Skip to main content

President Obama made a statement in response to the Treasury Department announcement on corporate tax inversions that would stop companies from avoid U.S. taxes by moving their tax base overseas.

Alex Wong/Getty Images

Donald Trump's positions on most issues range from reckless to idiotic to unconstitutional.

But the Republican presidential frontrunner is right about one thing – the U.S. corporate tax regime is a mess and companies need incentives to bring their profits back to the United States.

U.S. President Barack Obama, on the other hand, has it distinctly wrong. This week, he moved to outlaw so-called corporate inversions, in which a U.S. company merges with a foreign one for the sole purpose of assuming the target company's lower tax rate. He called inversions an "insidious" tax loophole.

Story continues below advertisement

These companies "essentially renounce their citizenship," Mr. Obama said.

"They declare that they're based somewhere else, thereby getting all the rewards of being an American company without fulfilling the responsibilities to pay their taxes the way everyone is supposed to pay them," the U.S. President added.

Clever rhetoric, to be sure. But by targeting inversions, Mr. Obama is treating the symptom, rather than the disease. The real problem is not inversions, it's the U.S. tax code. The U.S. federal corporate tax rate, at 35 per cent, is badly out of step with rates in most of the rest of the developed world (Canada's rate is 15 per cent and the OECD average is 25 per cent). And unlike Canadian companies, U.S. corporations are essentially taxed twice – once when they earn foreign profits and a second time when they bring that income home.

In Canada, companies can repatriate active business income – even from so-called tax haven jurisdictions – without additional taxation, as long as they show that foreign taxes have been paid. It's partly why Burger King put its global headquarters in Canada after merging with Tim Hortons in 2014.

Consider the case of U.S. drug maker Pfizer Inc., which this week walked away from its $160-billion (U.S.) merger with Allergan PLC, the Irish-based maker of Botox. The deal would have enabled Pfizer to cut its tax bill by roughly $1-billion a year.

The problem with Mr. Obama's crackdown on inversions is that it won't get at the root problem. Like many of U.S. multinationals, Pfizer has been parking a growing trove of foreign profits offshore. The drug maker's unrepatriated income reached $193-billion last year, up from $175-billion in 2014. And the sum will likely rise again in 2016.

The mountain of stockpiled foreign profits held by U.S. Fortune 500 companies reached a staggering $2.4-trillion last year, according to an analysis by Citizens for Tax Justice, based on U.S. Securities and Exchange Commission filings. Every year, multinationals add another $200-billion or so to their hoard. Apple Inc. has the largest foreign hoard of any U.S. company ($200-billion). The company has estimated that it would pay $80-billion, or 40 per cent, in combined federal and state taxes if it brought that money back to the U.S. So it doesn't.

Story continues below advertisement

But this isn't like Blackbeard burying stolen gold bullion on a beach in the Bahamas. It's income that's already been taxed by other countries – from Italy to Japan.

U.S. multinationals have strong incentive to keep those profits offshore indefinitely because if they bring them home, they'll be taxed again on the difference between the applicable foreign tax rate and the typically higher U.S. rate. They are "fulfilling their responsibilities" – as Mr. Obama put it – but to other countries.

The U.S. tax regime gives companies a strong incentive to create jobs and invest in other countries. The system is "awful for America," Apple chief executive officer Tim Cook told CBS's 60 Minutes last year.

Republicans and Democrats agree that something has to be done with the tax system, which has become globally uncompetitive. They just can't agree what to do, particularly when all sides are demonizing corporate behaviour. And while they dither, other developed countries have been lowering their tax rates, most recently in Britain, where the rate will be cut to 17 per cent in 2020 from 20 per cent now.

Democratic presidential front-runner Hillary Clinton says she would slap an exit tax on companies that want to renounce their corporate citizenship – just as wealthy individual Americans are required to pay.

Believe it or not, Mr. Trump offers a more reasonable solution – a one-time 10-per-cent tax on any money U.S. companies bring home.

Story continues below advertisement

Oddly enough, Mr. Trump's proposal just might be the kind of quid pro quo that persuades Republicans and Democrats in Congress to slash the corporate tax rate and end double-taxation of global income.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter