Treasury Inversion Tax Law Fallout Begins With Abbvie-Shire Merger Failure

The $54 billion inversion deal announced back in July by North Chicago, IL-based pharmaceutical giant Abbvie Inc. through a merger with Dublin, Ireland-based Shire PLC is now being rolled back.

Abbvie said in a statement last week that its board of directors is withdrawing the recommendation made on July 18, 2014 regarding the proposed Shire transaction and now recommends that stockholders vote against the transaction.

As per the statement, the board made this determination following a “detailed consideration of the impact of the U.S. Department of Treasury’s unilateral changes to the tax rules, as issued on September 22, 2014.”

That’s the first casualty racked up by the Treasury’s new law in this tax tiff over inversions. It’s a big deal and provides solid evidence that the inversion law changes will have some impact. It might even be better than the Treasury might have been hoping for, because this was a done deal that is now being rolled back.

It opens up the door for similar back-tracking of other large inversion deals because the tax benefit is now gone, and what’s the point of being headquartered on paper in a remote corner in Europe if your business and operational headquarters are actually based in the U.S?

Abbvie’s statement about tax law changes sums it up nicely – “the changes eliminated certain of the financial benefits of the transaction, most notably the ability to access current and future global cash flows in a tax efficient manner as originally contemplated in the transaction.”

It’s not unheard of, since many failed corporate marriages eventually end up with divorce.

As far as Abbvie and Illinois are concerned, they’ll just have to put the whole thing in the rear view and try to move on. Abbvie will not only lose the chance to reduce its tax rate from 22 to 13 percent, but may also now be on the hook for $1.635 billion which it may have to pay to Shire.

That’s the amount of the break fee according to their agreement, payable if the Abbvie shareholders reject the merger agreement or if the meeting doesn’t take place by Dec 14, 2014.

As far as Illinois is concerned, it’s like suddenly finding money which you forgotten about. They would have lost a huge amount in annual tax revenues if the inversion had been completed.

U.S. Senator for Illinois Dick Durbin said in a statement that he’s “by reports that AbbVie will reconsider its decision to move its tax address out of the United States.”

“When corporations choose to invert and don’t pay their fair share of taxes, they leave the rest of us to pick up the tab. That isn’t right, and I hope that more companies will see the light,” said Sen. Durbin.

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Federal Tax Collection Hits $3 Trillion

For the first time in the history of the United States, the federal government’s tax collection has exceeded $3 trillion.

To be specific, federal government receipts totaled $3,020.8 billion in FY 2014, according to a joint statement issued by Treasury Secretary Jacob J. Lew and OMB Director Shaun Donovan.

The FY 2014 tax collection was $247 billion higher than in FY 2013, an increase of nine percent.

The FY 2014 receipts equal 17.5 percent of the GDP, which is again 0.8 percent higher than FY 2013. The increase in receipts from last year has been attributed to an improvement in the economy, and the expiration of tax breaks that weren’t renewed by Congress.

A detailed breakup of the reasons for higher collections includes higher than expected collections of individual and corporate income taxes.

Specifically, individual income taxes collected amounted to $1,394.6 billion and corporation income taxes collected amounted to $320.7 billion.

Social insurance and retirement receipts were pegged at $1,023.9 billion, which is actually lower than estimated because deposits by States towards the unemployment insurance trust fund were lower than expected. 

Excise taxes and estate and gift taxes were higher than expected. The excise tax collection added up to $93.4 billion, while estate and gift taxes collected added up to $19.3 billion.

Customs duties collected were lower than expected at $33.9 billion, and miscellaneous receipts added up to $135 billion.

Now for the outlay - Despite all the spending cutbacks and gridlock in Congress, the federal government’s spending in FY 2014 still managed to increase to $3,504.2 billion, which is $50 billion above the FY 2013 spending level.

The good news is that the deficit is therefore only $483 billion, the lowest deficit since 2008. This deficit is down $197 billion over FY 2013.

As a percentage of GDP, the deficit is now only 2.8 percent, as opposed to 4.1 percent in FY 2013. This is the lowest level since 2007, and below the average for the last 40 years.

Another factoid you may find interesting is that this reduction of the U.S. budget deficit by approximately two-thirds is the fastest sustained deficit reduction since World War II.

It’s now a very real possibility that the deficit could turn into a surplus in 2016.

"This economic and fiscal progress underscores what is possible if we continue to invest in growth and opportunity," said OMB Director Donovan.

See the full FY 2014 receipts by source and outlays by agency

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Google France Tax Dispute May Decide EU Tech Taxation Law

A few months ago, the French taxman handed Google France a small assessment that could possibly exceed €1 billion. It’s now being negotiated, with Google claiming it followed current tax law and doesn’t owe the tax. But France’s tax agency doesn’t see it that way.

The core of the issue is about Google’s corporate setup in France which doesn’t directly have in clients. According to a report in Forbes, Google France only deals with Google Inc. and Google Ireland.

On paper, customers deal directly with Google Ireland, with Google France staff providing marketing and sales support as required. The ad revenues are all mostly from online auctions which don’t require any staff intervention.

The point here being that Google France doesn’t collect revenue from customers, and as such doesn’t get taxed on this revenue in France. Tax treaties between France and Ireland ensure that Google Ireland doesn’t get taxed by France either, unless there’s a “permanent establishment” in France helping the company earn that revenue.

The end result here is that Google is paying tax on its French revenues at a far lower rate in Ireland while entirely avoiding France’s higher tax rate. Ireland has a 12.5 percent tax rate, while France’s corporate tax rate is astronomically high at 33.3 percent. 

It seems to be legal as per current tax law in both countries if you accept Google’s argument that the bulk of their revenue is earned online without the aforementioned permanent establishment, but not a big surprise that the French tax authorities are miffed and claiming that the company’s marketing and sales staff in France represents said permanent establishment.

The end result of this dispute is not just about Google’s tax bill. It’s about whether multinational tech companies should be allowed to get away with legal tax avoidance in the EU by directing all their earnings to tax havens. If Google if forced to pay the huge assessment, a whole lot of tech companies are going to have to pay up too.

Besides, Google is not the only one in the crosshairs at the moment. Facebook took a lot of heat in the U.K. for not paying any corporation tax last year. Dell is appealing a court verdict on a tax issue in Spain, and the EU is gunning for Amazon with a probe into its tax arrangement through Luxembourg.

Photo credit – Carlos Luna/Flickr

Berkeley, SF Form Last Line of Defense in Soda Tax Battle

The lines have been drawn for one last battle of the “bulge” in Northern California in the soda tax war between Big Soda and public officials.

soda tax

The war has been raging from coast to coast, and Big Soda has until now managed to roll back all attempts to impose a soda tax in the name of public health.

The fight has raged in big cities like Philadelphia and New York, and has been taken to small towns including Richmond, CA and Telluride, CO.

The NY State Legislature’s refusal to get involved in former Mayor Mike Bloomberg’s soda ban and the court’s intervention to strike down the law was one of the biggest wins for Big Soda.

Their NYC victory effectively ended the war in the Northeast liberal bastions, and the focus has now shifted to the West Coast.

If public officials in the Bay Area, including California’s most progressive city, cannot get this tax passed, it will end the soda tax war once and for all.

Both sides know this very well, and that’s why over $8 million has been poured into this battle by both opponents and proponents of Proposition E, the ballot measure to impose a 2 cent soda tax on sugared beverages in San Francisco.

Of this, $7.7 million is being spent by the beverage industry to get voters to reject the soda tax measure in November by a two-thirds majority. Proponents of the measure have managed to raise a meager $260,000 by comparison.

One advantage that proponents have is that the tax revenue from the proposed tax has been set aside for a specific purpose (health and nutrition programs), and would not just be lost in the general fund. Not to mention the fact that San Francisco has a long history of civic activism in favor of a healthier lifestyle.

Even so, $7.7 million to defeat a single local ballot measure is a stunningly large spend, even if the city is San Francisco and the result could have a huge impact nationwide.    

What makes the measure even more worrisome for the American Beverage Association is that it could end up taking a 1-2 combo hit from San Francisco and Berkeley, where a similar 1-cent soda tax is on the ballot.

If both measures pass, that would immediately lead to a slew of cities in California and all over the nation trying to squeeze some of that fizz out of every sugary soda drink. It might even embolden public officials in New York to take another crack at it.

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Tax Case Ruling - Susan Crile’s Art Creation is Not Just a Hobby

If you’re gainfully employed and an artist selling your art, does that make your art a hobby or a business? A U.S. Tax Court judge handed out a ruling in Susan Crile v. Commissioner of Internal Revenue that could have major ramifications for other artists.

The core issue is that you can’t produce a net loss by making use of deductions in excess of profit for an activity classified as a hobby.

How the IRS determines whether your activity gets classified as a for-profit-business or hobby is defined in Section 183 of the code.

Here’s how it usually works – You’re an artist, but with an income from some kind of employment. Then you start trying to sell your art, and this venture involves expenses and perhaps a net loss. You try to offset the income from your employment with the loss from your new art venture. The IRS disagrees and labels your art as a hobby, and seeks to recover tax deficiencies and penalties.

Crile v. Commissioner is significant because it was the other way round with Susan Crile, who has had a long and distinguished career as an artist. She has been painting for more than 40 years, and has exhibited and sold her art at leading galleries and received awards, residencies and fellowships.

During her career, Susan Crile has created more than 2,000 pieces of art, and her art works are now on display at 25 or more prominent museums including the Metropolitan Museum of Art and the Guggenheim Museum.

Crile’s sale of 356 works of art from 1971-2013 have generated gross sales of $1,197,150. After setting aside the part of the income that goes to galleries and other reductions, Crile has earned a gross income of at least $667,902 from 1971 to 2013.

Furthermore, she was appointed as a full-time professor of studio art (now with tenure) at Hunter College in NYC.

The tax court ruling dealt separately with the nine factors under section 183 used to determine whether an activity should be classified as a for-profit business or a hobby.

The court found that four of the factors strongly favored Crile’s position, while three were neutral or slightly leaning towards the IRS position. Only the remaining two factors were strongly in favor of the IRS.

As such, the court ruled in favor of petitioner Crile that her painting work was not just a hobby but an activity she engaged in “with an actual and honest expectation of profiting from it.” 

The court therefore held that within the meaning of the internal revenue code, Susan Crile was “engaged during the years in issue in the “trade or business” of being an artist.”

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Affordable Care Act Tax Law on Shaky Ground After Oklahoma Ruling

Just as things were starting to get settled down with individuals and businesses learning to fulfill the compliance requirements under the Affordable Care act, it looks like the courts might declare one of the key components of the ACA invalid.

The latest development is that Federal District Court Judge Ronald A. White, who presided over Pruitt v. Burwell in the District Court for the Eastern District of Oklahoma, has issued a ruling which finds the IRS’ implementation of some of the tax law changes associated with the ACA to be invalid.

Specifically, the Patient Protection and Affordable Care Act only allows federal tax credits to subsidize health care purchased through the new health insurance exchange if the state has established said exchange.

Since 36 states declined to set up the marketplace, the federal government stepped in to provide tax subsidies for eligible health care plan enrollees in these states who bought their health care through the federal marketplace.

This is what Pruitt v. Burwell, filed by Oklahoma Attorney General Scott Pruitt, aims to overturn. Judge White agreed, noting that the language in ACA was clear and unambiguous that only those covered through an exchange established by the State under section 1311 of the ACA may receive premium assistance.

Judge White also noted that there is no similar clear and unambiguous language about what someone who purchases health care from the federal exchange is entitled to.

The federal court’s ruling doesn’t go into effect right away. It’s on hold pending an appeal, which the federal government is going forward with.

Pruitt v. Burwell is one of four such cases against the ACA’s tax law clauses that are making their way through the federal judicial system.

Two other cases (Halbig v. Burwell and King v. Burwell) are already in the appeals stage. In the Halbig case, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the plaintiffs, and the full circuit will be reviewing the case on Dec 17.

In the King case, the Fourth Circuit Court of Appeals ruled in favor of the IRS, so David King and the other plaintiffs in the case are now petitioning the U.S. Supreme Court.

The fourth case is State of Indiana et al vs. IRS filed by Indiana AG Greg Zoeller in the U.S. District Court for the Southern District of Indiana. This case is set to be heard later this month.

It’s obvious that this is going all the way to the Supreme Court, and it’s safe to say that Congress is at the moment incapable of providing any more clarity on the ACA through legislative changes.

It’s now up to the Supreme Court to decide whether the ACA tax credits will be available in all 50 states, or only in the states which have established their own health care exchange.

As far as the IRS is concerned, it will make life very difficult if their ability to authorize ACA tax credits to five million people in 36 states gets revoked a year down the line by the Supreme Court. 

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Tax Reform Focus Shifts From House to Senate

When Dave Camp (R-MI), chairman of the House Committee on Ways and Means and one of the most respected tax law authors in Congress, released his tax reform plan earlier this year, it was automatically considered as the go-to plan that would form the basis of any legislation that simplifies and overhauls the entire tax code.

But now the onus for any proposed tax reform is shifting from the House to the Senate. Last week, Senators Mike Lee (R-UT) and Marco Rubio (R-FL) came up with their own tax reform plan which sharply diverges from Camp’s plan.

The Lee-Rubio plan would allow companies to take a full and immediate deduction for all investments. It would consolidate existing income tax brackets into two brackets - 15 and 35 percent.

Their plan eliminates the marriage penalty, where married couples end up paying higher taxes than if they filed individually.

The Lee-Rubio plan also hikes the child tax credit of $1,000 to a $3,500 refundable tax credit, applicable against income taxes and payroll taxes.

They also say they plan to cut the corporate tax rate, but do not specify the new rate. There is also no date as yet for when the plan will be introduced as legislation. Dave Camp’s plan has already been introduced as the Tax Reform Act of 2014.

This brings us to an important issue - Rep. Dave Camp is retiring at the end of this Congressional session and won’t be returning to perch on Ways and Means next year. It’s fair to say that the Lee-Rubio tax reform plan would firmly put the onus for tax reform on the Senate.

This in turn raises the question of what happens to this plan if the Democrats retain control of the Senate. Nothing much, because then the Senate’s tax reform plan would have to be introduced by a Democrat or at least as bipartisan legislation, in order to stand a chance of making it through the Senate.

But in that case, the Senate’s plan would no doubt be firmly opposed by the House, which will simply pass the Dave Camp plan and wait for the Senate to follow suit. This standoff could be avoided if the Senate and House are both controlled by the Republicans.

In other words, the proposed Lee-Rubio plan is laying the foundation in case the Republicans gain control of the Senate. Regardless of whether this plan or the Dave Camp plan is ultimately made use of, that would be good news in terms of the fact that long-overdue tax reform now looks good to be passed by both the House and Senate early next year.

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Will Treasury’s Inversion Fix Play a Spoiler in Congress?

The U.S. Department of Treasury and the IRS finally unveiled a set of changes to the tax code that will make inversions harder or attempt to stop them altogether.

The corporate and tax law changes in the notice issued on Sept 22, which are not retroactive,  are meant to be a stop-gap arrangement to prevent further inversions until such time as Congress can get its act together.

Let’s look at how this is going to impact whatever legislation Congress may have been considering to close the tax loopholes and stop inversions. 

Nothing was and is going to happen before the Nov elections. But the thing is that Treasury’s move will slow down any further planned inversions, and there won’t be any corporate villains in the news portrayed as deserting America to avoid taxes.

With no public outrage and press coverage about inversions after the elections, it’s a good bet that Congress will be looking at other things. Any proposed action on inversions will be pushed back and lumped into the comprehensive tax reform proposal.

In other words, the Treasury’s action has all but assured that any possible standalone bill to stop inversions is now a dead duck.  

This would have been acceptable if the Treasury had cracked down hard on the “inverters.” But the actions taken are at best being described as a bandaid.

Business Roundtable President John Engler issued a statement in which he says that "tax inversions are a symptom of a U.S. corporate tax system that is outdated, uncompetitive and puts American companies and workers at a disadvantage with the rest of the world. Unfortunately, the regulations proposed by the Treasury Department yesterday amount to a Band-Aid solution that will only make matters worse.”

On the other hand, Susan Harley, Deputy Director, Public Citizen’s Congress Watch Division, applauded the Treasury’s actions in a statement issued by Public Citizen. “Treasury’s actions are needed to combat a longtime culture of tax dodging within some multinational corporations. Without teams of wily tax lawyers, small businesses and average taxpayers are left to pick up the tab when corporations like Burger King announce they are skipping town and relocating in another country,” said Harley.

It needs to be pointed out here that the Burger King-Tim Hortons deal wasn’t about a tax inversion. But Harley’s broader point about teams of wily tax lawyers helping large corporations avoid taxes through inversions and other complicated schemes is true enough and needs to be addressed through proper legislation.

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Tax Office Burned Down in France by Protesting Farmers

It’s not exactly the storming of the Bastille, but the pitchforks are really out in France, and it’s a tax office this time that had to bear the brunt of the wrath of a bunch of very angry farmers.

The tax office in the Town of Morlaix, in Brittany, was invaded by farmers who first laid siege to the tax office using artichokes, cauliflowers and manure.

Trailers loaded with the stuff were dumped on the streets around the tax office to block off access, and then the building was then vandalized and set ablaze.

The blocked streets prevented fire fighters from reaching the tax office in time to put out the fire, and the Town of Morlaix is now in need of a new tax office. Plus, the tax collectors are going to be very careful from now on about doing anything untoward in order not to set off another rampaging mob of farmers on the town.

This whole protest wasn’t exactly about tax, but it was in part about the government’s tax policy. It began more as a protest about the international trade standoff between the EU and Russia.

Because of sanctions imposed on Russia over the Ukraine issue, Russia has responded with a blockade of agricultural produce from the EU and the U.S.

A group of 100 farmers descended down on the town’s insurance office in their tractors and trailers and completely burned it to the ground. Then they made their way over the tax office and dumped their unsold produce to block the roads and burn down the tax office.

The farmers are negotiating with the country’s agriculture ministry and other departments for emergency assistance, and they have protested before against proposed new tax policies and regulations.

Last year, farming associations used tractors to block seven major highways that lead into Paris to protest against a proposed trucking levy and a hike in the value-added tax on fertilizer, in addition to new environmental regulations that limited use of tractors on certain days.

The proposed Ecotax levy on trucks was scrapped after the Brittany protests turned violent and one person was killed and others injured in the protests.

Earlier this year, another group of farmers burnt rice straws in front of the National Assembly to protest against tax hikes and restrictive regulations.

The French government already collects some 46 percent of GDP as taxes, and the latest International Tax Competitiveness Index from the Tax Foundation shows France as the worst of the 34 OECD countries in terms of a competitive tax code.

Photo credit - Bibliothèque nationale de France/Wikimedia

Tax Foundation’s 2014 International Tax Competitiveness Index

If you’ve been looking down your noses at France’s take-no-prisoners approach when it comes to taxing corporations, then maybe it’s time to take a closer look in the mirror.

Portugal is apparently the only thing that stands in between the United States and France, in terms of the least competitive tax code among OECD countries.

This, according to the Tax Foundation’s 2014 International Tax Competitiveness Index, which finds that Estonia tops the list of developed nations with the most competitive tax code.

Estonia is followed by New Zealand in second place and Switzerland in third place. The ITCI attempts to serve as a guide to show which countries offer the best tax environment for companies with business growth and development plans looking to make investments.

The rankings are based on more than 40 tax policy variables across five categories – corporate income taxes, personal income taxes, property taxes, consumption taxes, and tax treatment of foreign earnings.

The United States got ranked abysmally low with an overall score of 44.6 (with Estonia at 100) because of the 39.1 percent corporate tax rate - the highest in the developed world. Not to mention the fact that the U.S. is one of only six OECD countries that still have a worldwide system of taxation.

The Tax Foundation also cites the mess in the U.S. tax code in terms of the structure of taxation on individuals, property, dividends and capital gains.

Estonia at the top of the list of 34 OECD countries has a corporate tax rate of 21 percent, and there is no double taxation on dividend income. Estonia’s individual income tax rate is likewise a flat 21 percent across the board, and the country only has a property tax on land (as opposed to taxes on land, buildings and structures).

If it’s any consolation for the U.S., it can be found in France, ranked dead last on the Tax Foundation’s ITCI. Apart from the 34.4 percent corporate tax rate, France also has high property taxes and extremely progressive individual taxes that are poorly structured.

Tax Foundation Economist and co-author of the report Kyle Pomerleau, said in a statement that “No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance.”      

Pomerleau adds that many countries have recognized this fact and have moved to reform their tax codes in order to stay competitive. However, others [read United States] have failed to do so and are falling behind.

The Tax Foundation notes that the last major overhaul of the U.S. tax code was in 1986, when the top marginal corporate income tax rate was reduced from 46 to 34 percent in order to make U.S. corporations competitive all over world.

The rest of the world followed the U.S. lead and most have since reformed their own tax laws, the result being that the U.S. is now behind the curve and sorely in need of tax reform.

Read the full Tax Foundation 2014 International Tax Competitiveness Index.

Photo credit – Tax Foundation