Chiquita and Burger King usually aren't mentioned in the same sentence (unless, perhaps, it's in reference to the nutritional differences between the products they sell). But both firms have recently announced plans to merge with companies not headquartered in the United States, reigniting debate in Washington about corporate tax policy and how to deal with these so-called "corporate inversions."
The practice was relatively common in the 1990s and early 2000s, as firms reorganized themselves so that their "parent" elements were based in countries like Bermuda and the Cayman Islands with low or no corporate tax rates. Even if the vast majority of productive business activity still took place in the U.S., firms could pay the lower tax on most of their revenues rather than the higher U.S. rate by establishing headquarters abroad.
Congress made inverting much harder with the passage of the JOBS Act in 2004, which required firms to pay American tax rates if, after merging with a foreign company, their original U.S. stockholders controlled 80 percent or more of the new firm. While that eliminated firms' incentives to shift headquarters to tax havens like Bermuda, they could still invert if they conducted "substantial" business operations abroad (as of 2012, that means 25 percent of business activity) or the original U.S. stockholders relinquished control so that their ownership fell below the 80 percent threshold.
The growing disparity between U.S. corporate tax rates and those of other developed countries – which, on average, have actually been falling – has encouraged more than just Chiquita and Burger King to consider their options to avoid paying more than they need to. Just this year, corporate giants like Pfizer and Walgreen's considered transactions that would allow them to invert, while Abbvie and Medtronic went a step further and closed on deals. It's estimated that corporate inversions could cost the U.S. nearly $20 billion in tax revenue over the next ten years.
That prompted the Treasury Department to introduce new regulations last week, calling the rules “an important initial step in addressing inversions.” The regulations would make it harder for companies to transfer cash between foreign- and U.S.-based subsidiaries for the purpose of avoiding taxes. Additionally, they would redefine how a foreign subsidiary’s "passive" assets (i.e., those not part of a company's daily business functions) count towards the 80/20 percent domestic/foreign ownership requirement. While the Treasury says these measures "will significantly diminish the ability of inverted companies to escape U.S. taxation," others are doubting the long-term effectiveness such regulations will have in stopping inversions.
And even if the regulations are effective in retaining revenue, they don't address the reason that U.S. corporations are moving business abroad in the first place. As research from the Tax Foundation shows, combining the federal corporate income tax rate with the average state's rate totals 39.1 percent, over 14 percentage points above the average rate of all other OECD countries. Even when those countries' rates are weighted according to GDP, the U.S. is still almost 10 percentage points above the rest. And on the global stage, only the United Arab Emirates (55 percent) and Chad (40 percent) have higher corporate income tax rates than the United States.
The numbers show that the United States is home to one of the least competitive tax environments in the entire developed world. It's no wonder that Burger King, Chiquita, and others are deciding they'd rather do business elsewhere.