Tax inversion, or corporate inversion, is the relocation of a corporation’s headquarters to a lower-tax nation or corporate haven, usually whilst retaining its material operations in its higher-tax country of origin. The term is most frequently used in relation to U.S. corporations. Corporate inversions are a relatively recent phenomenon; although it is difficult to be definitive, the practice first became prevalent in the 1990s with U.S. corporations seeking to relocate to tax havens such as Bermuda; but more recently because of changes in the U.S. law publicity has focused upon corporate inversions conducted by way of merger with companies in lower tax European or Asian countries.
The Cost of Doing This Kind of Business: What Corporate Inversions Mean for America’s Future
Tanya Somanader September 26, 2014 1:00 PM EDT
A good way to build a stronger economy is to create a fairer and more efficient tax code — one that promotes business investment and job creation in the United States. That is why the President has proposed business tax reform that will simplify the tax code by lowering the corporate tax rate and closing wasteful loopholes.
Congress has yet to act on the President’s proposal, and in the meantime, some companies continue to exploit unfair tax loopholes. One such loophole allows U.S. corporations to undertake an “inversion,” whereby a company relocates their tax residence overseas, while changing very little else about its operations or business, in order to avoid paying taxes. With a simple change of paperwork, these companies can dramatically reduce their taxes, leaving other businesses and middle-class taxpayers to pick up the tab.
Dozens of U.S. corporations have taken advantage of the inversions loophole in recent years, and more are looking to follow suit. By renouncing their U.S. citizenship, these companies will cost our country nearly $20 billion over the next decade — critical dollars that could be used to grow and expand the middle class.
What Are “Inversions,” and Why Should You Care?
President Obama is calling for a kind of “economic patriotism” that’s based on investing in the things that we know grow the economy for everyone (like education and job training) — not protecting wasteful loopholes for a few at the top.
And he’s calling attention to one kind of corporate merger deal in particular — called an “inversion” — a word you might be seeing in a lot of news headlines lately.
It’s not the most intuitive name for a corporate tax loophole, so we’re going to break it down for you.
Q: So what exactly is an “inversion”?
A corporate “inversion” is what happens when a U.S.-based multinational with operations in other countries restructures itself so that the U.S. “parent” is replaced by a foreign corporation — and usually one that’s in a country with a lower tax rate than the United States. As a result, on the whole, this means that corporate income tax that would otherwise be paid to the United States ends up going overseas.
In other words, right now, our tax code allows any American company to merge with a foreign company (so long as that company’s shareholders own 20% of the combined firm) — and then “relocate” or “invert” to another country for tax purposes. This maneuver — which changes nothing about the actual operations that continue in the U.S. — allows companies to dramatically reduce the taxes they owe in the U.S. by taking advantage of loopholes in our tax system.
Meanwhile, they would continue enjoying the benefits and protections of the American economy — provided by our tax dollars. It’s a big loophole — and right now, it’s completely legal.
Q: That’s got to be costing us a lot of money, right?
Yes, and it could cost us even more. This is a growing trend among American corporations, and they’re getting increasingly creative and brazen in the ways they’re doing it. What’s more, for decades, countries have been holding “tax competitions” to lure American companies, offering special tax breaks to help them avoid paying their fair share at home.
All told, estimates suggest that it could cost nearly $20 billion over the next 10 years.
Q: OK, but I’m not a corporation. So how does this relate to me?
Simply put: You’re paying for it.
That’s because when corporations pay less, other working Americans have to pay more to help fund the services we all rely on: rebuilding our roads and bridges, equipping our schools with the resources they need, and defending our country at home.
Most Americans don’t have fancy accounting tricks at their disposal — and these businesses shouldn’t, either.
Lew Says Business-Tax Revamp Best for Limiting Inversions
U.S. Treasury Secretary Jacob J. Lew said the best way to deal with corporate inversions is through a comprehensive revamp of business taxation, according to a statement from the department.
Lew’s comments came in a meeting with policy specialists today in Washington, including Alice Rivlin of the Brookings Institution, Maya MacGuineas of the Committee for a Responsible Federal Budget, and Jared Bernstein of the Center on Budget and Policy Priorities, the Treasury said.
Lew’s comments today echo his previous statements on the issue, which emphasized reducing tax rates and making it harder for U.S. companies to shift profits overseas. The Treasury Department is also working on options for regulatory steps to curb inversions or make them less attractive.
During the meeting, Lew “expressed the same view he’s expressed publicly about the problem of inversions,” Bernstein said in an interview after the meeting.
Treasury is developing a plan on inversions and hasn’t made any decisions yet, said another person participating in the meeting. If Congress doesn’t revamp business-tax law, the department wants to find another approach, said the person, who asked not to be named since the meeting was closed.
In a recognition that such initiatives probably won’t become law soon, the administration is advocating retroactive legislation to prevent U.S. companies from changing their tax address by purchasing a smaller foreign company.