Corporate Inversion– Unpatriotic, Deserter, Tax Dodger… Wake-Up, Stop Name-Calling: Time for Tax Reform, Not Band-Aids…

Corporate inversion is a strategy for reducing a company’s U.S. tax liability by moving their headquarters overseas… it’s the relocation of a corporation’s headquarters to a low-tax nation or corporate haven while retaining its material operations in its higher-tax country of origin… it’s a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of U.S. jurisdiction to someplace with a lower tax rate… The most important thing to understand about inversion is– it does not, in a meaningful sense, involve a U.S. business moving overseas…

Corporate inversion is a form of tax avoidance and it’s driven by various issues… and most prevalent factor is– the U.S. tax code seeks to impose income tax on profits that U.S. corporations earn outside the U.S. jurisdiction, which is highly unusual among developed nations of the world. This creates a strong incentive for U.S. companies with large overseas markets to seek to restructure themselves as a foreign corporation, in order to protect their foreign earnings from double taxation…

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U.S. corporate inversion as a tax-reduction maneuver has become a public policy issue, because of two factors; 1. substantial tax revenue is being lost, 2. issue of fairness– corporations should pay their fair share of taxes… U.S. politicians and governmental official have issued statements calling the corporate inversion ‘unpatriotic’ and various proposals have been discussed to prevent corporate inversion when the corporation is less than 50% foreign-owned…

According to ‘The Economist ‘; U.S. government actions to restrict U.S. corporations from relocating abroad by way of merger is misguided; and ‘real’ tax reform is the only solution for addressing fundamental flaws in U.S. corporate tax system… According to Ron Wyden; U.S. tax code is anti-competitive mess… U.S. corporations pay the highest tax rate among OECD countries at 35%. When U.S. state taxes are included then U.S.-based corporations bear, on average, 39.1% tax burden… in comparison, OECD tax average is 25%, putting U.S. corporations at big disadvantage…

According to Jacob Lew; we need a good sense of economic patriotism… we should not support any corporations that seek to shift their profits overseas to avoid paying their fair share of taxes… The government has caused this problem through their own mishandling of the tax system, and now it’s time for a permanent fix–tax reform…

So how much money is Uncle Sam losing? So far this year, only nine companies have flipped their corporate tax base upside down, but those moves have drawn lots of attention– and prompted other U.S. multinationals with large overseas holdings to consider heading for the corporate tax exit… Some companies have already stashed assets and accumulated earnings outside the U.S.– hoping that Congress will eventually lower the tax rate and allow them to pay less when they bring their money to the U.S…

By some estimates as much as $2 trillion in corporate cash is sitting outside the U.S.– money that could otherwise be reinvested in U.S. to expand domestic operations and create more jobs… Corporations have been lobbying Congress for years to lower corporate tax rate– which means paring back a thicket of tax credits, subsidies, complex rules… most experts agrees that the U.S. tax system needs overhaul, but each of the current tax loopholes has a company or industry lobbying to protect it… and, as important, more that corporations dodge U.S. tax code altogether and shrink the overall pipeline of corporate tax revenues, the harder it will be to make a ‘revenue neutral’ tax reform package…

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In the article Controversy About Tax Inversion? by Howard Gleckman writes: A small but growing group of big corporations are fleeing the country to get out of paying taxes. They are basically renouncing their citizenship and declaring that they are based somewhere else, just to avoid paying taxes… According to Jack Lew; there is nothing illegal or wrong about cross-border merger activity; both investment overseas and foreign investment in U. S., but these activities should be based on economic efficiency, and not just tax savings… But is this a legal or moral question? 

Is it unpatriotic to avoid paying U.S. taxes, if it’s legal to do so? Inevitably, that debate is being framed by two of the most famous quotes in tax law: The first by Supreme Court Justice Oliver Wendell Holmes, Jr.: Taxes are what we pay for a civilized society… The second by the influential 20th century judge Learned Hand: There is nothing sinister or illegal in arranging one’s affairs so as to keep ones taxes as low as possible. Everybody does so, rich or poor; and all should do it right, for nobody owes any public duty to pay more than the law demands; taxes are enforced exaction, not voluntary contributions. To demand more in the name of morals is mere cant…

So, if we agree that it’s OK for business to legally minimize its taxes… then, is it OK for U.S.-based companies such as; GE or Apple to use aggressive tax planning to minimize their worldwide tax liability, but ‘unpatriotic’ for the U.S. corporation ‘AbbVie’ to purchase the UK firm ‘Shire’ to minimize its worldwide tax liability? Some say that this is a different issue… But, I say– these corporations may face different business circumstances and may use different tax avoiding methods, but they all are doing the same thing and its legal in both cases–They are ‘keeping their corporate taxes as low as possible’

Increasingly, in the complex world of multinational corporations, the legal location of the company is becoming less important, e.g.; when German based Siemens does business in the U.S., it’s subject to most of the same laws as U.S.-based GE., and they both must pay tax on U.S. income… But of course. firms (or managers) can be unpatriotic– by selling war material to enemy or financing terrorist is clearly unpatriotic, and also illegal… But, using legal avoidance strategies to reduce taxes may be distasteful or shameful, but it’s not unpatriotic…

In the article Corporate Inversions by Gary Clyde Hufbauer writes: Inversions are just the tip of the iceberg: Less noticeable but more important are– foreign multinationals acquiring U.S. companies at a much faster clip than the other way around. Taxes are not the only reason, but they are a contributing force… So long as U.S. tax system is unfriendly to parent corporations and friendly to foreign parent corporations, there will be a very strong tendency for multinational companies to locate their headquarters elsewhere.

This will show up in the way mergers and acquisitions (M&A) are structured, but purely from a tax standpoint, very few attorneys, today, would recommend putting the headquarters of a multinational firm in U.S… Why subject your foreign subsidiaries to the U.S. worldwide tax system? Congress can make inversion more difficult but the underlying problem from a tax standpoint is that U.S. is not a good location for headquartering a multinational corporation…

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In the opinions of many experts, it’s far more important for the U.S. to retain its position as the leading global nerve center for multinational corporations than it is to collect whatever revenue is gathered from the activities of foreign U.S. subsidiaries using the cumbersome and some say unfair– U.S. system of taxing worldwide income… And it’s foolish for the U.S. government to enact new tax provisions that give foreign multinationals an advantage when competing in U.S. market…

Typically, where ever corporation locate their headquarters then the key corporate functions tend to follow, such as; strategic planning, financial administration, marketing and sales, R&D… these are critical functions and add substantial value to the host country… However, according to Jonathan Adelson; under the most recent rules, the IRS will only allow the tax benefits of an inversion if the inverting company has significant change in ownership or a substantial business activity in new foreign home… IRS’s definition of substantial business activity applies an extremely stringent threshold and effectively limits the available inversion destinations to countries where a company already has major operations… 

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In most M&A deals that results in foreign inversion, the decision to move abroad is mostly predicated on the importance of expanding into global markets and growing the business. The rub seems to be that in furthering these legitimate business goals, the business often is also able to achieve a lower effective tax rate and greater ease of global cash management…

According to Tim Worstall; the basic idea of tax inversion is really rather simple; if the U.S. corporate taxation system is becoming a burden on a company then obviously the thing to do is to move the domicile of the company so that it’s no longer subject to U.S. corporate taxation, but this is becoming more difficult… so another way to do it is through inversion, which means that a U.S. corporation buys a foreign company and structures the deal so that either; the foreign company takes over the U.S. company, or a new holding company located in a very low-tax country then owns these merged companies.

If more than 20% (U.S. government is looking to rise the threshold to at least 50%) of the entire operation ends up being owned by the foreigners then this can mean that the original U.S. company moves out from being U.S. domiciled, and thus frees itself from the U.S. corporate tax code…

Recently, as another counter to inversion, Congress has introduced legislation that would deny federal contracts to U.S. companies that  incorporate overseas in order to avoid paying taxes… The ‘No Federal Contracts for Corporate Deserters Act’ introduced by Sen. Carl Levin (D-MI), Sen. Richard Durbin (D-IL), Rep. Rose DeLauro (D-CT) and Rep. Lloyd Doggett (D-TX), would ban federal contracts to– any company that reincorporate as a foreign company, which is not at least 50% owned by U.S. shareholders and which have no significant business in the foreign nation in which they incorporate…

According to Richard Trumka; inversion is a gaping, unpatriotic tax loophole... According to Carl Levin; companies are avoiding to pay U.S. taxes by effectively renouncing U.S. ‘citizenship’ and changing their corporate addresses to foreign nations… Nonetheless, in light of the significant value that can be created– and the pressure to act before possible future regulatory action lessens the benefit of such deals– the inversion trend can be expected to continue, in the near future… But be mindful– corporate inversion is not the fundamental problem; it is simply a wake-up call…