America’s crackdown on tax avoidance: will it work?

Amid mounting pressure last year, the US launched a supposed crackdown on tax inversion. But it might not have been as far-reaching as was made out, and with good reason
The recent G20 crackdown on tax avoidance by funnelling profits through tax havens has sparked a variety of reactions – not least from the likes of tech giants including Google, Facebook, Apple and Microsoft, whose representative lobby groups have raised objections against the two-year international programme that was kicked off in 2013. And it’s no surprise given the implications a genuine crackdown on tax schemes would mean for those names – and for the economies reliant on them.

It’s in the US, home to some of the biggest players in the world, that the crackdown has been especially prolific. The new guidelines brought out by the Treasury Department in September 2014 were supposedly meant to discourage tax inversions – that is, the act of moving a company’s tax address to another country to cut tax bills; a practice that shot into the limelight with the proposed $118bn Pfizer and AstraZeneca merger in April 2014. The guidelines appear to have had some impact, leading to the collapse of what was to be the biggest American acquisition of a European company seen in history – AbbVie’s planned $56bn takeover of Shire (see Fig. 1).

But despite the excitement that collapse stirred up among advocates of the crackdown, others believe the new rules will make little difference. Among the critics back in September was House Ways and Means Committee Chairman David Camp, according to whom “a few campaign-style speeches and stopgap measures from Treasury won’t do it. It hasn’t worked in the past”, The Wall Street Journal reported. The US Chamber of Commerce took a similar standpoint: “The administration didn’t really affect the ability of companies to invert”, Chief Economist Martin Regalia said in an interview with MarketWatch. “When you read the fine print, they admit it won’t affect inversions.”