The Washington PostDemocracy Dies in Darkness

You’d have to pay an exit fee to give up your citizenship. Corporations? Nada.

February 9, 2016 at 10:01 p.m. EST
A protest at the Lincoln Memorial of the Supreme Court's Citizens United ruling. Today corporations are treated like people — except when it comes to their tax citizenship, in which they enjoy all the benefits and little of the obligation. (Chip Somodevilla/Getty Images)

We all know about the famous Supreme Court decision that said corporations should be treated like people. It’s too bad that this ruling doesn’t apply to U.S. companies that give up their citizenship in order to cut their taxes while remaining in this country and benefiting from all it has to offer.

When it comes to tax citizenship, corporations don’t want to be treated like people. Well-off U.S. citizens have to pay an exit tax when they give up their citizenship. But well-off U.S. companies that change nationalities for tax purposes don’t have to pay any sort of exit fee.

Hillary Clinton, to her credit, is proposing to apply an exit fee to companies that do corporate inversions. But tax expert Bob Willens said that her proposal won’t work for the new breed of corporate desertions (my term, not Willens’s) involving the likes of Pfizer and Johnson Controls. These are growing rapidly, and are far worse for U.S. taxpayers than conventional inversions — and those transactions are bad enough.

Here’s the deal. When a U.S. citizen or “long-term resident” with a net worth of $2 million or more decides to give up his or her citizenship or U.S. residency status, the Internal Revenue Service collects an exit fee. That fee is calculated by treating everything this “covered expatriate” owns as having been sold at fair market value the day before citizenship is surrendered. That triggers a capital gains tax.

But there’s no such fee collected from Pfizer Inc. of New York, which is becoming Pfizer PLC by doing a deal with Allergan PLC of Parsippany, N.J. Or from Johnson Controls Inc. of Milwaukee, which is doing a deal with Tyco International PLC of Princeton, N.J. Pfizer and Johnson will continue to be run out of the United States, but for tax purposes, they will be based in Ireland.

The Pfizer and Johnson deals, along with Baxalta Inc.-Shire PLC and Broadcom Inc.-Avago Technologies LTD, represent a new and more dangerous breed of corporate desertions.

These are deals in which shareholders of the U.S. firm own less than 60 percent of the combined company. That allows the new company to get its hands on the cash that the formerly U.S. firm held abroad, without suffering any tax consequences.

In a conventional inversion — one in which holders of the U.S. firm own more than 60 percent but less than 80 percent of the combined company — the inverted firm can play tax games but can’t get tax-free access to its cash the way new-breed deserters can.

Last week, I talked about how Johnson and Tyco are doing a deal under which holders of 112 million Johnson shares are getting about $3.9 billion in cash rather than shares in Johnson PLC. That buyback allows Johnson holders to own about 57 percent of Johnson PLC, rather than the 61.5 percent they would otherwise own. Staying below 60 percent is crucial.

I wrote that Johnson was buying the stock. That was wrong. Actually, Tyco is borrowing $4 billion in order to buy the Johnson shares. Right after the deal closes, Johnson PLC will be able to repay the Tyco borrowing by tapping the $8.1 billion in offshore cash that Johnson has.

Pfizer and Allergan are doing something similar to get the ownership proportions right. The stampede to do less-than-60 percent deals is well underway.

That’s where the problem with Clinton’s exit-fee proposal comes in. Clinton’s proposal would apply to companies that become “expatriated entities” in an “inversion transaction,” Willens said. It’s a good idea, but it won’t stop the new-breed deals.

That’s because Johnson and Pfizer won’t become “expatriated entities,” and the transactions in which they’re engaged aren’t “inversion transactions.” Thus, Clinton’s rules wouldn’t apply to them.

This is an example of why our corporate-desertion problem can’t be solved by Treasury regulation-writing or even by well-intentioned but narrower-than-they seem-to-be proposals such as Clinton’s. Companies can find new loopholes faster than we can close old ones.

The real solution is for Congress to get off its butt and fix our damned corporate tax code. I’m not enough of a tax techie to propose specifics. But Congress better do something before we lose even more tax revenue, and before the new breed of corporate deserters gobbles up ever-bigger companies.

The bottom line: Corporations want to be treated like people . . . sometimes. They sure don’t want to be people when it comes to changing tax domiciles. Where’s the Supreme Court when we taxpayers need it?