Senator Carl Levin is the Chair of the Senate Armed Services Committee. His office issued the following last week:
Levin statement at Senate Finance Committee hearing on “The U.S. Tax Code: Love It, Leave It or Reform It!”
Tuesday, July 22, 2014
Chairman Wyden, Ranking Member Hatch, and colleagues, thank you for allowing me to submit this statement for the record of today’s hearing on international taxation.
As you know, the Permanent Subcommittee on Investigations, which I chair, has conducted a series of investigations, spanning more than a decade, into offshore tax avoidance and tax evasion. In recent years, the IRS has cracked down on some individual offshore tax cheats who use tax shelters and secret foreign bank accounts to evade paying their U.S. taxes in violation of U.S. law. And, this month, the Foreign Account Tax Compliance Act took effect, which will further strengthen U.S. tax enforcement.
But, today, many of the biggest tax giveaways aren’t to taxpayers who are breaking the law. Instead, many taxpayers – especially large, often highly profitable multinational corporations, are using a number of tax loopholes that may or may not be legal, but are unjustified because of lack of economic purpose and whose purpose is pure and simple tax avoidance. The Cut Unjustified Tax (CUT) Loopholes Act (S.268), which I and Senator Whitehouse introduced last year, would shut down a number of the most longstanding and egregious loopholes, and I urge you to consider including its provisions in any tax reform legislation you advance.
While the CUT Loopholes Act targets a number of loopholes, I’d like to discuss one particular tax loophole that has recently gained traction among large multinational corporations seeking to avoid U.S. taxes. Tax inversions, where a U.S. company moves its tax address to a low-tax jurisdiction through a merger with a smaller foreign competitor, have become the latest tool for CEOs seeking to dodge Uncle Sam. These transactions have allowed U.S. corporations to reduce their tax rates by up to 12 percentage points by claiming, for tax purposes, that they have moved away from the United States.
Yet, a company’s executives, officers, and management all remain in the United States, benefiting from our country’s marketplace, laws, resources, infrastructure, and workforce, while declining to provide their share of financial support for the very qualities that help them succeed.
Unlike many tax loopholes our Subcommittee has investigated, the tax inversion loophole is being exploited in plain sight. Daily, there are front page media reports describing one new inversion transaction after another. Sadly, iconic American companies like Walgreens, Medtronic, and Pfizer have already taken steps to give up their American corporate citizenship in order to lower their tax bills. And the problem is growing. Just last week, two more American companies, both closely tied to Abbott Laboratories -- an American company since 1888 -- sought to move their tax addresses overseas in two separate transactions.
These companies aren’t moving because there are better business opportunities in foreign countries. Their move is a pure and simple tax dodge. Executives don’t move, and the company headquarters isn’t moved. What’s more, inverted corporations continue to claim U.S. research and development tax credits, receive intellectual property protections in U.S. courts, and benefit from the safety and security provided by our nation’s military.
Tax inversions aren’t a driver of job creation in the United States. In fact, one need only look to California, where an American drug maker has been forced to lay off 1,500 employees in a bid to fight off a hostile takeover from an inverted corporation that has been swallowing up U.S. companies due to the advantages of the inverted corporation’s tax structure.
In other cases, inverted companies may claim to be creating jobs because they gain access to more capital. Although many small businesses have struggled to access capital as our economy recovers, for most profitable multinationals, capital is available from other sources that don’t use a tax inversion. Interest rates are at all-time lows, and banks are more ready to lend than any time in recent years. The equity markets are booming, with a growing market for public offerings. And multinationals have $2 trillion offshore that they could tap into if they wanted to invest and create new jobs.
Both Democrats and Republicans recognize that tax inversions are a major problem that must be addressed. I urge you to take action to put a stop to tax inversions, and I urge you to do so now. While most recognize that tax reform should take place, we can’t afford to wait for a comprehensive tax reform effort to fix the problem of tax inversions. If we wait, billions of dollars in badly needed revenue will disappear, growing the deficit, hurting our security, leaving our roads in disrepair, shortchanging education, and other priorities. Worse yet, while those billions of dollars in tax revenue disappear, the corporate freeloaders multiply – taking advantage of America’s greatness while refusing to pay their fair share.
Two months ago, I, along with 22 of my colleagues, introduced the Stop Corporate Inversions Act (S.2360). This bill would establish a two year moratorium on tax inversions. That two year moratorium would stop what nearly all agree is an abuse of our tax system, and provide Senators with two years to debate a permanent solution as part of a comprehensive tax reform effort. All ideas to bring the archaic U.S. tax system into the 21st Century can be debated during that two year period. The issue is whether in the meantime we should let the inversions flow. I believe we shouldn’t.
If we don’t act, we are forcing the corporations that don’t use the inversion tax gimmick to compete against the corporations that do. We will create economic pressures on our patriotic corporations to change their tax addresses. As one after another U.S. corporation moves overseas through a tax inversion, more U.S. competitors will face financial pressure to do the same, in order to stay on a level playing field. It isn’t fair to the U.S. taxpayers who foot the bill, and it isn’t fair to the U.S. corporations who want to do the right thing.
In 2002, the Finance Committee showed that it could work on a bipartisan basis to stop a similar tax inversion loophole. At that time, the then-Chairman and Ranking Member, Senators Baucus and Grassley, told companies that they would put a stop to corporate inversions, and drew a line in the sand, warning that tax inversions taking place after a specific date would be retroactively subjected to tax as a domestic U.S. corporation.
It took time, but Senators Baucus and Grassley achieved their goal. And, more importantly, they stopped a wave of corporate inversions that threatened to decimate our country’s tax base.
Now a loophole has emerged which jeopardizes the effectiveness of our anti-inversion law. We must act speedily to close that loophole. Chairman Wyden has made clear that he intends to make any closure of the loophole in the tax inversion law retroactive to May 8, 2014. I support making any legislation retroactive to that date, and 22 other Senators supporting my bill, S.2360, do also. U.S. corporations should understand that if they pursue a tax inversion after May 8, 2014, they do so at their own risk.
We cannot afford to wait for tax reform to address the issue of tax inversions. Urgent action is needed now, and I urge you to take action as soon as possible to end this abusive tax loophole.
I look forward to working with you to both stop tax inversions and to improve our international tax system.