Tuesday, July 29, 2014
I've been wondering about what is that has given impetus to the recent rush to expatriate firms from the US. I've heard lots of explanations, but nothing that is a really convincing story.
One story I've heard is that inversions are happening because the US corporate tax rate is high relative to other countries and that in order to compete against foreign companies, US companies either have to move or we in the US have to lower the corporate tax rate to meet other countries' -- presumably the lowest out there -- tax rates. I find that unconvincing. The taxes we're talking about here are corporate profits taxes. Taxes on corporate profits don't increase costs. That's to say, when we are talking about competition in the product market, corporate profits taxes are not relevant. Where corporate profits taxes are relevant in the capital market. But nowhere in any rationalization of inversion have I heard that firms in the US are unable to raise capital because non-US firms have cheaper access to capital. In fact, the NYSE hit an all-time high recently. So, if the result of relatively high corporate profits taxes is an anemic capital market, I'm not sure I see the evidence of that.
Another story to explain why this summer is seeing a rash of inversions is that the door on inversions is closing and Congress is going to close the inversion loophole. If you don't go now, you'll never go. Seriously? One of the reasons why I switched to sports radio is because our political system is stuck that nothing happens. I seriously doubt Congress could organize itself to tie its own shoes, let alone close the door on inversions.
A third explanation that I've heard is that the inversion is the only way for US firms to access all that tax free capital they have stored overseas. To that I'll simply say this: there is no fiduciary duty to avoid paying taxes. There simply isn't. Now, boards may not like paying taxes...who does? But, I've heard more directors than I care to admit saying things like they have fiduciary duties to their shareholders to do inversions because their fiduciary duties somehow preclude them from repatriating profits sitting in Ireland. Hmm. These board members need better lawyers. A director is not required by his fiduciary duties to pursue the most tax efficient strategies out there.
Anyway, I am quite positive there is a narrative out there that explains the summer of the inversion, I just haven't stumbled across one yet.