Obama Wins One Against Corporate Tax Dodging

Almost 70 years ago, Circuit Judge Learned Hand established an important tax principle. To paraphrase the judge, nobody has to pay more in taxes than the law requires, but would-be tax avoiders cannot make stuff up.

Unfortunately, over the years, making stuff up has become the stock in trade of lawyers for U.S.-based multinational corporations, and they too often get away with it thanks to our lax corporate tax laws and their weak enforcement.

But this week after swift action by the Obama administration, Pfizer Inc. abruptly reversed course on its planned corporate inversion, or made up move to Ireland, which would have allowed the pharmaceutical manufacturer to dodge taxes on $194 billion in offshore profits.

The Treasury Department’s new regulations strike the core of one of the main reasons corporations (and likely Pfizer) invert: avoiding taxes on profits stockpiled offshore.

Pfizer’s about-face, and the Treasury action that led to it, is a major victory for average American taxpayers, who would have been left holding the bag for the big hole in the federal budget that the inversion craze threatened to produce. It’s also a triumph for common sense.

Inversions are a particularly egregious exploitation of our loophole-ridden corporate tax code. Pfizer, for example, had no real plans to move to Ireland. In fact, in a press release announcing the inversion and merger with Allergan, Pfizer wrote that “the combined company is expected to maintain Allergan’s Irish legal domicile (but) Pfizer plc will have its global operational headquarters in New York.” In other words, New York-based Pfizer planned on continuing business as usual in the United States and retaining all the benefits of operating on U.S. soil without paying much in U.S. taxes.

Like most multinationals, Pfizer and its corporate lobbyists continually complain that U.S. taxes are too high, claims that are parroted by its elected allies on Capitol Hill. The truth is that big, profitable U.S. corporations actually pay an average effective tax rate of only 19 percent, which is on par with or lower than corporate tax rates in most other developed countries. The current inversion craze has helped exposed how multinational corporations relentlessly seek to achieve a U.S. tax rate of close to zero by shifting their profits on paper to tax haven countries like Ireland, the Cayman Islands or Bermuda.

Our elected officials can and should work to prevent these elaborate tax dodging schemes. A decade ago after a wave of corporate inversions, an appalled Congress, on a bipartisan basis, quickly passed a law that attempted to ban them. That law turned out to be inefficient, but our current Congress has refused to fix it, even as inversions have gone viral. This is why the Treasury Department’s latest action was necessary.

Clearly, President Barack Obama is committed to doing what he can to end tax-motivated expatriations. But this doesn’t guarantee a happy ending to this story. Already Allergan, Pfizer’s erstwhile partner in crime, is seeking a new inversion partner, and lawyers for other U.S. corporations are almost certainly searching for ways around the latest Treasury regulations.

There is no excuse for Congress not to act to protect U.S. taxpayers and ensure that multinational companies like Pfizer pay their fair share in taxes. Lawmakers have a number of sensible legislative options to do so, including the Stop Corporate Inversions Act, the Pay What You Owe Before You Go Act and the Corporate Fair Share Tax Act.

Unfortunately, the current majority in Congress apparently doesn’t need an excuse to do nothing. It’s up to us voters to rectify that.