INVERTING THE “ SOLUTIONS ” to Corporate Inversions
by Kaitlyn E . Martin
Since 1885 , Johnson Controls has been an American success story . For the past 130 years , the company has grown tremendously by expanding its product line to offer a broad range of products and services to increase energy efficiency in commercial buildings around the world . Johnson Controls is now a global conglomerate achieving billions of dollars in sales revenue . Despite its ever-growing and expanding business , the company ’ s Wisconsin headquarters and American domicile has always remained constant — until now .
On January 25 , 2016 , Johnson Controls announced that it will merge with Tyco International in a multibillion-dollar deal to create a new commercial building systems provider . The new company will be renamed Johnson Controls , PLC , and expects to save $ 500 million in operating costs by increasing efficiency and eliminating redundancies . Johnson Controls will maintain Tyco ’ s Cork , Ireland domicile . Why would a company with such a deep-rooted history in America make this legal address change ? The move , known as a “ corporate inversion ,” will save the new company an annual $ 150 million in United States federal tax bills . 1
A corporate inversion is a transaction in which a United States corporation merges with a foreign entity and restructures so that the foreign entity is the parent company , which ultimately allows the new combined entity to maintain the domicile of the foreign entity to allow for significant tax savings . There is no question that the corporate tax rate imposed by the United States is the highest among the developed nations of the world , 2 so by maintaining a foreign address for tax purposes , corporations save millions each year . 3 Due to these high tax rates , the volume of inversions has steeply risen in recent years . 4
In response to complaints from commentators and politicians that corporate inversions erode the United States ’ tax base , the Treasury Department recently issued new rules aimed at making corporate inversions more complicated for companies to execute . The Treasury rules intend to deter inversions by making it more difficult for companies to invert and by reducing the tax benefits so that inversions are no longer as economically appealing . 5
Due to these high tax rates , the volume of inversions has steeply risen in recent years .
However , these Treasury rules did not end the discussion of corporate inversions . In response to recent inversions , 2016 presidential candidate Hillary Clinton detailed her plan to stop inversions by requiring at least 50 percent foreign ownership post inversion , 6 and levying an “ exit tax ” on inverting corporations . 7 Additionally , presidential candidate and U . S . Sen . Bernie Sanders called to end corporate inversions altogether . 8
Limiting the companies that are qualified to invert or eliminating corporate inversions completely might prevent current U . S . companies from going abroad , but it would do nothing to encourage new companies to come to America . These solutions would not only lower the U . S . tax base , they would prevent potential jobs and investment opportunities from ever coming to America . Further , Clinton ’ s proposal to levy an exit tax on corporations looking to invert likely will not significantly reduce inversions , because a one-time exit tax might be seen as a small price to pay in exchange for millions of dollars in future tax savings . Additionally , since most inverted corporations simply change their tax domicile on paper but maintain operations in the United States , the tax savings allows the companies to increase wages and benefits for American workers , without sacrificing American jobs . An exit tax would hinder an entity ’ s ability to immediately pour its tax savings back into the American economy .
The only practical solution to the inversion problem is to eliminate the incentive to invert , while simultaneously encouraging new companies to organize in the United States . By lowering the corporate tax rate and making the corporate tax code more page 4 | LIBERTY LEGAL JOURNAL | SPRING / SUMMER 2016