Hillary Clinton Plans a Corporate ‘Exit Tax’ Proposal would be meant to deter companies from merging with smaller overseas firms By Richard Rubin And Laura Meckler
http://www.wsj.com/articles/hillary-clinton-plans-a-corporate-exit-tax-1449530258
WASHINGTON—Hillary Clinton’s plan to deter companies from leaving the U.S. will include an “exit tax,” her campaign said Monday, making it even more restrictive than President Barack Obama’s proposals.
Like Mr. Obama, Mrs. Clinton wants to prevent companies from leaving the U.S. tax system by merging with a smaller foreign firm. That rule could have discouraged Medtronic PLC from putting its tax address in Ireland and could complicate the similar transaction that Pfizer Inc. is attempting now. Both of those deals use a law that allows such inversions as long as the U.S. company’s shareholders own less than 80% of the combined business.
The Obama proposal has gone nowhere in Congress, stopped by Republicans who say it amounts to erecting walls around the U.S. tax system rather than making it more favorable. Mrs. Clinton would go further, requiring companies to pay U.S. taxes on deferred foreign earnings if they attempt to “game” her new threshold, a campaign aide said Monday.
Mrs. Clinton, the front-runner for the Democratic presidential nomination, will speak about corporate taxes on Wednesday in Iowa. The aide said she would unveil “another major component” of her plan then.
The U.S. taxes companies on their world-wide earnings but allows them to claim foreign tax credits for profits earned abroad and defer U.S. taxes until they bring the money home. That system and the 35% marginal corporate tax rate encourage companies to earn money abroad in low-tax countries and leave it there. U.S. companies now have more than $2 trillion in stockpiled offshore profits that haven’t been fully taxed.
An exit tax would mirror the system the U.S. uses to tax retirement accounts of individuals who renounce their citizenship, said Steve Rosenthal, a senior fellow at the nonpartisan Tax Policy Center in Washington. “At the very least, an exit tax would throw an impediment to all the existing companies,” he said. “It’s a sensible step. Of course, it needs to be more.”
The amounts at play could be significant and could make U.S. companies much less attractive takeover targets. Amgen Inc., for example, said in a securities filing that it would owe $10.5 billion if it brought home all $29.3 billion it has outside the U.S.
Clinton’s tax would apply to some transactions structured as foreign takeovers of U.S. companies aimed at getting around the rules. When U.S. companies are bought or when they do a corporate inversion, they don’t get to bring all the offshore money back tax-free. That money is typically still subject to U.S. tax rules.
The big attraction for companies has been accumulating future profits outside the U.S. tax net.
Douglas Holtz-Eakin, a Republican economist, replied to the Clinton proposal by noting that there is already an exit tax in place. Shareholders pay taxes on gains when companies invert, and that hasn’t been effective in addressing the problem, Mr. Holtz-Eakin said. The Clinton version of the exit tax also doesn’t address what he called the fundamental problems of the U.S. corporate-tax system.
“The ratio of politics to policy in this is quite high,” he said. He added that the exit tax assumes the exits continue. “They are admitting failure up front.”
Write to Richard Rubin at richard.rubin@wsj.com and Laura Meckler at laura.meckler@wsj.com
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