A decade ago, Congress cracked down on a loophole that allowed American corporations to renounce their U.S. citizenship to avoid paying U.S. taxes. It was a bipartisan effort, signed by President George W. Bush. But lately, a number of U.S. companies have found a way around the law. We need to take immediate action to stop them.
The 2004 law is supposed to prevent corporate inversions (the euphemism for legally declaring a corporation is headquartered in another country, though it operates in the United States) by prohibiting them if the new "foreign" corporation is still 80 percent owned by its original shareholders. But that rule has turned out to be far too weak and is now failing to do its job.
One way corporations are skirting the law is by buying or merging with foreign corporations. Two of the most prominent American corporations that are contemplating inversions are pharmaceutical giant Pfizer and the major drugstore chain Walgreen Co.
Pfizer hopes to take advantage of this preposterously weak rule if its bid to acquire AstraZeneca, a British pharmaceutical company, is successful. In Walgreen's case, a group of hedge funds that own a significant part of the company's stock is pushing the company to buy a controlling stake in Switzerland-based Alliance Boots for the same purpose.
Pfizer and Walgreen are as American as two companies can be - particularly if you measure that by how much they've taken advantage of public investments funded by American taxpayers. From 2010 through 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefitted from taxpayer funded research to develop drugs like Xeljanz, which was first discovered by government scientists at the National Institutes of Health. It's also obvious that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.
Walgreen, whose sales and profits are virtually all in the United States, also benefits from taxpayer-funded investments, since it makes a large part of its profits by selling the drugs manufactured by Pfizer and other pharmaceutical companies.
Neither Pfizer nor Walgreen plan to move their headquarters or business activities out of the country. Only for tax purposes would either company actually become "foreign." But if they are treated as foreign for tax purposes, then these companies would have new opportunities to shift their U.S. profits (on paper) to offshore tax havens and avoid paying U.S. taxes.
CEOs at other American corporations surely are watching to see if Pfizer and Walgreen can get away with their outrageous schemes. And if they do, the floodgates will be open for more companies to rush through.
Fortunately, there is a ready solution to stop this tax avoidance chicanery. President Obama has proposed legislation to disallow foreign "inversions" if the new corporation resulting from a U.S.-foreign merger remains majority-owned by shareholders of the original U.S. company, or if it has substantial business in the United States and is managed and controlled here.
Senate Finance Committee Chairman Ron Wyden, D-Ore., has recently endorsed the gist of the president's proposal, which he correctly notes is necessary to protect American workers and taxpayers. Rep. Sander Levin, D-Mich., the ranking member of the House Ways and Means Committee, and his brother Sen. Carl Levin, have also expressed interest in addressing the problem.
There is no reason Congress cannot act in a bipartisan way. Back in 2004, Senate Republicans, led by then Finance Committee Chairman Chuck Grassley of Iowa, were appalled by the inversion loophole and took action to curb it. There also is no reason for lawmakers to delay immediate action by insisting on sweeping, comprehensive reform that settles every corporate tax issue. Congress should simply enact the president's proposals to stop inversions right now before it's too late.
With the White House and key Senate leaders on board, it seems that only the House stands in the way of quick action. If the House majority fails to act, then we can fairly blame them for letting America's big corporations put profits over patriotism.
Robert McIntyre is the director of Citizens for Tax Justice.