President Obama’s Regulatory Reform

New Rules Stifle Investment, Undermine U.S. Ability to Compete Globally

This week the Obama Administration announced new rules designed to discourage corporate tax inversions. The new – and temporary – rules appear to target the previously pending Pfizer-Allergan merger, the largest pharmaceutical merger in history which has since been terminated. While the Obama Administration shows little interest in working with Congress to implement meaningful tax reform, they are showing quite a lot of interest in amending our tax system to further penalize the companies who fuel innovation and growth of the U.S. economy.

Prior to the new proposed rules, U.S.-based companies would seek lower tax rates by entering into a “corporate inversion.” In tax terms, an inversion is when a U.S. incorporated company enters into an acquisition with a foreign company qualifying them to avoid paying the 39.3 percent state-federal U.S. tax rate, one of the highest in tax rates in the world.

Until last week, Pfizer, Inc., a U.S.-based biopharmaceutical company and one of the leading investors in R&D advancing the science around next generation specialty drugs for oncology, cardiovascular and heart disease, had been in talks with Ireland-based Allergan, PLC about a pending merger. If the merger had gone forward, it would have qualified Pfizer for Ireland’s impressively low combined statutory business tax rate of 17 percent.

Because the new rules would hinder the financial growth of a Pfizer-Allergan merger, the actions by Treasury are suspiciously well-timed. The first rule targets what the Treasury Department has termed as “serial inverters” the second “earnings stripping”. Companies who have legally engaged in multiple off-shore acquisitions as a strategy for growth and tax savings will now be subject to entering into a three-year window, in which a foreign company will not be authorized to count newly acquired companies toward its foreign ownership percentage. Rule changes to stop “serial inversions” will subsequently end opportunity for growth by foreign acquisition on any short time frame.

The rule will require companies who have received loans from their foreign subsidiary – a common practice during a corporate inversion – to reclassify this loan from a transaction of debt, into a transaction of equity. This “earnings stripping” will take away the formerly legal option to use interest payments from a loan as a tax deduction to help combat the U.S.’ staggeringly high tax rate.

Treasury Secretary Jack Lew and President Obama have again proven their fundamental misunderstanding of how to create an environment that encourages greater economic growth. Some operate under the notion that economic and business incentives will have a static effect on revenue and investment, and further, require a high-level of punitive regulation in order to advance their objective to maximize federal revenue at all cost.

“When companies exploit loopholes like this, it makes it harder to invest in the things that are going to make the American economy strong for generations to come.” said President Obama following the announcement of the new Treasury rules.

In the President’s world paradigm, growing the U.S. economy comes from investing in public programs, while the private sector engages in “loopholes” intending to “game the system” that in reality were perfectly legal actions in a tax system that is in desperate need of reform.

Since 2002, there have been at least 133 major corporate tax cuts in 75 nations, all seeking to lure greater investment to their shores.  The existing U.S. tax code and these new rules in place, make it extraordinarily difficult to attract new business investment and jobs.  The U.S. faces a continuation of the meager 2 percent economic growth rate the U.S. has been experiencing throughout President Obama’s  term in office.

Absent a competitive system of taxation, we will continue to undermine our ability to compete globally, as compared to nations with significantly lower tax rates such as Canada, China, Great Britain, Ireland, Korea, Singapore and Japan. We must join other Organization for Economic Co-operation and Development (OECD) countries in lowering taxes and shying away from anti-competitive rules so we may retain the innovation and investment necessary to keep our economy growing, and once again make the U.S. the place for wise investment.

In Depth: Health

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