Comprehensive Tax Reform More Likely Now Than Ever BeforeJuly 25, 2014
Corporate tax inversions are grabbing headlines. Inversions are an international tax strategy where a company relocates its headquarters to a lower tax nation while maintaining its primary operations in a country with a higher tax burden. The U.S. tax code allows for an inversion if the acquired foreign company maintains a 20% interest in the U.S. acquiring company. More and more prominent U.S. companies, such as drug-maker AbbVie and medical device maker Medtronic, are making multi-billion dollar purchases of foreign competitors and re-incorporating abroad. Walgreens is also considering an inversion, and recently Pfizer made an unsuccessful bid for foreign based Astra-Zeneca. There were 47 tax inversions in the last decade – twice as many as in the previous two decades – and the trend is accelerating.
The uptick of inversions now has caught the full attention of policymakers in Washington. This week, the Senate Finance Committee, led by Chairman Ron Wyden (D; OR), held a major hearing focused on improving the current U.S. system of international taxation. The United States currently has a nominal corporate tax rate of 35%, which is the highest compared to other major industrialized countries.
President Obama and a number of members of the Senate Finance Committee expressed outrage that corporate inversions are occurring at such a rapid pace. As Chairman Wyden put it, inversions are a “virus” that seems to “multiply every few days.” The Senate Finance Committee, however, was split over whether immediate remedial legislation would be effective or was an appropriate response to the inversion challenge.
All of the Senators in attendance and the witnesses on the panel, nevertheless, wholeheartedly agreed that comprehensive tax reform is critical to the continued success of the United States as a global competitor and making sure the impact of inversions is nullified.
Chairman Wyden stated that he is committed to working on a bipartisan basis, with particular support from Ranking Member Orrin Hatch (R; UT), to rapidly overhaul the tax code and reform the system. As he stated, “The longer we wait, our tax base will keep eroding, cash piles overseas will continue to grow, and investment dollars will be driven overseas.“
In another signal that tax reform efforts are starting to be reenergized, the House Ways and Means Committee’s Subcommittee on Select Revenue Measures (Tax) has announced a hearing on the economic impact of Chairman Camp’s tax reform proposal.
Clearly, a major tax reform push is appearing increasingly inevitable. What the ad community needs to continue to be on guard against is that, in the effort to cure the inversion threat and other tax problems, the healthy parts of the tax code, like the ad tax deduction, which has been estimated to promote as much as $5.8 trillion in economic activity and to generate 21.1 million jobs annually in the U.S., are not severely harmed.
Proposals to amortize 50% of advertising expenses over five or ten years continue to be pending in both the House and Senate tax committees. It has been estimated that this amortization proposal would cost the ad community more than $169 billion in additional taxes over 10 years. These proposals would not further the expressed goal of strengthening the economy and bolstering companies in the United States. By substantially increasing the cost of doing business and burdening the selling process, amortization would defeat the clear purposes of comprehensive reform.
At ANA, we believe that overhauling the tax code to lower corporate tax rates is extremely important and must be accomplished as quickly as possible. This effort must be done, however, with great care and forethought. Any proposed legislation must not undermine economic activity and the selling effort in the United States by threatening the viability of advertising in the tax code.
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