Published: February 25, 2016
“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
The eccentric cowboy, actor, social commentator and newspaper columnist Will Rodgers, engineered that witty phrase a century ago, but it still resonates with Americans to this day. United States companies are constantly looking for new ways to increase their earnings and provide more value to their shareholders, and it seems like the new fad is a corporate inversion. A corporate inversion is when a company reincorporates in another country to alleviate the tax burden on income earned abroad. Corporate inversion has been a highly contentious political issue as of late, and candidates on both sides of the political spectrum are looking for ways to quash this practice.
Corporate inversions began in 1982 but did not become commonplace until the late 1990s. Congress passed laws during the Bush Administration to curb inversions in the early 2000s, and the number subsequently decreased until the late 2000s. That all changed toward the later part of the decade as the number of inversions rose tepidly, before exploding upwards in recent years.
“Due to the relatively high U.S. corporate tax rate and the seemingly complex tax code, U.S. domiciled corporations are beginning to reincorporate in foreign nations in order to benefit from lower tax rates. Such actions are decreasing overall tax revenue and increasing the amount of wealth held overseas, ultimately hurting the economy,” Junior finance major Joshua Cracknell said.
From 2011-2015 there were 37 instances where a United States company sought to relocate its headquarters to a country with a more favorable tax environment. There were seven corporate inversions in 2015 alone, which totaled $181.6 billion in market value.
The primary duty of corporate managers is not to do what is best for the country, but rather what is best for the shareholders. That means maximizing shareholder value at the expense of tax revenue. Corporate inversions are particularly appealing options because they do not necessarily change the fundamental structure of a company. Often, the only pronounced change is a change in the address of the company’s headquarters. Employees almost always keep their jobs, and management also often stays in place. The change in headquarters, as insignificant as it may seem, can have prodigious effects on how the company is taxed however. The United States taxes corporations on all the profits they make worldwide. An American company that sells a laptop in China will have to pay taxes on that sale when it tries to repatriate the income. This tax policy is in stark contrast with the tax policy of most countries that implement a “territorial” tax system. A territorial system only taxes income that is made in that specific country. Burger King, which recently moved its corporate headquarters to Canada, will still have to pay taxes on its United States sales, but it will no longer have to pay taxes to its home country (Canada) when it tries to repatriate its foreign earnings.
Corporate inversion has been a hot-button issue for the past several years, with criticism of the practice reaching a zenith after the Pfizer-Allergan deal last November. Both Republican and Democratic politicians want to curb these inversions, but they disagree over how to do it. Republicans are advocating for a corporate tax rate of 25 percent, and they want corporations to be able to repatriate foreign earnings without paying taxes. President Obama contends that a 28 percent corporate tax rate makes the most economic sense and he supports a “one- time tax break” that would allow American companies to repatriate the $2 trillion in earnings they are currently keeping overseas. Both parties generally agree that the current corporate tax rate of 35 percent, the highest in the developed world, needs to be lowered.
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