U.S. tax policies help drive companies away

Captain Ahab, in his fanatical desire to get revenge on the white whale, brought himself and his crew to destruction. President Obama’s obsession with killing the merger between Pfizer and Allergan could also end badly — for our economy.

The U.S. tax system is broken. We have the highest corporate tax rate in the industrialized world and, unlike most other countries, we tax income that is earned offshore. When our companies try to compete on the global stage, they do so with a built-in tax disadvantage. It is no surprise, then, that U.S.-headquartered companies look to become headquartered in countries with more favorable corporate tax systems.

If there is good news in all this, it is that House Ways and Committee Chairman Rep. Kevin Brady, R-The Woodlands, intends to reform our broken tax system so U.S. companies can compete on a level playing field. I applaud his efforts because until there is reform, any U.S. company seeking to compete in the global marketplace through mergers should be afraid of repercussions. The Pfizer-Allergan proposed combination was a case in point.

Pfizer had made no secret of its desire to reduce its uncompetitive tax rate and announced in November that it would merge with Ireland-based Allergan in a transaction that would leave Pfizer’s shareholders with 56 percent of the merged company. That number is significant because, under the laws passed by Congress, if Pfizer’s shareholders ended up with at least 60 percent of the stock, there would have been significant adverse tax consequences.

In an effort to inhibit companies from seeking out these ‘inversions,’ the Obama administration has put out three sets of guidance — in 2012, 2014 and 2015 — reinterpreting the corporate inversion laws, with the third set coming out after Pfizer and Allergan acknowledged they were in discussions. Yet, none of these past rules would have affected the Pfizer-Allergan merger. So, intent on scuttling this specific merger, congressional Democrats called for the administration to do more.

The administration has responded in kind. Earlier this month, the Treasury Department put out an astonishing new set of regulations that, in applying the shareholder percentage ownership tests, simply disregards stock attributable to acquisitions made by Allergan in the prior three years, therefore making the proposed structure of the merger with Pfizer unviable.

This retroactive rule is obviously intended to directly cover Allergan, which has grown through acquisitions, in particular over the last three years.

When the media pressed the administration on the appropriateness of writing a punitive, retroactive tax rule targeting a specific taxpayer, the White House and the Treasury Department prevaricated. Treasury called it a “myth” that it had specifically targeted the Pfizer/Allergan merger and said that it was only aware of public information. This misleading statement failed to answer whether the Treasury Department had used public information about Allergan’s prior acquisitions when crafting its new rule.

To make matters worse, the administration accompanied its new inversion rule with changes that overturn decades of settled understanding on when a corporate debt instrument will be respected as such for tax purposes.

We are a country founded on the rule of law. There are consequences to the administration making up new rules to punish particular taxpayers and overturning by fiat decades of precedent.

The retroactive actions taken by the Obama administration have prompted commentators to rightly question whether the U.S. is becoming a less stable and predictable climate for foreign direct investment. That’s a bad thing, because foreign investment is absolutely critical to economic growth and job creation in this country.

Instead of pursuing punitive and retroactive executive actions such as those taken recently by Treasury, Congress needs to address the underlying cause of why companies domiciled in the U.S. are seeking out inversions in the first place — a broken U.S. tax code that puts them at an uncompetitive disadvantage. This is exactly what Houston’s own Chairman Brady is trying to push Congress to do. Adopting a lower corporate tax rate and moving to a territorial tax system would provide the certainty Texas companies and companies across the country need and will incentivize them to invest in the United States, spurring economic growth and jobs.

Absent such common-sense changes, the United States should expect companies to continue seeking overseas addresses, and we’ll continue losing America’s corporate tax base.