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4 Ways For CEOs To Win The Debate Over Tax-Inversion Deals

By now, American companies seeking to lower corporate taxes by merging with foreign-based outfits—in so-called “tax inversion” deals—have become political punching bags.

That can be an unpleasant thing for CEOs. But it doesn’t mean they will or should stop seeking out arrangements that provide their companies much lower taxes by changing the corporate domicile from the United States—where the standard tax rate is 35%, to places such as Ireland, where it is 12.5%. Companies also don’t like the fact that the U.S. taxes all profits of its companies, even those earned abroad, unlike most other national governments.

Johnson Controls and its CEO, Alex Molinaroli, are bearing the misfortune of having chosen the height of the 2016 presidential campaign to announce a deal to merge with Tyco International PLC and move the combined company’s headquarters to Ireland. The two companies swear the deal is being made for strategic reasons, but they’ll save about $150 million a year in U.S. taxes.

“The failure to modernize the federal tax code has pushed American businesses to move overseas.”

Thus Democratic candidate Hillary Clinton said the deal should be called a “perversion” and slammed Johnson Controls for being “willing to walk away … instead of doing what they should to support our country,” while her rival, Bernie Sanders, called the deal a “disaster.”

Conservatives, meanwhile, cited the move as another reason that the United States should cut corporate tax rates. “The failure to modernize the federal tax code has pushed American businesses to move overseas,” wrote Brett Healy of the free-market think tank MacIver Institute, based in Wisconsin, where Johnson Controls now is headquartered.

Other CEOs may or may not want to be vilified for executing similar deals. But as they consider their strategy for handling this issue—whether or not their company might do a tax-inversion-fueled deal—here are four options, which aren’t necessarily mutually exclusive:

1. Citing their first obligation: shareholder value. The primary job of any CEO, of course, is to put his or her shareholders’ interests ahead of everything else. And even in doing deals that are hugely beneficial tax-wise, few CEOs are doing them only for that reason. They’re all chasing—and citing–broader, long-term strategic aims, as well they should be.

Besides the outright cost savings, Molinaroli noted, for instance, that most of his company’s sales come from outside the United States, and most of its employees are outside the country too. And for what it’s worth, Johnson Controls isn’t exactly going to be razing its considerable presence in the United States; in fact, most of the actual administration of the new company will be done from the current Johnson Controls headquarters in Milwaukee.

2. Structuring deals to fit the new rules. Fed up with inversion-based deals that already had proliferated, the Obama administration in 2015 moved unilaterally to raise the threshold on such transactions—even though Congress in 2004 had written clear rules to address the types of corporate inversions it believed should be blocked.

The Treasury Department’s primary action was to decide that the government wouldn’t permit a company to move its domicile outside the United States if the American-based company would own more than 60% of the new, combined entity. Johnson Controls was able to skirt that rule because it will own only 56% of its new company. Most CEOs, given the same set of circumstances, likewise will simply try to structure tax-inversion deals so they don’t go over that share threshold.

3. Agitating for lower U.S. tax rates. Rather than averting their eyes from politicians or in any way implying that they think their companies are getting away with something, CEOs behind inversion-based deals—as well as those who aren’t, but care about the issue—can use these transactions as platforms to prod candidates for reform of the U.S. tax system.

“How will representatives and senators, with an election year approaching, explain to their constituents why they are out of work because their employers left the country, when it so easily could have been avoided?” argued activist giant Carl Icahn in a New York Times op-ed in December.

And as Andrew Ross Sorkin conceded in his own Times opinion piece in January, “Ultimately, the only way inversions will stop is when the corporate tax code changes so it becomes more attractive for American companies to be American companies.”

4. Recognizing past considerations. CEOs in this vein of thinking may want to consider any past largesse granted to their company by the same U.S. government whose encumbrances they now want to avoid.

As it happens, Johnson Controls is particularly vulnerable on this front because, as a leading supplier to the Detroit Three automakers, it benefited hugely from the taxpayer bailouts of General Motors and Chrysler in 2009. And among other government breaks over the years, it received $299 million from the U.S. Energy Department in 2010 to ramp up production of hybrid batteries, and millions more dollars from the State of Michigan.

Neither Congress nor the Obama administration is likely to do anything more on the inversion issue this year, given the politically rapt environment. And the cooling global economy will continue to light a fire under CEOs to cut costs wherever they can.

So expect more tax-inversion deals to be forth-coming.


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