Daily Deduction

from the Tax Policy Center

Reincorporation, Renunciation, and a Dose of Reality

By :: July 30th, 2014

There’s more than one way for a corporation to reduce taxes. It doesn’t have to reincorporate itself overseas. It could instead spin off a part of itself into a publicly traded real estate investment fund. As long as the new REIT distributes 90 percent or more of its income to investors as taxable dividends, it would not be required to pay federal taxes. Investors are betting that the telecommunications industry will find the maneuver  especially lucrative. One tax consultant concludes “the technique is now widely available to any company that has real estate.”

For what it’s worth, investment banks will still finance inversions. They’ll collect nearly $1 billion in fees from three years’ worth of inversion deals they’ve facilitated among some of the nations’ biggest companies. They’re paying attention to New York-based Pfizer, for example, whose last effort failed when its purchase offer was rejected by AstraZeneca. CEO Ian Read continues to “look at all types of business development, regardless of size, that we believe would add value to shareholders… There’s no substantial advantage to being a US company…”

So much tax reduction, so much flag waving… arms can get tired. “Corporate deserters.” That’s how President Obama describes companies who pursue inversions. TPC’s Howard Gleckman asks: “Is it OK for US-based firms such as GE or Apple to use aggressive tax planning to minimize their worldwide tax liability, but unpatriotic for US drugmaker AbbVie to purchase the UK firm Shire to minimize its worldwide tax liability? Obama sees a difference. I don’t.” They might increase voter turnout in the midterms, but flag waving and name calling don’t help advance corporate tax reform.

Tax extenders, still dead for now. To the surprise of few, Congress has run out of time to restore those 50-plus expired tax provisions before its August recess. The issue will probably flounder until a lame duck session. The House wants to make many of the provisions permanent, Senate Democrats want to restore all of them but only through next year, and Senate Republicans want to use the bill to repeal an Affordable Care Act tax on medical device makers. Gridlock continues.

Trust that the Highway Trust Fund will be funded this week? Senate Finance Committee Chair Ron Wyden is hopeful that a Senate amendment to rely less on “pension smoothing” to offset costs of the House-passed federal highway funding bill will pass the House before Friday. House Speaker John Boehner warned that the House isn’t about to debate any further changes.

What every worker needs to know about another trust fund: TPC’s Gene Steuerle testified before the House Ways and Means Social Security Subcommittee yesterday. He addressed three troubling aspects of an otherwise successful program: unequal justice; middle age retirement; and impact on the young. Gene argues that without reform, questions of fairness, efficiency and adequacy will remain. He cites one fix to Social Security that doesn’t require tax increases or benefit cuts: Encourage people to work longer.

And today on the Hill—the IRS saga continues. The House holds concurrent hearings on the IRS. The Oversight and Government Reform Committee’s “IRS Abuses: Ensuring that Targeting Never Happens Again” hearing takes place at 9:30. The Judiciary Committee’s “The IRS Targeting Scandal: The Need for a Special Counsel” hearing takes place at 10:00. Decisions, decisions…

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  1. Michael Bindner  ::  1:37 am on July 31st, 2014:

    REIT spin-offs have the advantage of paying those dividends, which means the shareholders will pay taxes on them (another reason to raise the rate on dividends). I suspect they also remove the property tax liability from the main company, which will help the company in the event that a Georgist Land Value Tax is ever passed locally, which may have an impact on those dividends.

    The only reason being a US company has no advantage is that they can still locate operations here and sell here. Of course, the real advantage is to the investment banks who do earn those nice fees, all based on hysteria over the unlikely event of corporate tax reform. Maybe they think that the Democrats will win back the House and keep the Senate.

    I wrote about Howard’s inversion piece on his post and shared it on his wall. I still think the answer to this is consumption taxes, but they won’t happen this year. On patriotism, it depends on whether being an overseas firm makes it easier to help shareholders avoid U.S. taxes that they are required to pay. If so, that is totally unpatriotic.

    The August recess will allow time for people who benefit from extenders to push their viewpoint on members at home (or on vacation). I am actually for the House approach. Make these permanent and be done with them forever. In the old days (before the Hastert rule), whatever compromise the Senate hammered out would carry the House. Not sure this will happen this year and I suspect that this little dance is below the President’s pay grade.

    On the Highway bill, Boehner’s threat will likely be backed up by votes. Wyden should have taken smoothing entirely out, added making the extenders permanent and even agreed to the device makers tax repeal. Cut military spending to close the gap, including reducing the baselines in the out years of the Budget Control Act. I wonder if this could pass on unanimous consent?

    On Gene’s plan, let us remember that ever increasing productivity makes longer work life unnecessary, provided that retirees have some benefit from that increase. Indeed, middle age retirements are a good thing if you have so much money that work is not necessary. More workers could do that if their Employer contribution bought employer voting stock – with dividend reinvestment until retirement (and an insurance fund so that some of these shares are traded to larger fund that prevents corporate bankruptcy (and employee stocks should be undischargeable) from causing elderly poverty. This tax is also a fertile ground for more equality – simply decouple it from income and give every worker the same contribution (to either the OASI fund or employer stock funds). If you fund it with a consumption tax rather than a payroll tax, it is more progressive because it captures profit and because there is no cap. If young people see a stock account, they won’t mind this program any more nor buy into the constant right wing think tank myth that Social Security won’t be around when they retire.

    The IRS hearings are a John Birch Society plot. Sadly, all they are doing is making themselves look completely unhinged. Just get out the hook and take these fools off stage.