversions are legal, and sometimes necessary. They are a way for U.S. companies to change their HQ from the U.S. to a foreign country, for the sole purpose of allowing themselves the express privilege of being on par with foreign companies and eliminate the severe disadvantage that the U.S. puts on its own businesses via excessive taxes!

It is outrageous that the government applies such discrimination. It is outrageous that American companies have to chose to move their headquarters elsewhere simply to survive and compete globally, because they are taxed on their profits in two jurisdictions — both domestic and foreign.

High Corporate Tax Rates and Inversions


Dustin Howard over at Americans for Limited Government tackles one of the key factors contributing to the rise of corporate inversions: high corporate taxes. I would also argue that another mitigating factor is foreign-earned income, which the United States government lays claim to — and is the only major country to do so. Under U.S. tax law, U.S. companies are forced to pay both foreign- and domestic-earned income, putting them at a global disadvantage.

At any rate, Howard’s piece is a worthwhile read on the equally detrimental effect of high corporate tax rates. I have shared it in its entirety below.

“How should policymakers stop the bleeding of American jobs overseas? There’s one easy answer among many harder ones, and that is to stop making it so expensive to do business in the United States.

Many things price American workers out of competition, whether it be the current mix of trade rules, currency manipulation and other unfair labor practices but the easiest to address domestically is the corporate tax rate. Government’s unwillingness to do with less is making it considerably harder for Americans to even work.

Seriously, why should American corporations pay a 39 percent rate, among the world’s highest, to headquarter here when they can “invert” to Ireland and pay 12.5 percent, less than one third the domestic rate?

If the corporation can keep most of their American workforce and keep 26.5 percent more of their money as an alternative by cutting the corporate tax rate, wouldn’t that a good thing?

Why would the U.S. maintain a policy that discourages business from even being on American soil?

Democrats propose a solution to this phenomenon: punish the innovating refugees that refuse to pay into their racket. They believe in taxing the profits of inverted firms. One problem: extrapolating from a recent study by economist Wayne Winegarden for the Pacific Research Institute, this actually further discourages firms from even retaining their American workforce, and encourages them to simply export their products outright from their new foreign addresses.

Call it a lose-lose proposition, where American workers lose jobs, American businesses leave and revenues drop while the deficit increases; Ireland should chip in and send Democrats a fruit basket.
If taxing inverted companies suddenly sounds unappealing, here’s an alternative: make inversions less attractive as a means of generating profit. The U.S. is a free country, so it looks bad when it punishes corporations for acting in their best interest. Instead, why not lower the tax rate to a more competitive, attractive rate, and then focus rolling back the regulatory state that is literally paid by taxpayers to make businesses less productive?

The first step on this path would be to begin reducing the cost of business with a comprehensive set of tax reforms that clean up our messy corporate tax code, and give businesses a sense of calm when planning for the future.

Besides it’s not like the corporate tax generates that much revenue anyway, at just 10.6 percent of $3.2 trillion of total receipts in 2015, according to the Office of Management and Budget. By far the most revenue comes from individual and payroll taxes.

As things stand, corporations are seeking foreign shores to chart out profitable futures, mainly because the business climate in the U.S. has made itself so volatile that it cannot accomplish that at home. The data supports the notion that punishing corporations that choose foreign domiciles will hurt working Americans more than it will avenge or protect them. The limited government solution is to let individuals choose what works for them, and to tax them at a reasonable rate so they do not move out of necessity.

As stated above, lowering the corporate tax rate is just one part of the solution. America has fundamental problems across the board that put us at a global disadvantage that should also be addressed.

The corporate tax rate is a necessary first step to signal to the world that we are restructuring the policies to make the U.S. more attractive among competitors. Creating jobs in America begins with keeping the economy free and competitive, and that cannot happen without fiscal restraint and limiting government, but also cannot happen if we’re taxing ourselves to the stone age.

The Latest Business Attack on MLPs is Just as Flimsy as the Inversion Crusade

Cyber-attacks
Earlier this week, the business world was chattering about the news that Kinder Morgan, pioneer of the Master Limited Partnership (MLP) business model, was surrendering the MLP structure in favor of a more traditional corporation. This happened last Sunday.

While many questioned what this meant for the MLP model in general, the more pressing questions began to emerge when, the following day, the Treasury Department came out with a statement regarding MLPs: “We at the Treasury are looking into the effects of these transactions on future tax revenues. Instances where the tax base may be eroded serve as a reminder of why we need Congress to enact business tax reform that broadens the tax base and lowers tax rates.”

Much like that false crusade on inversions, here we have another instance of anti-business sentiment coming out of the Executive Branch. Obama’s abuse of the law is clearly now seeping down to his cabinet underlings who also think now they have the authority to rewrite the law as well — especially under the cloak of getting more tax revenue.

Starting this past April, the government issued a temporary pause in the formation of new MLPs. The way the process works is that the IRS would issue what’s known as “private letter rulings” that examine qualifying income, and then therefore allow an MLP to be formed. However, the Treasury Department decided to examine the standards being used, meaning that the creation of new MLPs have been on hold for a few months.

The internal committee has been tasked with evaluating the “aggressive” rulings regarding qualifying income of MLPs issued in recent years. The internal committee may determine that such rulings are too expansive and recommend stricter interpretations of what types of natural resources income constitute qualifying income.

Most folks in the business world fully expected the formation of MLPs to resume after rules were reviewed. Barrons noted that, “They went through a similar review process for REITs in 2013 and concluded that the approvals were in line with the law. The same results were expected for MLPs and that private letter rulings would resume. But Treasury seems to say they are looking at issues larger than the IRS which would seem like another attempt to jawbone companies in the future from seeking MLP approvals.”

This sudden interest in MLPs sounds eerily similar to the recent interest the government has taken in business “inversions”; the government claims (erroneously) that inversions also deprive the government of supposed-entitled tax revenue, the same flimsy justification for looking more closely at, and ceasing the formation of, MLPs.

The worst part about this new anti-business targeting is that it is completely unfounded. The Treasury Department makes it sound like MLPs somehow are avoiding paying tax revenue by the way the company is structured and calls on the need for “Congress to enact business tax reform”. Except that MLPs ARE a perfect example of a type of reformed business tax structure that Congress should be welcoming.

With MLPs, the business is only taxed once, (the way most business structures around the world already operate.) In the United States, however, corporations face an abominable problem in our tax code known as “double taxation”. Basically if a corporation pays its corporate taxes and then reinvests its profits, there is no extra tax. But if its profit earnings are given to the owner(shareholders), they are taxed again on that amount — hence the double taxation.

Contrast that with MLPs, which “does not incur income taxes. Its income is allocated among all partners in proportion to their ownership interest.” Hence, the taxation only occurs once. This singular taxation of businesses is what real broad-based tax reform should aim for.

The real inequality in the tax code is not the MLP structure, which only taxes businesses one time; it is the double taxation that major corporations face. If Obama is truly for tax reform — like he says he is when he talks about inversions — the MLP structure for businesses is one way to achieve that reform. (Another would be to lower the corporate tax rate.)

Going after MLPs now and reducing the number of them in existence is the opposite of tax reform. Allowing the Treasury Department to play with business rules willy-nilly is egregious. This MLP attack is just another example of how anti-business the Obama Administration really is.