Additional Effects of the Tax Inversion Rule Business Leaders Should Be Aware Of

Okay, so it's no longer attractive to merge two large companies, then set sail for cheaper shores. You probably weren’t planning to anyway. But what most CEOs don’t realize is that the Tax Inversion Rule has additional ramifications that could affect all companies.

To start with, Nancy McLernon, president of the Organization for International Investment, a nonprofit that represents the U.S. operations of companies based abroad, told The Wall Street Journal that if signed into law, the proposed rules could cause the loss of 12 million American jobs. “This is a misguided initiative that could have a freezing effect on attracting global employers and will damage U.S. competitiveness,” she stated.

“This is a misguided initiative that could have a freezing effect on attracting global employers and will damage U.S. competitiveness.”

In an interview with the newspaper, a spokesman for Swiss food giant Nestle SA expressed his company’s concern that the new regulations might have a substantial impact on the good-faith creation of jobs and investments in the U.S. by foreign-based groups.

Meanwhile, Merck & Co. CEO Kenneth Frazier told the Journal that even though the rules will render tax inversions less attractive, he predicted, “iconic” American companies will still move their headquarters overseas or be acquired by foreign firms because the Treasury changes do not address the underlying motivation for pursuing inversions. That motivation, Frazier asserted, is a U.S. tax structure that puts American companies at a competitive advantage to such rivals as Switzerland’s Novartis AG, which enjoys a lower effective tax rate.

International tax expert Jonathan Rosenzweig, a law professor at Washington University in St. Louis, told the newspaper that the issue of what constitutes any company’s corporate domicile—for example, “where it is legally incorporated, where the majority of employees are located, or where principal operations and research take place”—has yet to be resolved.

Kenneth Serwin, an economist and consultant with the Berkley Research Group in Emeryville, California, told the Los Angeles Times, “These are positive rules, and they may stem the flow for a short period of time.” But nonetheless, he equated the rules with putting a “really big ugly Band-Aid on the problem.”

The White House and the Treasury disputed these and similar criticisms of the rules, arguing that they are intended only to eliminate unfair loopholes that shift the tax burden to other corporate entities. “We tailored our earnings-stripping rules to focus on abusive practices, not genuine investment in our country,” Rachel McCleery, a Treasury spokeswoman, said in an interview with the Journal.  “Businesses that are investing in American workers and infrastructure will not be penalized by these regulations.”


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