16 July 2014 – There’s a controversy over the number of U.S. companies that are merging with foreign entities and declaring that they are no longer U.S. companies for purposes of U.S. taxation. This is an old story I have been following for four decades. I first interviewed Dow Chemical CEO Carl Gerstacker in 1974. He wanted to find an island offshore where he could incorporate and be nation-less. Then in 1988 I wrote a cover story for Business Week called The Stateless Corporation. The conclusion was that only American CEOs like to play with the notion they can be stateless. CEOs of companies in Germany, Switzerland, Japan, etc. know that they need to appear to be multinationals but in the final analysis they benefit from having a national government that nurtures and protects them.
President Obama is trying to close the loophole that allows the go-foreign maneuver, which is called an “inversion.” About 50 companies have reincorporated overseas over the past 10 years, according to today’s Wall Street Journal.
If I were Obama, I would try to close any loopholes but perhaps more forcefully I would create a special inter-agency office domiciled in, say, the Treasury Department. It would be like the Committee on Foreign Investment in the United States (CFIUS) I would announce that any company that moves its headquarters abroad to beat U.S. taxes would be on a list and would be subject to these types of scrutiny.
–All contracts that these companies have with the U.S. government would be subject to review. Incredibly, according to Bloomberg Business Week, many of them have been able to maintain sensitive contracts with U.S. government agencies even though they are no longer technically U.S. companies.
–The IRS would be instructed to pore over every tax filing they make. I’ll bet the IRS could find many issues.
–None of these companies should have access to the fruits of U.S. government-funded research at major universities or research centers. If they are not paying their fair share of American taxes, how can they be allowed to license technology that taxpayers supported?
–The U.S. Trade Representative and the Department of Commerce, which would sit on the inter-agency office, would write letters to the CEOs of each of these companies informing them that they are on their own in any dispute with a foreign government. If India wants to seize their IP or if the Chinese arrest their executives in Shenzhen, they are on their own. Uncle Sam is not coming to the rescue.
You get the point. Any U.S. company, to a lesser or greater extent, depends on the good will of its home governments, both state and federal. If the CEOs of these companies decide they want to incorporate abroad, let them be fully aware that the good will at home is over. I dare say a fair number of them would re-consider their plans to abandon the American ship.
