Wednesday, July 23, 2014

Tim Worstall on the Alleged Benefits of Corporate Inversions

There is a wonderful debate on why inversions matter. Tim Worstall knows the technical side of tax law:
A tax inversion changes the way that profits made outside the US are taxed by the US, this is entirely true. But such a tax inversion, in and of itself, doesn’t change the way that profits made inside the US are taxed at all.
He’s talking about the Walgreen proposed inversion:
So, what happens when Walgreen’s does a tax inversion (by merging with or taking over Boots etc)? The taxation of those profits that Walgreen’s makes by doing business in the US doesn’t change … What does change is that Walgreen’s profits made outside the US have moved from being US domiciled to being non-US domiciled. And as those outside the US profits are neither US resident nor US domiciled then they’re not taxable in the US.
I guess Tim has not read the Walgreen 10-K as it is a domestic retailer. There are just not that much in the way of foreign based profits. OK, there are for AbbVie and for Medtronic. In fact, AbbVie has allocated over 87% of its profits abroad. Abbvie’s concern is this repatriation tax, which the Republicans want to get rid of anyway. Medtronic does not pay a repatriation tax as it permanently defers its foreign sourced income – which is just say of 60% of its worldwide profits. Tim tries to dispute a claim made by David Cay Johnston (and others) that these inversions will lead to more sourcing of income abroad:
There are, it is true, other things that the newly merged company could do to move such US profits out of the US tax net. They could, for example, sell the patents on drugs that they market in the US to some nice offshore subsidiary in, say, Bermuda. That Bermudan subsidiary then charges the US unit for the use of those patents and this moves profits outside the US tax net into Bermuda’s no tax net. That’s certainly possible although we’ve no news at all that leads us to think that they are planning this. So we might be able to say that a tax inversion opens the possibility to future movement of US profits offshore. However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards.
Tim is referring to section 367(d) which says migration of IP requires that the original owner of the IP be compensated at fair market value. Tim assumes that the IRS is incredibly effective at enforcing this sensible requirement. I guess he has no clue that most of these transfers occur at something like 10 cents on the dollar of what the market suggests is the fair market value. Fortunately for us, Kenneth Thomas understands how this works in practice. Of course, I still have one wee problem with this being discussed in terms of the AbbVie inversion. With over 87% of their profits being sourced abroad even before the inversion, hasn’t the horse already left the barn?


Sandwichman said...

Tim is a disciple of Humpty-Dumpty. Words mean exactly what his argument needs them to mean. No more, no less.

Craig Walenta said...

Inversions seem like an economic betrayal and from a neomercantalist viewpoint or a myopically nationalist viewpoint that may have some merit. However, the bottom line is that the law in question which doesn't permit US C Corporations from deducting any and all dividends from its income has the effect of taxing the repatriation of profit already taxed in a foreign jurisdiction. This particular law is the single worst public policy the US tax code currently features. The result is quite predictably. The dividends aren't paid, the funds don't get repatriated and the US government doesn't collect the tax on it anyway. Taxes on dividends CAN ALWAYS BE AVOIDED BY NOT PAYING DIVIDENDS. This law is having a TRILLIONS impact, TRILLIONS....