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- [00:01]
Chris Miliacchio
The thing about AI for business? It may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT
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Andrew Silverman
and procurement processes, we've reduced costs by
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Chris Miliacchio
millions, slash repetitive tasks, and freed thousands
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Andrew Silverman
of hours for strategic work.
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Chris Miliacchio
Now we're helping companies get smarter by
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Andrew Silverman
putting AI where it actually pays off, deep in the work that moves the business.
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Chris Miliacchio
Let's create smarter business.
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Podcast Narrator/Advertiser
IBM when you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, that isn't always easy. Risk can touch multiple parts of an organization at the same time, often in ways that aren't immediately obvious. It might involve property liability or cyber. It could stem from regulatory requirements or challenges tied to a specific industry or the scale of an operation. At that level, managing risk becomes an ongoing discipline, not a one time decision. the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive. That means working with companies to identify where they're exposed, decide what matters most, and put practical standards in place so risk is managed as part of day to day operations. And when losses do happen, the Hartford can pair that risk control work with insurance coverage grounded in underwriting, risk engineering and claims experience developed over time. Learn more@thehartfort.com riskmitigation Support for this show comes from public.com if you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge on public you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English like if the Vix hits 25, buy a put option on the S&P 500 or if my cash balance goes above $20,000, move the excess into my direct index. You approve of the workflow and your agent handles the risk, monitoring the market, watching for your conditions and executing your strategies exactly as defined. An investing platform driven by your intent, not just your clicks. You can also get full read and write access to your account via the public API. Go to public.com market and fund your account in five minutes or less. That's public.com market paid for by Public
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Andrew Silverman
Investing Brokerage Services by Open to the Public Investing Inc. Member FINRA and SIPC Advisory Services by Public Advisors, LLC SEC registered advisor complete disclosures available@public.com disclosures.
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Podcast Narrator/Advertiser
Foreign.
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Andrew Silverman
Hello and welcome to the Votes and Verx podcast hosted by the Litigation Policy Team at Bloomberg Intelligence, the investment research platform of Bloomberg LP on the Bloomberg Terminal, Bloomberg Intelligence has 500 analysts and strategists working across the globe and focused on all major markets. Our coverage includes 2,000 equities and credits, and we have outlooks on more than 90 industries and 100 market indices, currencies and commodities. This podcast series examines the intersection of business policy and law. My name is Andrew Silverman. I'm an analyst with Bloomberg Intelligence covering tax policy. As always, you can find all of our research on the Bloomberg Terminal at BI Go and more specifically on our dashboard BI LawsGO. Today is January 23rd and it's 3 o' clock. And I'm delighted today to be joined by Chris Miliacchio, a partner at PKF o' Connor Davies here in New York and my frequent partner in crime, so to speak. But only when it comes to tax policy crimes.
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Chris Miliacchio
Actual crimes.
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Andrew Silverman
Right? Exactly. Yes, that's right. So, so, so credit where credit is due. This, this podcast and the note that sort of underlies it originated from, from a question that Chris had asked me a few weeks ago. Maybe I'll, I'll ask Chris to, to restate that, that, that question then, then we'll talk about trying to answer it.
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Chris Miliacchio
Yeah. So my question we you in international tax over our careers going back almost 20 years now. And one of the things we were talking about was how early in our careers there was a lot of conversation around inversions, which is US multinationals moving themselves abroad. And we had seen a real end to that conversation timed with the Tax Cuts and jobs act in 2017. And so the question was, you know, companies stopped inverting, but are the effective tax rates of companies that had inverted from the US to elsewhere still lower than similar companies that remained US based? In other words, what was the benefit? What has changed over time and what can we learn from that?
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Andrew Silverman
Right. And it's a question that actually occurred to me too, and I just hadn't gotten to answering it. But, but it's a really fascinating question and a fascinating topic to research. And, and so what I want to do to get going is to sort of set the stage by going back to 2016. If you remember, that was the year of Star Wars. The Force Awakens and Uptown Funk was the song of the year that year. Song of the summer, I suppose. Barack Obama was in his final year of the presidency, and that's important. We'll talk about that later. And Joey chestnut had won eight Nathan's Hot Dog Inning Championships going into 2016. He won again that year eating 70 hot dogs. He only ate 66 this time. Very disappointing.
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Chris Miliacchio
So there's been a decrease over time, right?
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Andrew Silverman
Exactly, yes. Like, like inversions.
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Podcast Narrator/Advertiser
Right.
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Andrew Silverman
But the big news in tax world was that Pfizer had announced in the previous November it was going to merge with Allergan and was going to leave the country and it would be the biggest inversion of all time.
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Chris Miliacchio
And I'll also note that you and I, right at that stage were in the international tax groups of, of a big for accounting firms. And legitimately the conversation around inversions was very significant. Very frequently we were being asked to consider the potential benefits of inversions, whether they were possible. It was a driving force in our work.
- [06:28]
Andrew Silverman
Right. Yeah, it was something that we talked about a lot and not only in the tax community, but I think a lot of people were talking about it. And in fact. So treasury had issued a notice just, just days before Pfizer had announced its inversion that had tightened up the anti abuse sections that apply to inversion sections 7874 and 367. And treasury had really thought that this notice would put an end to inversions. Once again, putting. Putting an end to inversions. But it didn't work. Pfizer's inversion wouldn't have violated the notice it was going to invert anyway. The treasury finally got its revenge in April 2016 when it issued temporary and proposed regulations that were specifically designed to kill the Pfizer inversion. And treasury finally accomplished what it had set out to do. Pfizer announced after those regs came out that it was going to be killing its murder. Then down the road, those regs were actually struck down by a federal district court. But it was too late to resuscitate the Pfizer deal. And there were other inversions after Pfizer, which shows that the new inversion regs didn't actually truly stop big inversions. Johnson Controls merged with Tygo Shire merged with Baxalta. IHS merged with Market. But even after the inversion regs were withdrawn, there really haven't been a huge amount of inversions. And that runs sort of counterintuitive to what we've seen, that the, the rules get weakened, the inversions go up. We haven't seen that happening. So I guess, I guess I should, I should probably take a step back for, for people that are not so knowledgeable about tax inversions, what are we talking about when talking about tax inversions? These are basically deals in which a US company acquires or merges with a foreign company so that at least on paper, the foreign company becomes the Parent, the business largely sort of carries on as usual and it looks the same on the surface to customers and employees. But the inversion has caused the company to largely be taxed by another country, another tax authority outside of the United States.
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Chris Miliacchio
Yeah, and these were primarily done because at the time the U.S. corporate tax rate was quite high relative to the rest of the world. It was 35% and more. So there were also fewer restrictions on the ability to move funds around large multinationals in terms of being taxed on that. And so there were at least the perception was, significant advantages to being an inverted company, to being parented in the UK or Ireland or elsewhere, as opposed to being parented in the US even if your business was otherwise operating exactly the same way.
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Andrew Silverman
And that's why it was so hard for the government to stop companies from inverting. And it was a process that had been going on for years and years. In fact, the, the first any inversion rule came out during the Kennedy administration. That was section 367. And for the next 40 years they amended 367 and they issued regulations on 367. Eventually they introduced 7874 to, to further stop inversions, but it just, it, it wasn't working. Right. And why, why did 78, 74 come out? Because we had this first wave of inversions. Helen of Troy was the famous one, especially now with, with the, the Odyssey movie. But Tycho Ingersoll Cooper, these were big transactions and 367 hadn't been able to stop them. And so, so we adopted 7874. But 7874 hadn't stopped them either. We had Medtronic Mylan and, and famously Burger King.
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Chris Miliacchio
Right. I mean, what those rules did. So, you know, section 367 is a very broad sort of statement rule about, about moving assets abroad from the US section 7874 is a very narrow and specific rules with multiple tests. And what it had done was take the inversions from being sort of relatively straightforward transactions into being fairly complex ones, where if you were trying to invert, you needed to find like a very specific partner and meet very, very specific requirements. But the benefits were enough that even though, again, this was not an easy process, this was a significant lift to figure out, you know, did you have a merger partner where it would work and how would this, what would this look like and how would you sort of meet all these requirements? The benefit was enough that people were still putting in significant work around it.
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Andrew Silverman
Yeah, right, exactly. And that's a great point and one that I think we should emphasize here that efforts to shut down inversions didn't shut them down because they were still good for companies. So no matter how expensive it was to do that, how expensive it was to hire folks like us to do these inversions, companies were still willing to do them because they were worth it. And it had become a completely intractable problem and Congress and Treasury seemed powerless to fix it. And then poof. Right, no more inversions. Yeah, magic. So, so what exactly happened to stop inversions? I think, I mean the main thing that, that happened in, in 20, then 2017, early 2018 was, was the Tax Cuts and Jobs Act. Rather than trying to further sort of tinker with the anti inversion rules, come up with the new 7874, Congress went the opposite direction, just reduced the statutory corporate tax rate. And it was almost like Congress was, was through with trying to string and they were now going to pull on that string. And it seems to have worked. I mean the US had a 35% corporate tax rate. Ireland had a 12 and a half percent tax rate. And when the US went to 21%, there just wasn't as much of a need to invert anymore. And meanwhile the rest of the world was adopting a minimum tax regime that made countries outside the U.S. less interesting for countries to invert to. I think that's the simple explanation. But I hope our discussion today offers a more complicated and a more interesting picture.
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Chris Miliacchio
Yeah, I think it's the big picture though, that changed to 21%. What it did was essentially really fully align the US with a lot of the rest of its sort of competitors in terms of places where businesses are located. We're all in that 20% corporate tax range. The US actually ends up being a little below that. But at a base level it just aligns everyone. It also coincides with some of the EU countries removing some of the incentives they had around intellectual property that maybe made them sort of interesting places as well. And so that it's a, it's a big shift and it seems to have again sort of fully driven this, this change.
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Andrew Silverman
Exactly right. The United States became more competitive. I think the rest of the world became less competitive. So, so what were we trying to show in this note? Well, I started out with a theory that inverted companies effective tax rates had probably increased over the past decade and domestic companies tax rates had really increased. And that had made the US more appealing and the idea of inverting less appealing. And I also knew that some assets, some companies were coming back to the United States. We didn't have a tidal wave of companies coming back. We didn't have a tidal wave of as far as I know, assets coming back. So I figured it was, it was probably still a pretty good decision to have inverted. But what we found in our research was that inverted companies book, that's effective tax rates for accounting purposes, not cash tax rates have remained about the same. But the book etrs of domestic non inverted companies have fallen dramatically, which was a surprise. There were some differences between industries. But that pattern is fairly uniform among all US inverted and non inverted companies. And the way that we did the research was to look at ETRs across all companies that have inverted since the 1990s. Well, those that still exist. I mean a lot of companies either went bankrupt, merged into another company after having inverted, but we compared the inverted company's ETRs from 2010 to 2025 to their sub industry peer so their big exact industry peers to get a sense of where those tax rates are. So for example, Medtronic was compared with other medical equipment companies and device Pentair was, was, was compared with other machinery companies. And we looked at median ETRs. We tried the average ETRs, but it got really messy. There were some huge outliers which were throwing off our numbers. So for, for 2010 to 2013 invented inverted companies, medium median book ETR was 16% and non inverted company peers were at 23%. So obviously it was better for a lot of companies to have reverted to get that 60% effective tax rate than their peers at 23%. But by 2022 to 2025 inverted companies median book ETR had become 17%, a small increase but fairly flat for companies over that period. And non inverted companies were at 13%. So if I do say so myself Chris, I think that's a pretty astounding finding. As I said, inverted companies EHR stayed about the same after the Tax Cuts and Jobs act, the Inflation reduction act, the one big beautiful bill, as well as the OECD's base erosion of profit shifting initiative. And then maybe that's an interesting fact in and of itself and it connects to some other research we talked about maybe a month ago. But the big news here is that the peers of the inverted company CTRS fell 10 percentage points to below that of the companies that had chosen to invert. So obviously there's no tax benefit to, to inverting. Why would you invert? It's expensive, it's complicated. I think you probably wouldn't.
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Chris Miliacchio
Yeah, it was it becomes sort of an easy choice if the benefits aren't there. Or again, if in fact staying in the US is, is literally again for a lot of these companies, a better answer. Why do it? Right. Because again, the thing around inverting was that it was a huge undertaking. Right. So the benefit had to be significant. A benefit of 7% on, you know, a very large, many hundreds of millions or billion dollar company is a lot of money. Even if it's just, even if we sort of throw out and just say it's flat, there's really no need to do that. Someone's just not going to undertake that work to gain nothing.
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Andrew Silverman
Exactly. So, so now I want to get into, I think maybe the more interesting part of the discussion here. I want to talk about why you think that this, these aversions sort of, sort of stopped. And I, you know, obviously the tax rate has something a big part of it. But, but I think there are other factors at play too. And I guess my first question to you is why didn't. So if inversions had become less appealing to companies, then why didn't we see inverted companies come back again? And I'm specifically talking, thinking in my mind about these two companies, Burger King and Popeyes, they're just not Canadian. Right. You know, it's always bothering me. I go to a Burger King, I'm like, it's a Canadian company.
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Chris Miliacchio
Yeah. And also interesting in that, you know, Canada and the U.S. there's surprising friction between those two countries and I don't mean like interpersonally, but you know, moving money between those two other times, but moving money between those two countries actually, like we have better treaties in terms of not having tax on like a dividend. For example, with the US and Germany and other European countries, as opposed to Canada, where there's actually no 0% dividend rate, there's always attacks on that, which is important. We'll talk about that later a bit more. But I think the other thing is that it's not like the world. The shift in the US has been very beneficial. But I think to your point, we did was kind of leveled the playing field. So in the same way that US companies haven't, you know, wanted to invert, I would think for a lot of the inverted companies there wouldn't be a huge benefit to coming back. Right. It's that equivalency. And so on the flip side, while, yeah, it's not worth the work on the one hand for Burger King and Popeyes, it's probably also just not worth the work to restructure their company or try to figure out a way to get back into the U.S. canada probably has their own, you know, and they do have their own outbounding rules. I don't know what they are specifically. This is always a. I always have a joke with international tax things because people will ask you, it's like, do you know that rule in Canada? I'm like, no, I don't. I'm a US Internet. I'm a US First Tax person. But, no, but, but generally, our competitor countries also have similar rules to prevent outbounding. Right. And so they would have to work around those rules in order to, again, probably not gain much of a benefit. They'd probably end up probably back in the same position, relatively speaking.
- [19:30]
Andrew Silverman
Yeah. It's interesting because. Well, I think on the one hand, I mean, Canada is still a pretty good place to do business from a tax perspective. And coming back to the United States is costly and annoying, frankly. And so Even though the US corporate tax rate went from 35% to 21%, is that enough to convince a company to go through all of that again? Obviously not if they haven't moved back again.
- [19:59]
Chris Miliacchio
Yeah, well, because an inversion really required a full restructuring of a business. Right. So, you know, you needed to move people. Right. You needed to really change a lot of the structure. And so, again, the undoing, that is a significant work. You know, it's a significant piece of work.
- [20:18]
Andrew Silverman
Right. And the other thing I think may be at play here is that the stigma, I guess, has. Has really gone away. I mean, with the fact that companies aren't really inverting anymore. I think the attention has not focused on. On companies that would decide to invert right now. And, and so there's no sort of. When the president is using the bully pulpit to try to convince them to come back again. So it's like, well, the pressure is not on them then, you know.
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Chris Miliacchio
Yeah.
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Andrew Silverman
Why make the attempt?
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Podcast Narrator/Advertiser
Yeah.
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Andrew Silverman
All right, so let. Let's do some role playing here. Okay. It's 2014, and you're the director of a large US multinational. The CFO comes to you and says Tyco and Ingersoll inverted. I heard they were able to cut their effective tax rates in half. Should we move too?
- [21:11]
Chris Miliacchio
Well, we should consider it. How do you feel about real estate in Dublin? Because again, the point there, right, it was, you did really need to restructure. And so there was, you know, people need to move and do things like that. But again, the answer would be, yeah, I mean, you got to consider it do you have a partner that makes sense would be part of it? Like, is there a company? Because again, those old Section 7874 rules, which are still in place, again, just no one talks about them, but they required very specific percentages to be met of, of us versus non US assets. And the way that played out. And so you really needed to find the right target. But again, it's something where the benefit was big enough that you'd be a little bit crazy not to at least explore whether it was reasonable and made sense.
- [21:58]
Andrew Silverman
Yeah. And I think it got to the point where the more recent inversions were not just a change in the headquarters. They were complete corporate transformation. And so companies weren't taking these decisions lightly in 2014. They really had to completely transform the company in order to do it. But I think that suggests maybe a, maybe a broader issue that maybe it's not just about the, the, the tax rate. Maybe these inversions, companies are doing these inversions because it gave them more flexibility. Right. But why, why were they deciding to leave the country? Maybe they had cash offshore. Maybe the United States had stringent rules about bringing money in and out of the country. We don't have those rules anymore. But maybe there was more to it than just the tax rate.
- [22:48]
Chris Miliacchio
Yeah, I think that was a lot of it too, right. That the US had a 35% corporate tax rate, but on offshore profits, if those met certain standards, you weren't taxed on them until there was a repatriation. So you had potentially zero or low taxed profits abroad. And you're stuck, trapped with that cash and had to put a lot of work into sort of moving that money around because you were a US parent and multinational, because if you paid a dividend up to the parent, literally you were just triggering a 35% tax. Right. And so there's a flexibility that was lost for US multinationals that the Tax Cuts and Jobs act by both lowering the rate, moving to a system where you couldn't defer income on offshore profits, you had, you know, using the global intangible low tax income. Guilty. But the trade off for that lack of deferral was that now you could pay dividends tax free and you basically had free movement of money around your, your multinational ecosystem. Right. And so that trade off I think also was helpful because suddenly being a US parented multinational wasn't nearly as stressful from a cash management perspective as it was prior to the tcja. Because that was part of it too. Right. Figuring out, well, how do I move Money. And I've got money here and I need to get it here. But you know, how do I pool the foreign tax credits to make sure that I don't end up paying a huge amount of tax and costing myself just for getting money from one of my subsidiaries to the other subsidiary? You know.
- [24:26]
Andrew Silverman
Yeah, I could tell you foreign tax credits was my least favorite part of tax school. And yeah, when the Tax Cuts and Jobs act came out and foreign tax credits, they're still important, but they're a lot less important than they used to be. I was like, oh, thank goodness.
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Chris Miliacchio
Yeah, well, they're much, much more straightforward. Right. You really had to figure out these unique like pooling rules and you know, early in our careers, right. We have these giant org charts but with specific rates and tax pools and you'd be trying to sort of figure out how to move things together to get the taxes right in the certain place to move the money and, but then not sort of like totally mess up your organizational structure in doing so. So those were the kinds of things we were discussing that again nowadays especially again for us, parent to multinational, a dividend is just a tax free event. And so money movement other than withholding taxes, which are important. We'll talk about that again, I think a little bit. But like, you know, it's, it's a much less stressful process to deal with
- [25:29]
Andrew Silverman
that, that money management and okay, so, so going back to the hypothetical, if you were talking to a CFO and the CFO or you're working for a company that was a tech company or a pharma company, as opposed to like an insurance company or a bank or something like that, does that affect your decision in terms of what you would advise them to do? And it, when, when talking about an inversion in 2014. Yeah, in 2014.
- [25:53]
Chris Miliacchio
Yeah, in 2014. Right. Against the tech and the pharma companies that were really struggling with, you know, they had the ability to move profits to lower tax jurisdictions and where they were developing their IP and where that was held and they were the ones that generally had that issue. So yeah, they, they were a lot of the focus, not to say that again, that other companies weren't considering it. Again, it talks about across a lot of industries, but yeah, you tended to see the ones that actually went through with it, broadly speaking, tended to be tech or pharma IT heavy tech companies.
- [26:31]
Andrew Silverman
That's interesting and that's actually part of the results that we found in the study that the companies, some companies like medical technology companies, medical device companies, they still seem to have a lower tax rate. The inverted ones seem to have a lower tax rate than their non inverted peers. And so even now, even after the tax rate has gone to 21%, even after we've had all these changes in the Tax Cuts and Jobs act, the one big beautiful bill, it's still better, at least for a medical device company to be headquartered offshore than it is in the United States.
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Chris Miliacchio
But the difference had shrunk, right?
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Andrew Silverman
Yes, right, exactly.
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Chris Miliacchio
Yeah, yeah, because I think that's because to your point, again, it makes sense, right? The way the US did all this stuff went to that lower rate, but with really the end of deferral. Right. So if you were an inverted company that had IP in a low tax jurisdiction, it still was a good idea to have done that. Right? To a point. You're still ahead. You're just ahead by a lot less than you were before.
- [27:35]
Andrew Silverman
Okay, now let's Fast forward to 2025. CFO comes to you of this company that you're working for and says, chris, I want to get our effective tax rate down 5 percentage points. Should we invert?
- [27:52]
Chris Miliacchio
No, no, simple as that. No, it's, there's, there's really kind of pretty much nowhere in the world that would allow you to have a five again in a certain scenario. Every scenario you might consider, but pretty much nowhere in the world is going to allow you to get that rate down 5% on its own. Right. And when you combine that with the restrictions that exist now around moving IP and getting lower tax rates around it, you really, every time I've worked with companies that were thinking about sort of where to set themselves up and where, you know, kind of thinking about these types of issues, not exactly an inversion, but again, maybe like a newer company that's building out some IP and thinking about like where to set themselves up. It just did not seem to make sense to put it anywhere else other than where the business was actually operating. Right. That there just wasn't a big enough benefit or any benefit at all to trying to move things around in that way. And so it really had been more of a business driven conversation. Again, if you have a team in Ireland, right, where you have that 12 and a half percent rate, that's not to say that's not a better rate. But again, unless you can really have that built out, if you've been doing your research in the US saying that things are going to go to Ireland doesn't sort of magically knock your rate down. And again, the question is the benefit there even that Theoretical shift is nine and a half percent. And again, there's almost no way you would get that on every dollar of profit. It would be an incredibly huge undertaking to try to go after that. And the other question is sort of where the investors are, right? Because again, from just a getting money out perspective, there's a lack of friction around if you're a US Parented company, US Investors. Oftentimes I have companies that are operating abroad that are telling me, no, we want to be US Parented. Because from an investment perspective, investors would prefer that they're dealing with a US Company, either because they're us or again, there's a perceived sense of, you know, some sort of safety around that or just knowledge, Right? Just knowing what, what it means to invest in a US company and what that looks like relative to other countries where that's a little bit less frequent. And I always explain like, hey, these are the rules and you're gonna have to deal with these rules. And they're like, that's okay. You know, they walk. I walk them through that and they're like, yeah, I get it. There's gonna be some compliance, there's gonna be some difficulties here, but that's okay. It's not, again, it's not gonna be any worse really than anywhere else in the world. And I'm getting the advantage of, for my investors who want to sort of see a US parented company a lot of times, and that was the early stage startups.
- [30:51]
Andrew Silverman
And if the CFO pushes back and says, well, what if I move a couple factories, move some employees, I don't have to move the headquarters, does that make a difference?
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Chris Miliacchio
It could, right? And that would be the question. One of the things that does come up for a lot of clients is if they're maybe ambivalent about where something is, right? If I've got a factory somewhere,
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Podcast Narrator/Advertiser
but
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Chris Miliacchio
I could move that factory, or especially think, come up with executives, right? In the executive is a, you know, just one person, maybe a very key person, but they're mobile. So, okay, if they're in this country versus this country, how does that impact my effective tax rate? And there is still, there's still work to be done around there, right? Because you can still be in a lower tax jurisdiction or potentially a jurisdiction with more friendly withholding tax rate. So this is maybe that point. Talk about that there. To the extent you have profits in a jurisdiction, you're trying to bring them back to the U.S. as I said, the U.S. doesn't tax that now. So what ends up being the tax effectively on that movement of money is the dividend withholding rate in the country that you're in. The US Has a broad treaty network, but a lot, every treaty is different, right? So the advantage of being in a country with a 0% potential dividend rate versus 1 where the lowest you're going to get to is 10 or 15%, that could actually be a relatively big benefit if you're in a scenario where you're moving money around a lot. Right. So that could be something to consider, Right. Maybe there is a, a benefit to that movement, but part of it, it's got to move with the business, right? The, there has to be a change in the actual business flow to some extent. This does align a little bit with some of the conversation over the last couple years around tariffs, right. Where the movement of goods and where things are going has been a big conversation. And so I think there's been a renewed conversation around, well, where do we have our supply chains, where do we have our, like, manufacturing subsidiaries? Are there better answers we can get not just from a tax perspective, but from a tariff perspective? So I think if you're really reconsidering your overall operations, there's still tax benefits to be had, there's still things to look for there. But it's not the giant move like inverting, right? And think about the conversation we're having. It's much more business driven, right? In inversions, let's be frank, were pretty purely tax driven transactions. As much as, you know, people wanted to put another spin on them. These really are. These questions we're having are about like, well, where does it make sense to operate if you're a multinational? And that's a reasonable conversation to have. That's a much different conversation about like, well, you know, different jurisdictions do have different tax rates as opposed to, we're going to restructure our whole business because changing our headquarters will have our, have our tax rate.
- [33:48]
Andrew Silverman
Mm, interesting. Okay, now let's fast forward, right? Let's say it's 2035, right? We've got flying cars and robot maids and President Trump may still be president, who knows? But okay, so it's 20 for the 35. Are we still talking about inversions or do you think we're talking about something new? And why?
- [34:13]
Chris Miliacchio
I think we're talking about something very different. I think what we're talking about is sourcing. And I say that in sourcing, in tax parlance is really who has the right to tax income. And I say that because as the biggest Multinationals become more digitally focused, right. AI companies that no matter where they're actually operating, are serving customers all over the world every day. I think the question around who has the right to tax the profits, particularly of our biggest companies, although again of even sort of medium sized companies, I think will be a conversation is going to be a big question. And so I think that's probably what's driving the tax conversation ten years from now. And again, you know, to the extent that there's a large scale alignment around principles in the way that the OECD and the BEPS project in 2014 and 2015-2025 again has, it's not exact, it's not like everyone has the same policies, but has brought a fair bit of alignment of peer countries in terms of their tax policy. Will there be alignment or will there be real questions around, you know, if I operate this way or that way, do I avoid certain jurisdictions where my tax rates are going to be a lot higher or where they're going to assert a tax on a larger portion of my income? I think that's going to be what's really driving multinationals. Again, particularly, I think that's particularly in the, in the digital space. There is a sense that, you know, if a company is, you know, a tangible asset, a product based business, maybe the world doesn't look so different. Maybe we've sort of reached some level of equilibrium that's likely to persist for a period of time.
- [36:14]
Andrew Silverman
Okay, so, so maybe maybe 40 years ago or 30 years ago even, it was still physical assets that were making the determination about whether something was taxable. Those are the most valuable things. I think countries were looking at those physical assets and trying to tax them. And then maybe 20 years ago it was about intellectual property, which I think is why we have all these cases now about companies like Meta and all pushing their intangibles offshore and countries trying to capture that value. I think right now we're talking about AI, we're talking about quantum computer, we're talking about data centers, things like that. So it's sort of shifted into almost like a hybrid of intellectual property and physical assets. Where do you think it goes from there?
- [37:03]
Chris Miliacchio
I think the biggest question that we're going to have is actually really like tracking of these things. Right. You know, one of the things about like AI and blockchain is I think the ability to actually understand the question of where income is earned. If you're using a lens of like where customers are actually using it or things like that harder and harder. Right? I mean, if you have a transaction around a physical product or even a transaction around intellectual property, a direct transaction, it's relatively straightforward. You have a purchaser, someone who's making an acquisition, you understand where those things go. And maybe it requires some tracing and there's some issues around that. It's not, say it's simple. But you know, sometimes the conversation now around again in terms of like, like blockchain, things like that is like, I actually don't know where people are using my product. I, it's. I know people are, but I don't necessarily have that data or I might have some data that may be a very weak proxy for, you know, where it's being used. And so I think that, you know, to what extent are companies, are countries going to have that data or companies to even make those determinations? I think is really going to be a big talking point because even if you think about again, like the biggest IP case over the last few years has been like the Coca Cola, you know, transfer pricing cases. Right. At the end of the day though, Coca Cola obviously very IP driven a lot of value in their trademarks, recipes and things like that. Again, that ultimately results in a, in a product. Right. And so the conversation around how much income in what place is a haveable conversation. I think we are moving into a space where there's going to have to be a fair bit of creativity and conversation around like how do we even think about these types of businesses? And that might really append a lot of the conversations that have driven the last 20, 30 years of tax. Right. Which has already been a big shift in terms of people. Businesses don't necessarily need to be in one place to earn money. Right. You don't need to have an office somewhere. That's been a lot of that now I think that's going to accelerate. And so I think that's probably what we're talking about repeatedly 10 years from now. In a certain sense, the inversion conversation may seem sort of quaint because there'll be a movement towards trying to tax things on some other basis. Right. Rather than the sort of traditional methods where. Because the traditional methods may really no longer have a logical tether to how big businesses earn income.
- [39:52]
Andrew Silverman
All right, well, so what happens if, and this is something I've been, I've been thinking about a lot lately and well, nobody else seems to be talking about, although we just had a report recently about, about Social Security, but that this report was, was saying that by the early2030s, the nobody will be able to receive 100 of their Social Security benefits anymore, we'll have to cut it down, haircut it at 83% or maybe, you know, take people off of the, of the roles. But, and that's really so sort of only one aspect of things. We, we. I guess what I'm saying is we're probably going to have to raise taxes in, in some ways, you know, Grover Norquist is going to put out a hit on me now. But, but, but the fact is that we're probably going to have to do that. Yeah. And so my question is if, if we raise the corporate tax rate again, if we start repealing parts of the tax cuts and jobs acts, things like that, in order to, to get more revenue, do you see inversions coming back again?
- [41:00]
Chris Miliacchio
I think it would have to be a fairly extreme shift just because at this moment. Right. We're not just competitive with a lot of our peers, but just a smidge below it. Right. So for example, you could move the corporate tax rate from like 21 to 25%. And I don't think you would see a big rush to invert because you'd still be in a, in a position where you're fair. Everyone, again, is fairly competitive. So it's not, again, the difference between 35 and 25. It's 25 versus another country that's 25 or maybe a country that's a 23% or something like that. So I think you're not, you wouldn't see a big thing. But I, and I kind of think people understand that, that there's, while there's maybe room to move the rate up, there is sort of a constraint on how much you do that. Similarly with, I think the, like, the asset rules, you know, the oba, like bonus depreciation, there's probably an understanding that having some incentive around that is valuable. If you roll back that incentive a little bit, you could maybe raise cash tax rates a little bit while also probably not providing enough incentive to say, no, I've got to go elsewhere because I'm going to get such a better deal on my taxes. So I think that's, you're likely to see movement around the margins because I think there's a, is a sense, even if maybe our politicians aren't talking about this significantly, that this has been a success. Right. That that shift really has put us in a very different place than we were 10 years ago. And so I doubt there's a desire to sort of give all of that back.
- [42:41]
Andrew Silverman
Do you think both parties realize that?
- [42:44]
Chris Miliacchio
I don't know, that's a good question,
- [42:45]
Andrew Silverman
because the, one of the reasons that I wanted to talk about this is, and it's mystified me, the Trump administration has not talked about inversions at all. I mean, you know, they talk about how well the Tax Cuts and Jobs act has done, or, you know, they think about how well the one big beautiful bill has done, and they sort of talk about it in general terms, but they never really said, hey, we beat inversions. Right. Obama would have been preaching that. He would have been bragging about it day and night. And yet the Trump administration's like, bet, whatevs, you know, I don't know. I just thought that was interesting.
- [43:20]
Chris Miliacchio
Yeah. I do also think, I mean, part of it is that the impacts of, like, the tcga, I think, have been fairly complex and nuanced. Right. This is one where there's kind of a clear victory. I think, to your point, other places there was maybe a thought that there'd be a rush back, and it has not been as dramatic. So I think there's, it's a little bit, it's a little bit of a tricky conversation to have. It's a somewhat easier conversation, unfortunately, if you're a tax guy like us, when you kind of have an interest around these. But we also are sort of focused and sort of understand these nuances and how they, you know, how they play out for companies. Right. I think that sometimes it's not always clear how that's going to happen for a company or as visible as, you know, for a politician who's not, you know, not a tax person.
- [44:09]
Andrew Silverman
Yeah, that makes perfect sense to me. All right, so last thoughts. I think we should maybe, maybe we can wrap this up.
- [44:18]
Chris Miliacchio
I will just say it was really nice to have a gut feeling proved out by data. That was really helpful because I, you know, it's, again, it's a funny thing. Like, we talk around these things, but tax pros, right, we don't have a wide enough subset. We have a good perspective. We work with a lot of different clients and we see all these different things and stuff. Like, it's like I have a kind of a sense of this, but then to see it in numbers and go, oh, yeah, that makes total sense. Was, was helpful because we're not all, you know, not always right. Made a little humility.
- [44:47]
Andrew Silverman
But no, I was, I was certainly wrong about this. And yeah, you were very farsighted coming, coming up with this prediction. So I thank you for that and I'm open to more ideas, certainly. And with that I guess we'll wrap up this episode of Votes and Verdicts. As always, thank you for listening and if you have any questions about any of the matters we discussed in this episode, please don't hesitate to reach out to us at your convenience with questions. As a reminder, you can find all of our research on the Bloomberg Terminal under BI Go or on our Litigation and Policy Dashboard at BI lawsgo. We also want to heartily thank our producers Aditya Samani and Maryam Traore, with whom this podcast would never publish at all if not on time. And thank you so much for listening. Have a great day and we'll see you next week.
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Chris Miliacchio
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