Hatch: Only Meaningful Changes to the Tax Code Will Curb Inversions

Utah Senator Says, "If we want to prevent future inversions, we should spend less time tinkering around the regulatory edges and engaging in partisan rhetoric and more time trying to find common ground to actually fix our tax code.”

WASHINGTON – In a speech today on the Senate floor, Finance Committee Chairman Orrin Hatch (R-Utah) highlighted the need for an overhaul to the U.S. tax system to curb of corporate inversions and addressed the Treasury Department’s latest rules on earnings stripping aimed to counter inversions.

“We have the highest corporate tax rate in the developed world,” Hatch said. “And, we have a tax code that effectively pays U.S. multinationals to keep their foreign earnings offshore and punishes them when they decide to bring capital back into the country. It is these factors, that make foreign countries more attractive destinations for American companies.”

Hatch went on to note that more regulations imposed on U.S. companies will not improve the business climate in the United States and said Presidential leadership is needed for meaningful tax reform.

“Instead of acknowledging that our tax system is the cause of the inversion problem, my friends on the other side have generally opted to put forward regulations that may very well be effective in curbing inversions in the short-term, but will do nothing to improve business conditions in the U.S.,” Hatch continued. “We’ve heard quite a bit of blame thrown in Congress’s direction for not acting to prevent inversions. What we haven’t heard is any serious effort on the part of the President or anyone in his administration to engage with Congress on meaningful tax reform.”

The complete speech as prepared for delivery is below:

Mr. President, over the last couple of years, I have spoken numerous times on the issue of corporate inversions, the problems they cause, and various proposed solutions. I want to take a few minutes today to comment on some of the recent developments with regard to this important issue.

Inversions are a matter of great concern in our country. This is true among members of both parties, both in and out of government. As the chairman of the Senate’s tax-writing committee, I have to say that, for years now, most major discussions I have on tax policy and reform with various private sector stakeholders eventually end up focusing on inversions.

Virtually everyone acknowledges that inversions are a problem. When a U.S. company re-identifies itself as a foreign entity and moves its tax headquarters overseas, it shrinks our tax base. It means lost investment and growth for our country. And, it further demonstrates the failure of the government to create a tax environment in this country that allows businesses to flourish, create jobs, and help grow our economy.

Like I said, members of both parties see inversions as a problem, one that needs fixing. Sadly, the debate surrounding this issue has all too often become mired in politics and partisanship, which, thus far, have prevented Congress from making any real progress.

Some here in Washington – here in the Capitol and at the other end of Pennsylvania Avenue – would rather talk about inversions than solve the problem.

When a wave of U.S. companies announce that they’re merging with other entities and moving their headquarters offshore, the strategy seems to be to publicly attack those companies, accusing them of, among other things, lacking “economic patriotism,” and to put forward unworkable policy proposals while labelling anyone opposing those proposals as somehow being in favor of, or at least indifferent to, inversions.

Most of the policy ideas that get put forward tend to be punitive and burdensome with the goal, not of incentivizing companies to stay in the U.S., but to forcibly prevent them from leaving.

Over the past year or so of political campaigning we’ve heard a lot of talk about building walls and who will be made to pay for them. Some are proposing that we build a literal physical wall to keep certain people from coming into the U.S. with a supposedly clever plan to force other countries to pay for it.

Well, at the same time, most of the proposals we’ve seen to deal with inversions would amount to building a virtual wall – a wall forged in regulation and punitive tax treatment – around the country to keep companies from leaving and making every business in America – and all of their employees and their individual customers – pay the cost.

The latest wall-building exercise came earlier this month with Treasury’s temporary anti-inversion regulations and proposed regulations aimed at earnings stripping.

Of course, the administration’s anti-inversion approach was essentially the regulatory equivalent of a doctor who wastes all of his time and energy treating a patient’s symptoms one-by-one as they arise without making any effort to diagnose, let alone treat, the underlying illness.

Inversions, Mr. President, are not, in and of themselves, a disease. They are merely symptoms of a much broader illness that will continue to infect our economy so long as we refuse treat it. And, I won’t keep you in suspense, Mr. President. That illness is not a lack of proper regulation, it is an overly burdensome tax system and an environment that is, on the whole, unfriendly to American businesses.

U.S. companies don’t move their tax headquarters offshore because they like the weather in other countries. If that were the case, I don’t think so many of them would be moving to Ireland or the U.K. No, American companies invert because they face global competition and our system forces them to compete on an uneven playing field with at least one, if not both, arms tied behind their back.

For example, we have the highest corporate tax rate in the developed world. And, we have a tax code that effectively pays U.S. multinationals to keep their foreign earnings offshore and punishes them when they decide to bring capital back into the country. It is these factors – not a lack of appropriate regulation by the government or a shortage of “economic patriotism” on the part of American businesses – that make foreign countries more attractive destinations for American companies.

If we want to prevent future inversions, we should spend less time tinkering around the regulatory edges and engaging in partisan rhetoric and more time trying to find common ground to actually fix our tax code.

And, for the record, it isn’t just inversions that are the problem. As I’ve noted repeatedly, even if the administration and Congress found a way, through punitive and burdensome means, to block all inversions, our tax system would still make American companies even more attractive targets for foreign takeovers, which are every bit as problematic as inversions – if not more so – and much harder to address through a purely regulatory approach.

Foreign takeovers are already a problem. According to an Ernst and Young study released last year, the U.S. economy suffered a net loss of $179 billion in business and assets to foreign buyers in the decade between 2003 and 2013. The same study also found that a reduced corporate tax rate would have greatly reduced these losses, possibly eliminating them entirely.

Keep in mind that, unlike most inversion transactions, U.S. management is almost always fired after a foreign takeover. Other employees, local service providers, and suppliers are often targeted for elimination as well.

Sadly, many Democrats in Washington – both here in Congress and in the administration – don’t seem to grasp the nature of this problem. They talk a great deal about inversions and the need to prevent them. And, because the picture of a big American company moving offshore to escape taxation is particularly distressing for populist audiences, they tend to ramp up that talk and couple it with ideas on how to punish inverters in even-numbered years. Yet, they’ve taken precious little action to actually fix the underlying problems that lead companies to want to invert in the first place.

There was a glimmer of hope with the findings and recommendations of the Finance Committee’s bipartisan International Tax Reform Working Group. However, as is far too often the case, that glimmer of hope may very well be overtaken by the politics of the moment.

So, instead of acknowledging that our tax system is the cause of the inversion problem, my friends on the other side have generally opted to put forward regulations that may very well be effective in curbing inversions in the short-term, but will do nothing to improve business conditions in the U.S.

Within days of the release of Treasury’s latest regulations, Pfizer, a major American drug company, announced that it was backing out of its proposed inversion deal with Allergan. Many observers were quick to credit the Obama Administration for a supposed job well done while Democrat candidates for President openly celebrated the fact that an American company chose to subject itself to hundreds of millions of dollars in losses and penalties in order to avoid even greater losses as a result of these regulations.

That’s the kind of world we’re living in, Mr. President, one where a willingness to demonize an iconic American company that employs tens of thousands of American workers and cheer when it suffers massive losses is viewed as an affirmative qualification to be the Democratic nominee for President.

Now, to be fair, I will acknowledge that, in addition to unveiling the proposed anti-inversion measures, the Obama Administration did also lay out a basic framework for corporate tax reform. Of course, this framework, which closely resembles similar proposals that the President has included in past budgets, is woefully short on details. It is not a reform proposal with any serious potential for bipartisanship, nor one with a detailed list of specific goals and objectives. It is more or less just a vaguely worded wish-list of tax ideas they’d like to see enacted at some point. The reaction from many sectors of the business community, including from CEOs who, more often than not, support my friends on the other side, proves the point.

We know basically that the President’s version of international tax reform consists of a one-time mandatory repatriation of foreign earnings to be taxed at a rate designed, not to maximize any benefit, but to hit a revenue target for increased spending. This would be coupled with a high minimum tax on foreign earnings, also designed specifically for increasing spending, not for significantly bringing down the statutory tax rate.

Put simply, there is virtually nothing in the President’s nebulous tax reform framework that would discourage companies from moving offshore. In fact, one could argue, and many have, that the President’s proposed high minimum tax on foreign earnings would actually encourage more U.S. companies to invert.

For example, this past November, the Vice President of Global Taxes at Procter & Gamble – another iconic American company – was quoted as saying: “If we take a step towards a [minimum] tax at the corporate level, we’re exacerbating the problem; we’re actually guaranteeing that inversions are more attractive.”

On top of these new taxes, there is no real effort in the President’s tax framework to improve the business climate in the U.S. more generally. And, after all of these changes, the framework would still leave the U.S. with a corporate tax rate that would be well above the average in the developed world.

In short, this framework is par for the course with this administration. We’ve heard quite a bit of blame thrown in Congress’s direction for not acting to prevent inversions. What we haven’t heard is any serious effort on the part of the President or anyone in his administration to engage with Congress on meaningful tax reform.

Like I said, Mr. President, the President and his supporters are far more willing to assign blame for the problems caused by our tax system than to actually work toward a solution. This is particularly true in election years when their motto seems to be: Why fix a problem when you can blame it on the other side?

For my part, I am working to take specific steps to address these problems. I’ve been the Republican leader on the Senate Finance Committee for about four and a half years now, and for four and a half years, I have been calling on my colleagues and imploring officials in the administration to engage on tax reform. To date, I’ve seen little in the way of a meaningful response.

Currently, I’m working on a relatively simple but potentially effective tax reform proposal that many believe would relieve a great deal of the inversion pressure on American companies and, at the very least, significantly alter the economic calculation for inversion transactions. Best of all, it would do so without punishing companies or imposing burdensome mandates.

In short, my proposal would provide more carrots to keep companies from inverting and fewer sticks to punish companies that try to go in that direction.

While I’m still working with the Joint Committee on Taxation to finalize the details of this proposal, the basic idea behind my proposal would be to streamline the taxation of business income and eliminate instances in which profits and earnings are subject to multiple layers of taxation at the company and shareholder levels.

I’ll have more to say on this proposal in the coming weeks.

Today, I am simply trying to counter the narrative that American companies can and should be forced to remain in the U.S. by regulation.

I’m trying to demonstrate that you can’t fix the inversion problem by building a virtual wall around the country to keep businesses from leaving.

And, I’m trying to show why you can’t build that wall expecting some other country to pay for it. Indeed, if an anti-inversion wall goes up without any real changes to improve the tax and business environment in the U.S., it will be American workers and consumers that will end up footing the bill.

With that, I yield the floor.

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