It Must Be Election Time Again
On Tuesday, Democrats in the United States Congress introduced legislation that would deny government contracts to corporations that move their tax domiciles abroad. Last week, President Obama called into question the loyalty and patriotism of corporations that have or are considering what is known as an “inversion”. Reading the headlines and listening to the sound bites would lead one to believe there is an immediate danger that requires drastic action. As with most election rhetoric, it has much ado about nothing.
What is an Inversion?
Simply put, an inversion is where a new corporation is established somewhere and then an existing corporation merges into or becomes a subsidiary of the new corporation. The new corporation takes on all the business and assets of the existing corporation but with a new, legal domicile. There is nothing illegal about such a transaction and it is commonly done for a variety of legitimate business reasons.
So… What is the Problem?
The United States has one of the world’s most aggressive tax regimes. United States based companies pay income tax on earnings from all over the world, while other countries only tax earning from within their own country. If a company inverts to a foreign domicile it will only pay United States taxes on its United States derived income, not on its world-wide income.
How Big a Problem is it?
Over the past 32 years, 52 United States corporations have completed inversions.
If the Democrats really believe inversions are a problem, they should look at fixing the cause, not the symptom. Making legislation to punish companies for doing something that is completely legal is not the answer. The answer is to overhaul the United States Tax Code, especially when it comes to taxing foreign income of domestic corporations. If the Tax Code didn’t motivate corporations to move out of the United States, they wouldn’t go.