Building the New Berlin Tax Wall: Treasury’s Anti-Inversion Regulations

Some people think current U.S. policy is accurately described using a "Hotel California" metaphor—you can check out anytime you like, but you can never leave—but the better analogy, precisely because it so clearly illustrates the melding of bad policy and all-but-certain failure, is the Berlin Wall. Khrushchev built the Berlin Wall in 1961 because growing hordes of East Germans were fleeing, and it grew increasingly awkward to try and defend the workers' paradise of the Eastern Bloc when large swatches of workers were intent on bailing out. So too with U.S. tax policy: Treasury thinks the natural answer to the fact that many U.S. corporations want to escape the U.S. is to make them stay unwillingly, by building the corporate tax equivalent of the Berlin Wall.

Ironically, the current U.S. tax mess is easily fixable, and indeed the United Kingdom, which itself was hemorrhaging corporations to Ireland just a few years ago, has provided an exact blue-print: Bring the corporate tax rate down, and stop trying to tax the repatriation of foreign earnings. But accepting this simple, obvious solution and the related consequences seems oddly anathema in Washington D.C. these days.

So, in the meantime, we are where we are, which is more or less on the wrong side of 1961 Berlin. How this will all shake out in the short- and medium-term is far from clear—politics hangs like a heavy fog—but one thing seems self-evident: In the long term, current U.S. tax policy seems likely to work out every bit as well for the U.S. as building the Berlin Wall did for Khrushchev. It will, eventually, need to come down. 

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Joe Darby, a tax law expert, is also the author of Practical Guide to Mergers, Acquisitions and Business Sales, 2^nd Edition, published by The National Underwriter Company, a division of ALM Media. ThinkAdvisor readers can get this resource at a 10% discount. Go there now.