The number of US companies inverting to a lower-taxed jurisdiction has created another form of peer pressure. Shareholders are seeing rival companies successfully restructure, and many are now pondering the question: to invert or not to invert.
The practice is divisive; politicians loathe it while business applauds effective management of multinational operations (and of the tax rate).
The rhetoric of many in Washington has been polarising, too, and is likely to inflame the debate over that horribly nebulous concept – tax morality.
President Obama has described inverters as "fleeing the country to get out of paying taxes" and Jack Lew, Treasury Secretary, has bemoaned a lack of "economic patriotism", while Ron Wyden, Senate Finance Committee chairman, invoked more colourful language, describing inversions as a "virus" and an example of the US tax code being "infected with the chronic diseases of loopholes and inefficiency".
Taxpayers, however, argue that true economic patriotism would be to cut taxes to keep companies in the US. Their duties to shareholders are also not irrelevant and for certain highly-mobile industries such as pharmaceuticals, the size of the inversion prize is substantial.
The tax morality debate has not taken hold in the US in quite the same fashion as in some European jurisdictions, but this latest round of political reactions to the inversions trend is putting the issue in front of the public.
But actions must match words.
When UK Chancellor George Osborne said he regarded tax evasion and aggressive tax avoidance as morally repugnant, his words were in stark contrast to the approach he was taking to tax policy and tax competition. Obama must match his words with action, too, but not executive action. If he wants a lesson about balancing tax competition and anti-avoidance measures, he would be well-advised to give Osborne a call.
The need for tax reform in the US is widely acknowledged – to such an extent, in fact, that I'm certain comedians out there are already rephrasing the weary lightbulb joke format to reflect the extent of US inaction. "How many US legislators does it take to pass a reform Bill?" I can hear it now (and though it's as unfunny as the original lightbulb concept, it's also more true to life).
Obama has acknowledged the need for a territorial system. He must therefore know that his inversion solution is tax reform. And Wyden's reference to loopholes and inefficiencies suggests he, too, knows the answer lies in reform. But the anti-multinational rhetoric is so easy to peddle politically, that the opportunity cost of saying nothing is proving too great to be justifiable.
True leadership means forcing progress on the toughest issues, not playing to the crowd, regardless of the strength of wind against you. Washington, take note.
Matthew Gilleard
Corporate tax editor, International Tax Review
