A Recent Executive Order Threatens to Roll Back Safeguards against Offshore Tax Avoidance

The tax reform battle in Congress is looking to be a long, hard-fought one, but the president’s recent executive order shows that there may be no need to wait to start giving huge tax breaks to corporate giants.

The executive order, signed late last month, calls on the Treasury Department to review all “significant” tax regulations issued on or after January 1, 2016. Included in this window are rules curtailing earnings stripping and corporate inversions for the purpose of tax avoidance.

The executive order states that this review should examine which, if any, rules impose an undue financial burden on U.S. taxpayers or add undue complexity to the federal tax law.

In fact, curbing earnings stripping and limiting corporate inversions relieves the financial burden on U.S. taxpayers, levels the playing field for small businesses, and would simplify the tax system by eliminating some of the more nonsensical tactics multinational companies use to pretend their U.S.-earned profits are actually earned elsewhere. These tax gimmicks serve no useful purpose, are unfair, and they help only the few biggest multinationals.

Just 30 Fortune 500 companies control 66% of the total stash of profits booked offshore. The vast majority of these profits are shifted to these tax haven countries — not by way of legitimate business — but by way of tax gimmicks precisely like the ones the Treasury Department was originally aiming to minimize with its rule.

Small businesses are rarely able — or often unwilling — to shell out the money to hire the army of tax attorneys necessary to take advantage of the same loopholes that the biggest corporations use to cut down their U.S. tax liability (sometimes to near-nothing). Thus, small businesses end up competing with these giants, not on the merits of their products and services, but rather on the cleverness of their tax gimmicking game.

This rule has, in its short life, already worked to prevent companies from taking advantage of our tax code by flip-flopping their “ownership” to a low-tax jurisdiction. In April 2016, Pfizer backed off of a $160 billion deal that would have effectively shifted its headquarters in name only to Ireland, a country well-known in pharmaceutical and tech industry circles as the latest go-to destination for tax avoidance. By buying up a smaller company (Allergan), Pfizer would have been able to legally claim itself as an Irish company, despite still operating largely in the U.S., benefiting from U.S. markets, education, and infrastructure, and being owned by a majority of U.S. shareholders.

That’s where the tax games would have only just begun. Pfizer would have then likely used its newly acquired Irish parent company to give loans to its American subsidiary, charging the U.S. subsidiary high interest rates and fees. These loans would have allowed Pfizer to shift its U.S. earnings over to Ireland without paying a dime of U.S. tax on any of it, thanks to substantial interest rate deductions. The Pfizer deal never came to fruition, in part thanks to the specter of the new safeguards the Treasury announced in April and finally put in place in October 2016. Knowing that the benefits of their Irish inversion would be short-lived, Pfizer opted to shut down the deal.

Undoing the Treasury Rules would tell a company like Pfizer to pull out the old paperwork and have at it when it comes to offshoring and tax dodging.

According to a 2015 Pew Research Center poll, American’s top complaint about the tax system is the feeling that some corporations do not pay their fair share in taxes. In fact, President Trump ran his campaign on rhetoric around keeping companies in the U.S. and closing the loopholes that the biggest corporations take advantage of. President Trump’s latest order, if it results in the unraveling of significant progress toward curtailing tax avoidance, will do just the opposite of that. The biggest corporate giants will be handed back their favorite tax gimmicks, incentivized to shift their profits to offshore tax havens permanently, and small businesses and ordinary Americans will pay the price.

 Michelle Surka is the Tax and Budget Advocate at U.S. PIRG.