At first glance, it seems to be purely an American issue. President Barack Obama wants to make it harder for U.S. companies to evade taxes. But his stance impacts Germany, too, and we should be grateful.
It is all about so-called corporate “inversions,” a tax dodge advocated by many U.S. tax consultants and investment bankers. They advise clients to buy a competitor in a country with as little corporate tax as possible and move their corporate headquarters there. Now they won’t have to pay the relatively high U.S. corporate tax rate of 35 percent.
Many companies are on board. Consider Ingersoll Rand, which combines brands such as the heating and air conditioning systems maker Trane and the small-wheel, electric vehicles manufacturer Club Car under one roof. Ingersoll Rand has a special place in American history. About 80 years ago, workers used the company’s tools to carve the likenesses of four famous U.S. presidents in the rock of Mount Rushmore. Now, Ingersoll Rand is officially an Irish company and pays the tax rate there of 12.5 percent.
The list of similar companies is longer. And it would have gotten a whole lot longer if Mr. Obama hadn’t stepped in. The pharmaceutical giant Pfizer, for example, wanted to ditch its New York roots and take over its English rival, Astra-Zeneca, to take advantage of more advantageous tax rates. The U.S. pharmacy chain retailer Walgreens also planned a tax dodge through the acquisition of Europe’s largest chain of drugstores, Alliance Boots. But Pfizer cancelled the deal, and Walgreens said recently it would refrain from a corporate inversion.
Outrage over the tax evasion is immense and comes from all U.S. political camps. As usual, Congress has proven itself incapable of taking action. The Republicans want to abolish tax inversions only if the move is linked to a reduction in corporate taxes, and Democrats are opposed to this. So Mr. Obama reached into his bag of executive tricks. He said his administration would use its power to battle the corporate inversions. This threat helped convince companies such as Walgreens to reverse course.
Mr. Obama’s decision will result in less distortion in the marketplace and in greater competition.
This helps German companies in two ways. First, their U.S. competition is losing a possible tax advantage, which makes competing in business easier. And secondly, German firms no longer have to grapple with irrational buyers from the United States. Because of the tax advantages, the Americans were able to offer more money, independent of business considerations. For this reason alone, Germany’s Bayer could never have competed with Pfizer for AstraZeneca, for example.
Mr. Obama’s decision will result in less distortion in the marketplace and in greater competition. Companies will now concentrate on product development and not on the art of “financial engineering.”
The decision will prevent lunatic mergers. A pharmaceutical behemoth with $77 billion in sales would have been created if Pfizer had bought AstraZeneca. Company officials would have been preoccupied for years with the “leveraging of synergies” and would have fired workers and cut other costs instead of developing new medicines and saving lives.
With Mr. Obama’s decision, America is ensured of higher tax revenues over the long-term. According to the congressional tax committee, the Treasury otherwise would have let about $20 billion slip through its fingers between 2015 and 2024. Considering its size, the U.S. budget wouldn’t have been hurt much. But every additional dollar helps keep America stable, which is good for the global economy.
Mr. Obama has taken the first step in dealing with the U.S. corporate tax issue, but much work remains.
Thomas Jahn is bureau chief in New York. He can be reached at: email@example.com