Just back from the above panel, which was held under the Chatham House Rule, which provides that "participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed."
So I'd better not say whether I actually delivered the remarks in my prior post, or whether, if I did, I spoke fast enough (or the chair was lenient enough) for me to deliver the whole thing in five minutes.
But I will mention what I considered the most interesting thing I heard at the session. It was suggested in some quarters that, even though the U.S. has what we label as a "worldwide" system, while Germany has what we label as a "territorial" system, it is not entirely clear which system bears more rigorously on its multinationals. Germany, for example, has much tougher earnings-stripping rules than we do, perhaps even making it harder, in some circumstances for German than U.S. companies to strip earnings out of the domestic tax base.
The response offered to this was as follows: If the U.S. isn't much tougher on its multinationals than Germany, why is it that tax inversions are a U.S. phenomenon, not a German phenomenon?
Sounds convincing, right? Actually, not so much. The response offered to that was, at least my view, a game, set, and match refutation of the claim that inversions prove the U.S. tax regime to be more onerous.
The point is as follows. Companies don't look to invert because their current tax rate is high - it's not based on the absolute pre-inversion level. Rather, they consider inverting based on an assessment of before versus after. The U.S. rules differ from Germany's in that they make the before vs. after analysis of an inversion potentially far more appealing for U.S. than German companies.
This, in turn, happens for two reasons. First, given how much tougher the German than the U.S. earnings-stripping rules are, there's much less payoff to a German inversion. You can't do as much great stuff afterwards, such as through intra-group loans. Plus, in the U.S. setting, since we use our controlled foreign corporation (subpart F) rules to discourage the use of intra-group debt to reduce U.S. tax liability, you really give yourself a new tool here by inverting.
Second, because we have deferral, you get out from under the burden of having to play costly tax planning games to access the overseas earnings without incurring U.S. repatriation tax. That reflects a stupid design element of our system, but again, it's about the before versus after, and doesn't prove anything about the overall relative levels.
My remarks in the previous blog post emphasized the importance, if we eliminate deferral, of imposing a transition tax on the pre-change foreign earnings that would now permanently escape the repatriation tax. I would also consider applying such a tax to U.S. companies that invert, i.e., treat the transaction (even if very substantive) as a constructive repatriation of prior foreign earnings of the U.S. group. Indeed, this cash-out of the deferred tax liability could apply even though the foreign earnings typically remain in the hands of subsidiaries of U.S. companies in the ownership chain, since having a foreign parent on top of the whole group generally makes it easier to avoid repatriation indefinitely than it would have been before.