ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Tax Inversion and the United States

Updated on November 13, 2016

Tax Inversion and the United States

Recent mergers by large multinational corporations have increased awareness to the practice of corporate inversion, or tax inversion. Corporate inversion, as defined by the U.S. Department of the Treasury, “is transaction in which a U.S. based multinational restructures so that the U.S. parent is replaced by a foreign parent, in order to avoid U.S. taxes.” Typically, “a U.S. company acquires a smaller company based in a foreign country- usually a low-tax country – and then relocates the residence of the combined company in that other country for tax purposes” (Hanlon and Zeints). Understanding why companies leave the United States, the effects of their relocation on the United States, government actions taken to curtail future inversions, and analyzing solutions is essential to making it less attractive for corporations to incorporate elsewhere. Reevaluating the U.S. tax code will lead to a significant decrease in inversions and increase in tax revenue for the United States. Current domestic tax policy is a major factor in many companies’ decisions to give up their U.S. residency.

Multinational corporations seek to increase profits by reducing their costs, including tax bills, as much as possible. Operating across the globe, they conduct business outside their country of incorporation and generate income in foreign markets. Which country a company establishes residence in can significantly influence the amount of taxes it owes to governments. Unfortunately, current tax policy can place the United States at a competitive disadvantage when a company is trying to decide where to call home. Companies based in the United States are subject to a tax policy that follows a worldwide view (DeAngelis 1356). Income generated, both, domestically and abroad is subject to the U.S. corporate tax rate of 35 percent (DeAngelis 1356). It is also subject to taxation by the country in which the transaction took place (DeAngelis 1356). While tax credits for payment of foreign taxes are offered to U.S. companies, the tax bill of those subject to territorial regimes is often still lower (DeAngelis 1357). Territorial tax structures only subject income generated within the domestic country’s borders to taxation (DeAngelis 1357). Any income from beyond the country of incorporation’s borders is only taxed by the source country (DeAngelis 1357). By relocating its headquarters from the United States to a country with a tax code resembling a territorial structure, companies can often reduce their tax liabilities. Using cost-benefit analysis and strategic decision-making, a company can determine which tax jurisdiction is most favorable. Countries recognize this opportunity and strategically develop tax policies encouraging foreign entities to establish residency and invest within their borders.

When companies renounce their citizenship, and leave the U.S., they take tax revenue with them. Companies surrendering their American residency strips the United States of the ability to invest in valuable programs. The Joint Committee on Taxation Revenue Estimate for H.R. 415 determined that there is potential that “inversions cost the U.S. as much as $40 Billion over the next 10 years” (“You Don’t Get to Pick…”). As noted by the White House, these funds could be used to fund 7 years of child care programs, make college more affordable, and reduce poverty through tax credits (“You Don’t Get to Pick…”). Operating with a budget deficit, every dollar is crucial to continuing government expenditures taken for granted. Eroding of the tax base limits the government’s ability to operate and prepare the United States for the future. Quickly finding a solution to the inversion epidemic is pivotal in preventing greater strain on the budget.

Action must be taken to create an environment where leaving the United States is never optimal. Congressional legislation toward a revised tax code is the only permanent fix. Unfortunately, due to Congress’ unwillingness to do so, the Treasury Department opted to exercise its power to make inversions less attractive and beneficial to companies (Hanlon and Zients). Recently, the department has addressed “serial inverters” and “earnings stripping” (Hanlon and Zients). Scott DeAngelis, a graduate student at Vanderbilt University studying Law and Economics, suggests creating a patent box to the likes of European nations (1383). Doing so would eradicate some of the advantages of relocating to countries with these policies. Solutions such as these are only patches to the problem or parts of the whole fix. DeAngelis endorses the notion that, “The best course of action for the United States would be to join the member countries of OECD and G20 and adopt the OECD’s proposed multilateral instrument” (1380). When the global market place is growing increasingly connected, drafting tax instruments that work harmoniously is the most logical solution. Without international agreement, nations will, justifiably, do what is only in their best interest. Selecting a course of action and moving to enact resolution must be of high importance.

Companies, and corporations, owe it to shareholders to increase their value and returns. Current tax policy in the United States has led many entities to question where they locate their operations. By simply relocating headquarters beyond the U.S. border, it is possible to reduce tax liabilities and increase the bottom line. Globalization has led to this phenomenon. Taxes faced by those in worldwide tax regimes, as the United States is, are frequently greater than those in territorial-like regimes. As a result, many U.S. companies left the United States solely for tax purposes, and many more continue to evaluate the opportunity. Reviewing the tax code and enacting legislation fit for the 21st century will help mitigate this issue and grow U.S. tax revenues. Ultimately, working with the international community to draft a comprehensive tax reform for a global marketplace will best serve everyone.


Works Cited

DeAngelis, Scott. “If You Can’t Beat Them, Join Them: The U.S. Solution to the Issue of Corporate Inversions.” Vanderbilt Journal of Transnational Law, vol. 48, no. 5, Nov. 2015, pp. 1353-1384. Academic Search Complete, http://web.a.ebscohost.com.proxy-wcupa.klnpa.org/ehost/pdfviewer/pdfviewer?sid=9e3b16cd-daf1-4679-9ede-decf44cbf364%40sessionmgr4008&vid=9&hid=4114. Accessed 12 October 2016.

Hanlon, Seth, and Jeffery Zients. “The Corporate Inversions Tax Loophole: What You Need to Know.” The White House, 8 April 2016, https://www.whitehouse.gov/blog/2016/04/08/corporate-inversions-tax-loophole-what-you-need-know . Accessed 12 Nov. 2016.

“Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions.” U.S. Department of the Treasury, 22 Sept. 2014, https://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx. Accessed 12 October 2016

“You Don’t Get to Pick Your Tax Rate. Neither Should Corporations.” The White House, 26 Sept. 2014, https://www.whitehouse.gov/share/the-facts-on-inversions. Accessed 12 October 2016.



Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)