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Focus on corporate tax dodging should fuel U.S. tax code reform

Mostly below the radar of public attention, some large U.S. corporations have shifted their corporate headquarters out of the United States to cut their tax bill to Uncle Sam. As these big companies cut their income tax bills, the burden shifts to individuals.

Writing in Fortune magazine, columnist Allan Sloan blasted a practice known as inversion, which involves a U.S.-based company merging with a foreign-owned company, then adopting the foreign address to cut its U.S. taxes. Sloan notes that 28 companies have done inversions in recent years — and it’s costing U.S. taxpayers about $19.5 billion over the next decade.

On inversion tax dodging, Sloan writes, “companies have decided to desert our country to avoid paying taxes but expect to keep receiving the full array of benefits that being American confers, and that everyone else is paying for.”

In Bloomberg’s BusinessWeek magazine, another pro-business publication, a recent article describing inversion and other tax-dodging techniques is titled “Big enough to drive a government contract through.” The headline refers to lost federal tax revenue, but goes further to point out that some companies moving their legal headquarters to save on taxes are still getting huge government contracts, paid for by U.S. taxpayers.

The magazine features Ingersoll-Rand, with its founding 143 years ago in Connecticut. The company’s historical highlights include providing machinery for the construction of the Panama Canal as well as drills used on Mt. Rushmore. Since 2001, though, Ingersoll-Rand has been based, for tax purposes, in Bermuda, a move that cut its tax bill by 50 percent. Yet, the company recently won a $300 million contract to install Trane air conditioning in U.S. government and military buildings as part of an energy-saving project. Some in Congress see a problem.

Commenting on the government contracts and corporate tax evasion, Sen. Harry Reid, D-Nevada, said “There is no reason the U.S. government should reward tax runaways with lucrative government contracts.”

BusinessWeek’s article notes that 40 major U.S. companies have moved their legal headquarters to tax havens, with 11 inversions happening since 2012.

Last month, Medtronic, the medical device maker based in Minnesota and with dozens of facilities around the country including in the Pittsburgh area, said it plans to reincorporate in Ireland to cut its U.S. tax bill. Critics note Medtronic has major contracts with the Veterans Affairs Department.

Overall, BusinessWeek’s report says the federal government awards contracts worth $1 billion a year to about a dozen companies that have fled the U.S. for lower-tax countries.

The practices of relocating legal addresses to tax havens such as Bermuda or using the inversion technique are just the latest corporate tax avoidance efforts by big U.S. companies. General Electric made headlines a few years ago when legal loopholes in the tax code helped it produce a $0 corporate income tax bill, despite billions in revenue.

Business groups often complain about the 35 percent corporate tax rate being the highest in the world. While that is technically true, most large corporations use tax loopholes to produce an effective tax rate that is much lower, often closer to 10 pecent. Granted, taxing multinational corporations fairly is complicated, but it’s also true that some companies, through accounting tricks or reassignment of sales revenue to lower-tax countries, are gaming the system to reduce their U.S. tax bills.

These abuses need wide public exposure — and action by Congress. The complexity of the tax code and the challenges of international businesses must be part of the tax-reform debate.

For too long, big companies have quietly slashed their U.S. tax bills, putting an increased burden on individuals. That cannot, and should not, continue.

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