Building the New Berlin Tax Wall: Treasury’s Anti-Inversion Regulations

The Treasury no doubt felt that it could chalk one up in the win column early in April 2016 when, following its release of a veritable carpet bombing of new regulations designed to blow up inversion transactions, the primary target, Pfizer Inc., chose to wave the white flag and cancel—at least for the time being—its efforts to merge with Allergan PLC.

One can easily imagine, deep in the bowels of the IRS headquarters at 1111 Constitution Avenue in Washington, D.C., giddiness reigning supreme, with elated tax policy wonks exchanging awkward “high fives.” Let’s not go there.

Unfortunately, a more sober assessment is that the Treasury’s “victory” was Pyrrhic at best and catastrophic at worst, as the Treasury “doubled down” on a U.S. corporate income tax policy that is in a shambles. Pfizer was trying to leave the U.S. for precisely the same reason that so many corporations have already left, and many others would be delighted to follow.

The U.S. has one of the highest corporate tax rates in the world, and, moreover, asserts (almost uniquely among major countries) the right to tax the worldwide income of every U.S. corporation, including every multinational corporate group with a U.S. parent corporation, regardless of how minimal or tangential the U.S. relationship may otherwise be to that income.

Put it this way: Having a multinational corporate group with substantial worldwide operations owned beneath a U.S. corporation is not merely a “questionable” strategy, or even a “poor” idea; it is provably, mathematically the wrong structure if your goal is to operate the corporation in the best interests of its owners, employees, and other stakeholders.

Distilled to its basics, the current Treasury policy is both bullying and wrong-headed. Treasury has signaled that it will do all it can to stop U.S. corporations from leaving—even when the law is not necessarily on the Treasury’s side.