Call it avarice, call it craft: companies will do anything to save a buck, or millions. And they are doing it through a strategy known as a tax inversion, wherein a U.S. company buys a foreign company and is therefore afforded that country's tax rate, usually lower than the U.S.'s relatively high 35-percent corporate rate. Some, however, find fault with this practice. To wit, the President of the United States.
This dubious practice is back in the spotlight after U.S. drug maker Pfizer's failed attempt to acquire Allergan, which is registered in Ireland. Had the acquisition gone through, it would allow Pfizer to redomicile to Ireland, where it could slash its tax bill.
The announcement came a day after the U.S. Treasury unveiled new rules to curb inversions. The department's latest rules would make a practice known as "earnings stripping," which enables companies to lower their taxable U.S. profits, more difficult. Using this strategy, the U.S. subsidiary of the inverted company can take on a loan from its foreign parent company. The interest payments on that debt can then be deducted from the U.S. company's taxable income and is taxable at a low rate in the country in which the inverted firm is based.
President Obama has decried the practice, calling it a "huge problem," and urging Congress to take further action.
"While the Treasury Department's actions will make it more difficult...to exploit this particular corporate inversions loophole, only Congress can close it for good," Obama said.
While Republicans and Democrats don't agree on much, this, they do.
Presidential candidates Donald Trump, Hillary Clinton and Bernie Sanders have all opposed it.
"We have so many companies leaving, it is disgraceful," Trump said this week.
In late 2014, tax inversions became part of the hospitality news cycle. This was well before the Marriott/Anbang race for Starwood. Back then, in August, rumors swirled that Starwood would be doing the buying, possibly acquiring IHG, based in the UK, for the tax benefit. It never came to fruition, but again brought the, what some called "un-American", process to light.
Meanwhile, the sharing economy has also come under scrutiny for its shirking of tax rules. Consider Airbnb. It manages its finances via units in Ireland and tax havens like Jersey in the Channel Islands. Becasue so, only a small part of its share of the revenue is ever taxed.
As Bloomberg writes, "Airbnb collects 6 percent to 12 percent of the rental price, depending on cost, then deducts 3 percent from the host’s take before passing the money along. This lets Airbnb shield most of its profit from the country where the service was delivered."
Two of Airbnb's subsidiaries are in Ireland, where local tax laws allow U.S. multinationals to avoid both the 35 percent top rate in the U.S. and Ireland’s 12.5 percent income tax.