Wisconsin Based Battery Maker Moves to Ireland

Washington responds to Johnson Controls’ inversion to Ireland

Inversions continue in the U.S., with Johnson Controls’ deal to merge with Ireland’s Tyco International being the latest example. The plan prompted one U.S. congressman to say it shows the urgent need for Congress to act against inversions. The chairman of the House Ways and Means Committee, separately, said his panel will work toward having a comprehensive international tax reform package ready in 2017.

Johnson Controls Inc. and Tyco International PLC have reached a definitive accord to combine the two companies by fiscal year end. Following the proposed transaction, Ireland-based Tyco would be 56%-owned by shareholders of Johnson Controls, a car battery maker based in Wisconsin. Tyco, a global fire and security provider, would be renamed Johnson Controls PLC. The boards of directors of both companies have approved the terms of the agreement.

Note: While Ireland boasts a standard 12.5% tax rate for trading (that is, not passive) income, the United States continues discussions about international tax reform to potentially reduce the U.S. corporate tax rate to 25% or lower.

Urgent action needed

In a statement regarding this recent inversion, House Ways and Means Committee Ranking Member Sander Levin (D-Mich.) said:

“The Johnson Controls–Tyco deal shows the urgent need for Congress to get off the sidelines and pass legislation to end corporate tax inversions. While Speaker [Paul] Ryan has responded by saying that we need to do tax reform, we cannot continue to dawdle. Congress must close this loophole that is costing our country tens of billions of dollars in lost revenue. Legislation I introduced last year — which is retroactive to May 2014 — would stop these tax-motivated inversions once and for all.”

Separately, House Ways and Means Committee Chairman Kevin Brady (R-Tex.) said that the urgency of U.S. international tax reform is heightened by what has been happening in the rest of the world and what is on the horizon.

In a keynote address at the Tax Council Policy Institute’s 17th Annual Tax Policy & Practice Symposium, he said the recommendations from the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) project “would disproportionately burden American global businesses,” as countries around the world, in following those recommendations, are “implementing aggressive new tax measures.”

Brady called recent European Union actions a “whole new arsenal of new revenue-grabbing tax measures.” He charged that EU state aid investigations “are threatening to impose retroactive taxes going back ten years on American businesses. . . . We cannot allow American taxpayers to foot the bill for increased tax collections in Europe and elsewhere.”

Principles of reform

Chairman Brady noted that, in the two decades leading up to 2004, the United States averaged two inversions a year. That doubled to four a year in the decade through 2014 and increased to six in 2015. Many more U.S. multinational enterprises (MNEs) may “be forced to restructure their business operations and move U.S. activities, such as research and development, overseas,” due to concerns with higher taxes and compliance costs, double taxation, and other tax implications resulting from the OECD’s BEPS project recommendations, he said.

Chairman Brady outlined the following six core principles that would guide U.S. tax reform:

  1. The tax code must be simpler, fairer and flatter, so that individuals, families and small businesses needn’t grapple with a tax code that is impossible to understand.
  2. Tax reform must close loopholes, eliminate special rules, and limit the deductions, exclusions and credits that riddle the tax code today — so as to lower U.S. tax rates for everyone. Well-advised taxpayers today use an array of complex tax provisions to minimize their U.S. taxes under the law, but that complexity is a waste of resources that distorts investment decisions, leads to disputes with the IRS and takes critical time and capital away from running successful businesses.
  3. Enterprises both large and small must have a competitive tax system, including a fair and competitive U.S. tax rate. Small businesses, which are typically operated as S corporations, limited liability companies (LLCs) or partnerships, deserve a tax system that encourages growth. Small businesses shouldn’t believe that their U.S. tax rate places them at a disadvantage to large C corporations.
  4. The U.S. tax code must stop encouraging the shift of jobs overseas. Too many businesses are being acquired by foreign corporations or engaging in corporate inversions to avoid being a ripe target for foreign takeover. The U.S. tax code should encourage businesses to locate their operations in the U.S., create U.S. jobs and help grow the U.S. economy. The current U.S. worldwide tax system needs to be replaced with a permanent modern territorial-type system that helps U.S. companies compete and win overseas and easily bring earnings back home to invest in new jobs, research and growth.
  5. A tax code must be built for U.S. economic growth, Brady said. Tax reform that merely aims to place America back in the middle of the pack “won’t cut it.” He added that the late Steve Jobs of Apple, when urging his team to develop innovative products, preached, “When you’re behind, leapfrog.”
  6. A 21st Century tax system shouldn’t raise taxes to bail out Washington’s spending problem. To eliminate the U.S.’s enormous national debt requires more than entitlement reform and spending restraint. Strategies to constrain U.S. spending must be accompanied by U.S. growth. There is no better formula for growth than the right kind of U.S. tax reform.

Looking forward

Chairman Brady said his committee will move forward immediately to draft international tax reform legislation. He said: “Our work here will be a down payment that clears the way to focus on the work on lowering rates and simplifying the code for all businesses and individuals, so that we are ready to enact comprehensive tax reform in 2017.”

© 2016

International tax reform - San Jose CPA