There’s a corporate inversion invasion taking place. Or an invasion of inversions that U.S. corporations would like to employ to reduce their tax burdens.
Either way, the U.S. government is not amused. Here’s Investopedia’s definition of corporate inversion:
“Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.”
Generally speaking, inversion occurs when a U.S. company acquires an overseas company and then changes the companies’ structure so that the foreign company becomes the corporate parent company of the U.S. Company.
The U.S. government can only tax the company’s U.S. earnings at U.S. tax rates, but it can’t touch the rest of the company’s worldwide income. If the tax rates are lower in the home country of the new corporate parent company, their total tax bill can be reduced significantly. This makes inversion an attractive option for American multinational corporations.
The cruise ship industry presents a corporate inversion comparison. Most cruise lines, regardless of headquarters location, fly flags of the Bahamas, Bermuda, or other countries with regulations that are perhaps less strict – and lower taxed - than the U.S., United Kingdom, etc.
Inversion is not evasion. It’s legal avoidance.
Trying to achieve the lowest legal tax burden isn’t a novel concept: it’s what most individual and corporate taxpayers try to do. However, in today’s superheated political world large corporations can be made to appear un-American for trying to hold down their U.S. tax load. The argument is that the financial difference will have to be made up by individual taxpayers and companies that can’t flee to foreign havens.
At one time an inversion could be accomplished just by filing paperwork relocating incorporation from the U.S. to, for example, Grand Cayman. No transfer of headquarters, facilities, or employees was necessary. Just file the paper in the proper drawer.
The Treasury Department and Congress have taken stabs over decades to rein in the advantages of corporate inversion. However, just like periodic “fixes” for campaign finance reform, illegal immigration and other issues, with every swipe of the legislative or regulatory sword new inversion pathways were found.
Inversion became a hot topic in the last few weeks as it became known that at least eight U.S. corporations were mulling the step. The administration and the IRS began rattling their regulatory sabers.
The heat became so intense that one of the companies, Walgreens, America’s largest drug retailing chain, backtracked. As Bloomberg reported on Aug. 7,
“Walgreen, based in Deerfield, Illinois, said a decision to shift its legal address out of the U.S. might have backfired because it could have been challenged under IRS tax-abuse rules. The largest U.S. drugstore chain warned of “almost certain, intense, protracted IRS scrutiny” that might have taken a decade to resolve.”
As stated above, the current administration has suggested that large corporations taking steps to legally minimize the taxes they pay is somehow unpatriotic. But the key word in that phrase is “legally.” The amount of press that corporate inversions have received lately makes it seem almost inevitable that the laws that allow these complex transactions will be changing soon, in fact that is a stated goal of the administration. But as of right now, these transactions are not illegal, they are legal.
When I tell people what I do for a living, I tell them
“I help people and their businesses pay the least amount of taxes they are legally required to pay.”
I have yet in my seventeen year career to have a client tell me they want to pay more taxes, or that they don’t want to claim a deduction they are entitled to take. So I find it hard to swallow that legally saving people money is unpatriotic.
But, the one thing that is certain (aside from death and taxes) is that things will ultimately change. And when they do, the professionals at Rodefer Moss will be there to help interpret the changes, and to continue to help people minimize their total tax liability.