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ABOUT FACE Inversions once OK for administration

Corporate inversions have been a hot topic in Washington of late. President Obama doesn't like the practice, saying companies that use the technique to avoid punitive U.S. corporate tax rates are "unpatriotic." He refers to them as "corporate deserters."

So would it surprise you to learn that five years ago the Obama administration helped a $20 billion U.S. company do an inversion? Or that it invested $1.7 billion from the U.S. Treasury to help make it happen?

Perhaps it should also come as no surprise that the administration now is trying to rescind the tax benefits the company won in the deal.

The company involved is Delphi, a Michigan auto parts supplier that filed bankruptcy in the lead-up to the financial crisis. As Bloomberg News reports, Delphi is now technically a British company, Delphi Automotive Plc. Although its executives continue to run the company from a Detroit suburb, the company saves as much as $110 million a year in taxes by being legally headquartered in the UK.

Inversions are a technique in which U.S. companies buy a smaller foreign firm and then reincorporate in the country where the smaller firm is located, thereby becoming a foreign entity. The technique allows such companies to escape the U.S. corporate tax rate of 35 percent, which is the highest in the developed world. U.S. companies have been doing inversions for decades. But the pace has picked up in the past couple of years, particularly among drug companies and medical device providers, causing alarm in the Obama administration.

The administration's main motivation to help Delphi in 2009 had to do with its role as a major parts supplier to General Motors, which the government at that time largely owned. Delphi, according to Bloomberg, was in danger of being liquidated.

To save Delphi, the administration tried to engineer a sale of the bulk of the company to a Los Angeles private equity firm that planned to reincorporate it in Luxembourg. But two other private investors later emerged offering better terms. They established a partnership in London, into which the administration pumped $1.7 billion, and the new partnership obtained the bulk of the assets of Delphi. Delphi thus re-emerged as a British company, even though its three top investors were from the U.S. and it continued to be run from Detroit.

The appeal of incorporating in the UK was two-fold. First, the corporate tax rate there is 21 percent, a 14 percent discount to that of the U.S. Second, like most foreign countries (and unlike the U.S.) the UK only taxes the domestic earnings of companies domiciled there. The U.S. taxes foreign earnings as well.

Granted, 2009 was a different time, and the tax savings from the inversion were thought to be essential to helping Delphi survive. But the administration's sudden position that the decades-old process is now unpatriotic and is a form of economic desertion is hard to reconcile with its earlier posture.

The president did recently succeed through his jawboning and threats of administrative sanctions in dissuading one major drug company, Walgreens, from going through with a contemplated inversion. But if the administration really believes inversions are such a bad thing, the cure is to reform the U.S. corporate tax code to make it competitive with those of the rest of the modern world. There is bipartisan support for such a solution in Congress, but it will take leadership from the president to get it done. Unfortunately, for the moment the president seems more content to keep bullying U.S. firms into paying exorbitant rates.

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