Corporate Inversion Crackdown

Smith's Faulkender to Reporters: U.S. Companies will Evade New Measures

Michael Faulkender, associate professor of finance in the University of Maryland's Robert H. Smith School of Business, says companies will find ways around the Department of the Treasury's new measures to deter U.S. firms from relocating headquarters to countries with lower tax rates – the basis of a “corporate inversion.” Instead of focusing on this business strategy, he says, U.S. officials should target and lower the corporate tax rate.

Faulkender, co-author of the working paper Taxes and Leverage at Multinational Companies, and director of the Smith School's Master's Program in Finance, told Toronto’s The Globe and Mail that “some agreements would be rewritten or even fall apart,” but ultimately “the bankers and the lawyers will figure out how to get around it… The Treasury always will be running behind."

Burger King’s planned relocation to Canada and a lower corporate tax rate via a $12 billion deal to acquire doughnut-coffee chain Tim Hortons is piquing Canadian interest in this U.S. policy development.

As the merger proceeds despite the U.S. crackdown, Faulkender told the Financial Post’s Nicolas Van Praet: “A true end to (corporate inversions) won’t come before more substantial tax code reform enacted by Congress.” (Van Praet’s report was republished by large dailies across Canada, from the Montreal Gazette to the Vancouver Sun.)

Through the Christian Science Monitor, Faulkender said: “With the highest corporate income tax rate among [advanced] nations and the double taxation of international operations, the United States with its tax code has made itself increasingly uncompetitive as we vie for companies to locate and to expand operations here.”

It's possible, he added, to lower corporate tax rates in a way that attracts business investment and keeps firms in the US, while ensuring through other tax changes that the US Treasury gets the revenue it needs to pay the government’s bills.

Recent events should incentivize lawmakers to act. Faulkender told the Morning Consult: “The outrage over inversions should serve as laying the groundwork for comprehensive tax reform. I do not think members on the Ways and Means Committee in the House or Senate Finance are going to want to merely address inversions and remove some of the groundswell for attempting more comprehensive reform.”