Inversion Issue Comes Home to Roost for CEOs  

There’s unprecedented noise from all directions around the issue of relocating a corporate domicile by means of acquisition to avoid high national tax rates. The Obama administration, some in the Congress and anti-corporate activists have been inveighing against the practice because they say it undermines the federal tax base to the benefit of investors, while American corporate chiefs and sympathizers have been defending inversion because draconian tax rates in their home country compel them to investigate alternatives.

Inversion first arose as a transatlantic kerfuffle when Pfizer wanted to buy AstraZeneca earlier this year and become headquartered in Europe, eyeing a tax rate as much as one-third lower than the typical 35% in the United States. Then a closer examination by media and progressive interests highlighted a number of other American companies that were angling to do the same thing. So Walgreen buckled under the pressure and said it will proceed in acquiring the Switzerland-based Alliance Boots chain of drugstores in the UK, but maintain its U.S. headquarters.

Walgreen won some points with consumers, employees and political interests in doing so, even though many concluded that CEO Greg Wasson simply recognized the handwriting on the wall and made the only rational decision he could after inversion became such a political and media issue. “We’d like to see more economic patriotism like that demonstrated by Walgreen,” opined the Lee Enterprises newspapers in Wisconsin.

Now heads of other companies must consider whether to use the Walgreen move as a model, as inversion opponents sense the momentum is on their side. “The rules must be changed so that the IRS is not forced to recognize a ‘move’ offshore by a corporation that has not moved at all in real life,” a Huffington Post politics columnist said.

Certainly Wall Street is concerned that they might. Bearish investors have been circling Covidien Plc out of concerns that Medtronic Inc. will modify its inversion-predicated offer to buy fellow medical-device maker Covidien. “Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for [inversion] deals,” Jim Strugger, derivatives strategist for MKM Holdings, told Bloomberg.

Meanwhile, a credible academic alleged to be shedding some extra light on the issue by arguing that the U.S. tax code actually is not impeding global competitiveness, contrary to the assertions of corporate chieftains. “Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for [inversion] deals,” wrote Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff of the Congressional Joint Committee on Taxation. “Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

But by raising the profile of the corporate-tax issue, inversions may end up benefiting CEOs anyway because discussion of the tactic is rallying some to their defense. “Don’t expect other companies to bypass” savings from inversions, warned a Detroit News editorial. “In a global economy, counting on the better nature of corporations is no substitute for rational tax policy … Those taxes should be fair.”

Despite such opinions, expect the tide on this issue to keep going against the freedom for business leaders to decide on inversion without political interference.