Inversion Acceleration, Part 2

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the second part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Part 1 is available here.

Why Inversions?

The crucial motive in transferring corporations’ “nationality” and official headquarters to low-tax nations is that inversions shield the “foreign” profits of U.S. corporations from federal taxation and ease access to these assets. This protects total U.S. corporate profits held outside the United States—a stunning $2.1 trillion—from any U.S. corporate taxes until they are “repatriated” back to the United States.

Major corporations benefit hugely from the infinite deferral of taxes purportedly generated by their foreign subsidiaries. “If you are a multinational corporation, the federal government turns your tax bill into an interest-free loan,” wrote David Cay Johnston, Pulitzer-Prize winning writer and author of two books on corporate tax avoidance. Thanks to this deferral, he explained, “Apple and General Electric owe at least $36 billion in taxes on profits being held tax-free offshore, Microsoft nearly $27 billion, and Pfizer $24 billion.”

Nonetheless, top CEOs and their political allies constantly reiterate the claim that the U.S. tax system “traps” U.S. corporate profits overseas and thereby block domestic investment of these funds. But these “offshore” corporate funds are anything but trapped outside the United States. “The [typical multinational] firm … chooses to keep the earnings offshore simply because it does not want to pay the U.S. income taxes it owes,” explains Thomas Hungerford of the Economic Policy Institute. “This is a very strange definition of ‘trapped’.”

In fact, these offshore profits can be, and are, routed back into the United States through the use of tax havens. (Tax havens, where corporations and super-rich individuals place an estimated $7.6 trillion, were thrust into the international spotlight with the recent release of the Panama Papers. See William K. Black, “Business Press Spins Elite Tax Fraud as ‘Good News’,” p. 5.) “‘Overseas’ profits are neither overseas nor trapped,” explained Kitty Rogers and John Craig. “It is true that for accounting purposes, multinational corporations keep these dollars off of their U.S. books. But in the real world, the money is often deposited in U.S. banks, circulating in the U.S.”

However, the “overseas” profits come with some significant constraints on their use, pointed out David Cay Johnston. “The funds can only be accessed for short-term loans back to the U.S., and are not useful for major investments like new factories or long term R&D, or for investment outside the U.S.,” said Johnston. But inversions eliminate these restrictions on how such funds can be used. “By inverting and then using a variety of tax avoidance schemes, the firms can have access to these earnings virtually free of U.S. taxes,” notes Hungerford. “This is undoubtedly the primary motivation to invert.”

The inversion route is not the only means for U.S. corporations to radically slash their U.S. taxes and gain access to offshore earnings. Any particular company’s tax-avoidance strategy is dependent on the specific conditions it faces. As tax expert Johnston notes, “Every company has its own unique issues so it will decide what works for it.”

Some giant multinational corporations, like Apple, Microsoft, and Google, have chosen to bypass inverting. Instead, they utilize immensely complex shifts of their revenue to minimize their taxes and maintain access to their offshore earnings. These maneuvers have gained exotic names like “Double Dutch Irish Sandwich,” reflecting the multiple transfers of capital that they employ. The corporations involved are able to avoid the public backlash brought on by jettisoning their U.S. nationality. On the other hand, such ploys require careful planning and execution, compared to the simple, direct step of inverting.

Corporate inversions also head off the possibility of higher rates being imposed in the United States, an idea with very broad public support as shown by polling. But in addition to the vast political resources that corporations bring to any fight in Congress on corporate taxes, inversions remind U.S. public officials that their policies can be undermined by CEOs’ unilateral decisions to relocate anywhere on the globe. Companies use this trump card to weaken the push for increases in corporate taxes and instead build momentum for further federal concessions.

Johnson Controls: The Ugly Truth

The most recent inversion deal, orchestrated by Johnson Controls—called the “latest and quite possibly the most brazen tax-dodger” in a New York Times editorial—explodes the myths underlying the standard rationale for inversions. Johnson Controls, which has been based in the Milwaukee area for 131 years, is the 66th largest firm in the United States.

Much media coverage has focused on the $149 million in annual tax savings that Johnson Controls will purportedly reap by jettisoning its U.S. identity and moving its official “domicile” to Ireland, where the tax rate is 12.5%. This is a tidy sum, but not because Johnson Controls was victimized by paying the statutory rate of 35%.

On the contrary, Johnson Controls has already been benefitting handsomely from a U.S. tax system that is remarkably generous to major corporations. As Matthew Gardner of the Institute on Tax and Economic Policy pointed out, “Between 2010 and 2014, Johnson Controls reported just over $6 billion in U.S. pretax income, and it paid a federal income tax rate averaging just 12.2 percent over this period.” Significantly, “This is actually lower than the 12.5 percent tax rate Ireland applies to most corporate profits.”

Far more central to Johnson Controls’ inversion is the virtually tax-free status that it will gain over its vast pile of profits accumulated offshore, Gardner argues. Digging beneath the surface, Gardner found, “At the end of 2014, Johnson Controls disclosed holding $8.1 billion of its profits as permanently reinvested foreign income, profits it has declared it intends to keep offshore indefinitely.”

The tax stakes for Johnson Controls are therefore much higher than the annual savings so often cited. “Reincorporating abroad would allow Johnson Controls to avoid ever paying a dime in U.S. income tax on profits currently stashed in tax havens,” Gardner stated.

Johnson Controls is using the common inversion strategy of arranging for a smaller corporation based in a low-tax nation to purchase a much larger firm operating in the United States. In this case, the Ireland-based Tyco International (itself an inverted firm which had long been based in the United States) is buying Johnson Controls. Tax expert Edward Kleinbard describes this as a “minnow swallowing a whale” scenario that characterizes many inversions.

The Johnson Controls-Tyco deal qualifies as a so-called “super inversion,” as Fortune put it, because it evades a number of new ownership regulations set by the U.S. Treasury Department to discourage inversions. “Tyco shareholders will own 44% of the deal after it is done, avoiding any penalties the Treasury Department has tried to impose on these deals,” Fortune reported. “The Treasury Department had set an ownership requirement in 2014 of 40% for foreign firms involved in inversion deals with U.S. corporations, in an effort to discourage inversions.”

The deal with Tyco will change virtually nothing for Johnson Controls International except for its slightly modified name—“Johnson Controls plc.”—and its ability to manipulate the U.S. tax system. The company’s new domicile will officially be Cork, Ireland, but it will retain its real operating headquarters in its present site near Milwaukee. It will continue to be listed on the S&P 500 stock index. Johnson Controls will still be protected by the vast legal architecture safeguarding U.S. firms, like those on securities, intellectual property, and patents.

The corporation’s CEO Alex Molinaroli insists that the firm is simply acting to best serve its shareholders: “It would be irresponsible for us as a company to not take advantage of the opportunities that come along.” The inversion will also provide some advantages to the CEO himself, with Fortune observing, “Molinaroli will receive at least $20.5 million and as much as $79.6 million for doing the deal over the next 18 months.”

Johnson Controls also stands to retain other advantages. It will remain eligible for U.S. government and state contracts under current law, as have Accenture and other firms which have staged inversions. Between 2010 and 2014, Johnson and its subsidiaries received more than $1 billion in federal contracts—more than $210 million a year, according to ITEP’s Gardner. Furthermore, Johnson Controls’ ability to gain federal and state tax incentives for job creation will apparently continue.

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