Hatch Delivers Speech on Corporate Inversions at Brookings Institution

Today, Senate Finance Committee Chairman Orrin Hatch (R-Utah) delivered the following remarks at conference on corporate inversions hosted by the Brookings Institution:

I’m very happy to be here today to talk about the problem of inversions and what I believe is the solution.

Let me start with the basics. 

I don’t think it will surprise anyone here to learn that I do not believe the best solution to the inversion problem is government regulations.  And, the solution is not building a wall around U.S. companies to keep them from moving offshore. 

The best solution to this problem is, in my view, tax reform. 

Tax reform, if it’s done right, will help grow our economy, create jobs in the U.S., and discourage businesses from leaving our shores and invite businesses to set up and locate here.  

Though there are disagreements on the details, there is bipartisan support for tax reform in Congress.  Indeed, members of both parties have expressed their support for a tax overhaul.  And, I believe there is real momentum to get something done on tax reform this year, if we remain committed. 

And, believe me, I’m committed. 

As the new Chairman of the Senate Finance Committee, I have made reforming our nation’s broken tax code my highest legislative priority. 

I’ll have more to say about the specifics of our tax reform efforts in a few minutes.  But, first, I want to lay some groundwork – I want to make the case for why tax reform is the only real, lasting solution to the inversion problem.

When we talk about inversions, particularly in recent decades, history appears to repeat itself over and over. 

There is a cycle when it comes to inversions, and it usually happens in four steps.

Step 1 – A few high profile-inversions take place and people become concerned about the possibility of a trend.

Step 2 – The government takes steps to shut these inversions down.

Step 3 – Inversions are temporarily halted, but the underlying economic conditions remain the same.

Step 4 – Companies find ways around whatever solution the government puts in place and another wave of inversions takes place.

We need to learn from this history. 

Let me give you a few examples. 

In 1994, a U.S. corporation called Helen of Troy, a company that sold haircare and beauty products, inverted.  Maybe Helen of Troy was the corporation that eventually launched a thousand inversions.   

The U.S. Treasury reacted to the Helen of Troy transaction by issuing regulations making it clear that, when a U.S. corporation inverts, it triggers a shareholder-level capital gains tax. 

Given the increases in stock prices in the mid-to-late 1990s, attributable largely to the dot-com boom, many shareholders had a low-basis in their shares, but yet these shares had a high value.  So, at that time, the idea of an inversion triggering a significant capital gains tax on this built-in gain was a serious deterrent against a company inverting in the first place. 

But then, in the early 2000s, the dot-com bubble burst. 

At that point, shareholders didn’t have nearly the built-in gains that had been so typical just a couple of years earlier.  With share prices depressed, U.S. corporations realized that it was, once again, a good time to invert. 

And so, in the early 2000s, there was another wave of inversions.

This time, Congress acted to stem the tide, enacting bipartisan legislation to establish Section 7874 of the U.S. Tax Code, which imposed another significant hurdle for inversions.  Under Section 7874, a U.S. corporation cannot engage in what is called a “naked inversion” where they invert single-handedly without still being considered a U.S. corporation for tax purposes. 

And, with the enactment of this provision, inversions slowed down once again. 

Obviously, that decline wasn’t permanent.  If it had been, none of you would be attending this conference to talk about inversions. 

There were a number of factors that led to the most recent wave of inversions which reached a peak last year. 

One of those factors was likely the collapse in stock prices in 2008 and 2009.  With this collapse in share prices, there was a decline in the built-in gains inherent in an inversion transaction and, therefore, a decline in the tax penalties associated with them.  This may have re-invigorated interest in inversions while stock-prices were depressed. 

Although stock prices largely recovered over the next few years, US multinationals had increasing amounts of offshore earnings resulting in significant amounts of trapped cash.  This also re-invigorated interest in inversions.

So, highly intelligent international tax planners – like the people in this room right now – gave yet more thought about ways around Section 7874.  I don’t know exactly how it happened, but this is how I picture it:

There was a conversation sometime around 2010 where some clever tax lawyers, relaxing in the South of France, over bottles of Bordeaux, conceived of a new wave of inversions. 

Now, as a good Mormon boy, I don’t drink.  That’s probably why I missed out on all the filthy lucre that comes with being an international tax planner.

Anyway, in this Bordeaux-infused brainstorming session, these lawyers conceived of a way to pair U.S. corporations with smaller, but still sizable, foreign corporations in order to get around the Section 7874 rules. 

Prodded on by these clever lawyers, global investment banks took on the role of match-maker – setting up U.S. corporations with foreign corporations.

And, the rest, as they say, is history. 

The last factor in this wave of inversions that I will mention – and the one most relevant to my job – was likely the realization that U.S. international tax reform wasn’t going to happen soon enough.  Sure, there were Members of Congress committed to the job, even some who were putting out their own tax reform proposals and frameworks.  But, there wasn’t any presidential leadership or engagement. 

And, as a result, the failures of our tax system seemed more and more permanent, and the pressure to invert became greater and greater. 

It appears that all of these pressures reached the tipping point with a wave of 2014 inversions. 

This, of course, led to the September 2014 Treasury Notice.  The Notice has certainly stymied inversions, but, if history has taught us anything, we can count on seeing more.

The pace of inversions could in fact pick up again.  And, if we are unable to fix our tax code once and for all, it almost certainly will. 

For those who believe in a worldwide tax system, you probably saw the September 2014 Treasury Notice as a good thing.  That Notice certainly made it harder to escape the worldwide tax net.  For my part, I don’t believe in a worldwide tax system.  I believe we need to go a different direction when it comes to taxing international income and move from our worldwide-leaning international tax system more toward territoriality. 

If we’re serious about preventing inversions and about keeping American companies from picking up and moving their legal headquarters elsewhere, we need to get to the root of the problem.  Anything else that we do – any tinkering along the regulatory edges – will only address the symptoms.  In the end, it will be like using a Band-Aid to treat a broken arm. 

Despite what some, including the President and high-ranking officials in his administration, have claimed, companies weren’t leaving the U.S. because of a lack of “economic patriotism.”

For the record, I’m no fan of inversions.  But, I’m even less of a fan of the rhetoric and attacks that surrounded this issue in the last year.  If you ask me, it is national leaders that use their position to demonize our own companies that are lacking in “economic patriotism,” not the companies who are simply trying to do right by their shareholders and firms trying to compete, produce, and hire workers to tap into markets and customers in growing economies. 

But, I digress. 

I see these inversions as symptomatic of a dysfunctional tax code that is taxing at too high a rate and is attempting to tax worldwide income.  What we need is a tax system that will encourage investment and growth in the U.S.  For that, we need tax reform.

If you’ve been around Washington over the last few years, chances are, you’ve already heard me talk about tax reform.  I’ve been making the case for reform on the Senate floor, in the Finance Committee, in public appearances, in written materials, and in private conversations.  And, I’m going to continue to do so.

I want to pose a question to the audience.  Raise your hand if you heard about the tax reform book I released in December.

Now, raise your hand if you read the whole thing.

It looks like some of you have some homework to do.

In that book and elsewhere, I’ve laid out seven principles that I believe should guide our tax reform efforts.

I won’t go into detail on each principle today.  Instead, I’ll just list them – and encourage you all, once again, to read the book.  Don’t wait to see the movie.

The seven principles are: 1) Economic Growth; 2) Fairness; 3) Simplicity; 4) Permanence; 5) American Competitiveness; 6) Promoting Savings and Investment; and 7) Revenue Neutrality.

Not all of these principles directly relate to the problem of inversions.  But, some of them do.  The one that relates the most is American Competitiveness.

Put simply, we need to make American a better place to do business and put our job creators on equal footing with their foreign competitors.  To do that, we need to lower corporate tax rates and transition toward a territorial tax system. 

That is what is being done in the rest of the industrialized world.  That, more than anything else, is what makes some of these foreign countries – particularly countries like Ireland and the U.K. – more attractive destinations for American companies seeking to invert. 

There is a lot of agreement on bringing down the corporate rate.  Both Republicans and Democrats have endorsed that general idea as the basis for reforming our business tax system.   Unfortunately, there continues to be widespread disagreement on getting rid of our current worldwide tax system. 

Most of my Republican colleagues want a territorial tax system.  Some open-minded Democrats are sympathetic to it – especially if they really want to stem the pressure to invert.  But, as of yet, we haven’t gotten significant buy-in from a large number of Democrats on this idea.

I hope that will change.  And, I think it will.

After all, it only makes sense.  Like I said, the rest of the world is already moving in that direction.  If we want to compete, we’re going to have to follow suit. 

What we mean by a territorial tax system is not taxing foreign-source business income, but, at the same time, making sure we do tax US-source income, accurately measured.  Under such a system, we would continue to tax domestic source income of U.S. multinationals, but the earnings they make offshore would not be subject to U.S. tax. 

Of course, I don’t believe a territorial system will be a magic elixir.  There will likely still be pressure to invert even if we make that change.  But, this much needed transition is the first and a very important step we can take to stem any future inversion waves.

Once we have agreement on the overall idea of a territorial system, we can talk about other ideas that will further prevent erosion of our tax base.  But, in all discussions, we must – and I can’t stress this enough – we MUST always be looking at our international taxation system with an eye toward improving our competitiveness. 

We cannot be competitive with our current treatment of taxation of foreign-source business income and our current tax rates.  Our corporate tax rate is the highest in the world, and proposals for reform have envisioned rates that are not even at or below the average of OECD countries.  Maybe we won’t have the lowest rates in the world, but we should at least be able to not have the highest.

As most of you know, the Senate Finance Committee is already fully engaged in a very real tax reform effort.  We’ve created five working groups that will look at all the areas of our tax system with an eye toward producing recommendations for a comprehensive tax reform bill. 

My goal is to introduce such a bill and mark it up in the committee later this year. 

As I said earlier this week, this is not an exercise.  This isn’t just for show.  I’m not in this just to introduce a proposal or two and move on.

My only goal when it comes to tax reform is to make new law.  And, with the help of all my great colleagues on the Finance Committee – Ranking Member Wyden in particular – that’s just what we’re going to do. 

I hope we can learn from our history of inversions.  I hope we can go after the root causes of this problem rather than merely treating the symptoms.

Once again, the solution to this problem is tax reform.

I want to once again thank Brookings for having me here today.  And, I want to thank all of you for taking the time to listen.

God bless you all. 

          ###

• Print
• Email
• Tweet