While it remains to be seen whether some level of federal income tax reform is able to advance through Congress and be agreed on by the president this year, it’s an issue that warrants close attention.
Wisconsin Congressman Paul Ryan, a proponent of tax reform and chairman of the House Ways and Means Committee, has said if reform is going to happen it needs to be finished by summer. At a recent address to the Rotary Club of Milwaukee, he also suggested a need for reform in order to discourage businesses from executing inversions to take advantage of more favorable tax rates overseas.
Simply put, inversions involve domestic companies engaging in a merger or acquisition transaction to move their headquarters abroad. In many cases, these moves are made at least in part for tax purposes. Some corporations have significantly reduced their tax rates compared to the U.S. rates as a result of moving their headquarters to another country.
Reform that brings the U.S. tax code more in line with global competitors would level the playing field and greatly reduce the competitive disadvantage experienced by companies headquartered in the U.S. Most importantly, reform could pave the way for businesses to repatriate revenues that they have traditionally kept overseas for tax purposes.
As it stands now, revenue that is kept overseas is not subject to U.S. taxes. Revenue that is repatriated is subject not only to the tax levied in the originating country, but also to the difference between the 35 percent U.S. tax and the foreign tax.
Effective tax reform that lessens such tax burdens could create more opportunity for U.S. companies to bring revenue back home for investment and potential economic growth.
For a region like southeast Wisconsin – home to its share of multinational corporations – such developments could pave the way for investments on the home front that lead to job growth and economic development.
-John Wilson is a partner and corporate lawyer in the Milwaukee office of Foley & Lardner LLP, and is a member of the firm’s Transactional & Securities practice and Energy Industry team.
