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Photo: Philadelphia City Council via Flickr (under license CC BY-NC 2.0)
Photo: Philadelphia City Council via Flickr (under license CC BY-NC 2.0)

With new bill, Clarke takes aim at companies fleeing U.S. taxes

The bill will prevent the city from doing business companies defined as "tax inversion companies."

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A new bill proposed by City Council President Darrell Clarke last week would ban city government from doing business with companies who move abroad to avoid paying U.S. taxes.

Corporate tax inversion might not have a sexy ring to it, but it has been a topic on the minds and mouths of politicians across the country.

Clarke’s bill would add “tax inversion companies” on the list of prohibited contracts. It would also require all city bids and contracts to “contain a clause stating the business entity is not a tax inversion company.” Failure to do so, would incur fines and penalties.

“These tax avoidance schemes are unpatriotic, and are another example of how wealthy corporate interests manipulate the tax system to benefit themselves at the expense of their own nation,” said Clarke in a statement. “Tax inversions are unfair to hardworking Americans who pay their taxes every year and to businesses that pay every quarter. Companies that exploit this loophole should not further benefit through public works projects funded by taxpayers.”

In the simplest terms, tax inversion is a strategy U.S. companies use where they merge or become subsidiaries of companies based in countries with lower corporate taxes. Then, by moving their legal headquarters to these countries, the companies can take advantage of the lower tax rates and circumvent paying U.S. corporate tax.

Though they do not pay U.S. corporate taxes, these companies can keep their headquarters in the U.S. as well as their management thanks to a loophole in the tax code. They can also take advantage of tax deductions designed for foreign companies that choose to do business in the U.S.

President Barack Obama has long called on lawmakers to create legislation to combat this practice. Obama told CNBC, “It is true that there are a lot of things that may be legal that probably aren't the right thing to do by the country."

The controversial strategy became the topic of conversation recently after Pfizer announced that it plans to merge with Irish company Allergan. The $150 billion deal would create the largest drugmaker in the world and allow Pfizer to take advantage of the significantly lower Irish corporate tax rate.

Though new legislation or reform is needed to completely stop the practice of tax inversion, the U.S. Treasury announced last year that it do what it could to make the strategy more difficult to pull off. Locally, New Jersey legislators introduced a bill in December that would accomplish the same as the bill proposed in City Hall last week.

Clarke’s bill would not combat large-scale inversion but it would send a message that city government does not condone the practice. Should the bill become law, the new code would go into effect July 1.

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