Republicans and Democrats don’t agree on much these days, but there is one issue on which they have found common ground: taxes.
Specifically, the corporate tax rate. The debate has reached critical mass as more and more American companies look for foreign companies to “merge” with as a means of avoiding some U.S. tax bills.
In recent weeks, more of these types of mergers and acquisitions, sometimes referred to as “inversions,” have popped up, including Pzifer (PFE) and Allergan (AGN)’s record-breaking $160 billion merger announced last week. The new company would be officially located in Ireland for tax purposes.
Why? Because Ireland’s combined corporate tax rate is 12.5%, compared with the United States’ rate of 39%, which is the highest in the world by a considerable margin, according to the Organisation for Economic Cooperation and Development (OECD).
The White House has come out strongly against the practice of inversions. Democrats in Congress generally back the White House, and Republicans support the idea of lowering the corporate tax rate.
EY Chairman and CEO Mark Weinberger, who served under both President Bill Clinton and President George W. Bush, says calling these deals “M&A” or “inversions” is a red herring. “The real issue is foreign acquisitions of U.S. companies, which has accelerated,” he says. “Our tax system right now is out of step with the rest of the world … We’re an outlier.”
And it’s having an impact beyond individual companies or industries.
“If you ask the business community what is one of the single biggest detriments to global growth, it would be the handicap we have from the U.S. tax system.”
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While it is a step in the right direction to have broad agreement among both parties on the need to address corporate tax rates, Weinberger concedes that the real struggle will come in the legislative process.
He would recommend three things to reform the corporate tax code: lower rates to around 25%, which would put the U.S. in line with the average among OECD nations; form a territorial-like system, in which companies are taxed in the country where income is earned rather than a worldwide tax system; and get rid of the loopholes.
Sounds easy enough. Let’s see if Washington can follow through.
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