Hillary Clinton unveiled a plan Wednesday to crack down on a controversial practice that allows U.S. companies to relocate abroad to avoid paying billions of dollars in federal taxes.
If Congress does not act, Clinton said she would use executive actions to punish companies that engage in “earnings stripping,” which is used by companies that move their tax addresses outside the United States. It’s one piece of her three-part plan.
The announcement comes after U.S. pharmaceutical giant Pfizer announced that it will merge with Allergan, becoming an “Irish” company and lowering its U.S. tax bill.
“The maneuvers powerful corporations are using to game the system and leave everyday taxpayers holding the bag are just offensive,” Clinton said at a town hall in Waterloo, Iowa. “All told, inversions by Pfizer and other companies, plus related loopholes, will cost American taxpayers more than $80 billion in revenue over the next 10 years. That’s money we should be investing here at home. This is not only about fairness; this is about patriotism. I want to raise the cost to corporations that try to get out of paying their fair share.”
The practice, called inversion, occurs when large U.S. corporations merge with smaller foreign companies, moving their headquarters to low-tax countries, such as Ireland, while making only minimal changes to their operations. The U.S. company, though, becomes a subsidiary and saves on taxes.
Corporate inversions appear most popular in the medical and pharmaceutical fields, where companies purchased smaller players in places such as Ireland or the Netherlands, countries known for lower corporate taxes.
Among companies to do so are drug makers Mylan Inc. in Pennsylvania and Chicago’s AbbVie. Minnesota-based medical device manufacturer Medtronic Inc. touched off a firestorm with its $42.9 billion acquisition of the Irish firm Covidien PLC.
President Barack Obama has been urging Congress to act on the practice for months. The White House estimates inversions could cost the government as much as $17 billion in lost tax revenue over the next decade.
Treasury Secretary Jack Lew took steps in late November to make it more difficult for U.S. companies to merge with smaller overseas rivals, following up on similar action he took in 2014. To fully prevent the practice of inversions, however, legislation is needed. Republicans have balked, saying it is a problem that should be addressed in a broader overhaul of corporate taxation.
When Lew issued the new rules last month, he acknowledged Treasury is considering action on so-called earnings stripping. In that sense, Clinton’s call Wednesday puts pressure on the Obama administration to act now.
Earnings stripping is when a company, through its complex accounting practices, shifts it debt to U.S. soil and its profits overseas to a locale where those profits are taxed at a lower rate. The closure of the “earnings stripping” loophole would raise approximately $60 billion over ten years, according to her campaign. She would use the money to provide incentives for job creation and support manufacturing, research and small businesses.
Clinton also said she wants Congress to stop inversions by requiring that for any merger that a U.S. company pursues in order to expatriate, the acquiring entity must control a 50 percent stake of the combined company. (Current law requires a 20 percent stake.) She backs an “exit tax” on the untaxed overseas earnings of corporations that give up their U.S. residence.
The Republican National Committee said the Clintons have personally profited from overseas tax havens, which makes Clinton’s proposal hypocritical.
“Hillary Clinton’s entire proposal is inverted because it does nothing to solve the underlying problem of our outdated and uncompetitive tax code. Hillary Clinton should also explain why she should be trusted on this issue when her husband defends the very practice she’s criticizing and she’s personally profited from overseas tax havens,” RNC spokesman Michael Short said.