Foreign investors are putting record amounts of cash into the US in a sign of significant optimism about the country’s economy. But the investments also reflect the popularity of so-called “tax inversions,” a way for US companies to cut their tax rates by joining with a foreign company that has a lower rate.
Foreign direct investment into the US reached $200 billion in the first six months of this year, a record high according to a report by the Organization for Economic Cooperation and Development, NewsMax reported.
“These flows were driven not just by the improved economic performance in the United States but also by cross-border M&A designed to reduce companies’ US tax obligations,” the OECD said.
Luxembourg, whose laws allow the creation of “special purpose vehicle” companies for mergers, was the source of about 77% of the investment.
The flight of US companies for tax-friendly regions has stirred political debate about how to prevent the country from being hollowed out with the loss of jobs and its tax base.
Carl Icahn, the billionaire investor who Republican presidential candidate Donald Trump wants to name secretary of the treasury, is urging Congress to change the tax code so that companies do not have an incentive to move outside the US.
His latest warning followed confirmed merger talks between Pfizer Inc., the largest US drugmaker, and Ireland-based Allergan Plc. The companies have a combined market value of about $320 billion, which would be a record-breaking deal for the pharmaceutical industry.
Icahn, 79, last month sent a letter to Congress urging the end of tax inversions and announced plans to put $150 million into a political action committee that would push for reform. He said the government should lower US corporations’ taxes on earnings abroad, which would remove the incentive to relocate.
“The imminent planned exodus of many of our best companies is extremely dangerous, especially in our fragile economy, as it will cause the loss of thousands of jobs, as well as hundreds of billions of dollars of future tax revenue and investment in the United States,” his letter said. “The PAC we have started will leave no stone unturned to find out who is most responsible for this ridiculous and unconscionable situation.”
Apple Inc. is Icahn’s largest holding and has billions in foreign earnings parked outside the country. Icahn has called for Apple to return more earnings to shareholders, but international tax rules stand in the way.
