Maximizing profits has been and will continue to be the most common goal for businesses around the world. One way to earn higher profits is to find a way that will allow various expenses to be as low as possible. However, reducing expenses may lead to products and services of lesser quality. Therefore, it is important to find and reduce the expenses that do not directly impact quality, such as income tax expense.
One way many corporations have found a way to reduce their income tax expense is through a process known as a tax inversion. Because tax inversions are common for U.S. companies, we will focus on a tax inversion from the U.S. perspective. In a tax inversion, a U.S. company purchases a foreign company. By purchasing a foreign company, a U.S. company can relocate its home country for tax purposes. This is attractive for American companies because they are subject to U.S. income taxes on their income, regardless of where the income was earned. Therefore by obtaining a foreign address, earnings made abroad will no longer be subject to U.S. income taxes. Burger King reaching a deal to buy Tim Hortons, a Canadian doughnut chain, is a recent example of interest in an inversion.
Making inversions less attractive to U.S. companies is challenging considering the high corporate tax rates in the U.S. relative to many foreign jurisdictions. However, lawmakers who have long been concerned with tax inversions now have reason to believe this tax loophole will be closed. The Treasury declared Monday that it is working to reduce the benefits associated with inversions. Among these moves include blocking techniques that allow inverted companies to gain access to their offshore accounts without paying U.S. taxes on those funds.
Other changes include increasing the foreign ownership requirement. Current tax law requires foreign ownership of only more than 20 percent. It will be interesting to see what other new measures will be introduced and if those new measures can discourage inversions.