No doubt you've been hearing about corporate "inversion"
lately, whereby a U.S. company merges with an overseas entity,
then restructures its operations so that its new home base is in
the foreign country - which, almost always, has a lower corporate
tax rate. The move, however, has no effect upon the company's
business functions here in the U.S.
A recent study by the
Congressional Research Service
shows that inversions are on the rise, as companies try to
exchange the U.S. top corporate tax rate of 35% for a much lower
foreign rate like the U.K.'s 20%, which takes effect next
Over the past decade, 47 U.S. companies have lowered their
taxes in this way, despite the passage of the American Jobs
Creation Act of 2004. That law sought to cut down on such
activity by requiring, for one thing, that foreign shareholders
own at least 20% of the new company. Considering that only 29
inversions took place in the two decades prior to 2004, the AJCA
doesn't seem to have been even a mild deterrent.
U.S. taxpayers, shareholders lose
Companies use inversions to save big in other ways, too. By
incorporating overseas, they will now have access to huge cash
stockpiles - money earned by their foreign operations, but not
brought into the U.S. because of the tax bite. American
in these offshore accounts as of March 31 of this year.
Another way to cut down on the corporate tax bill is to place
tax-deductible debt, loans, and other liabilities onto the U.S.
subsidiary's balance sheet, thus trimming U.S. taxes owed. This
technique, known as "earnings stripping", by the way, is entirely
A fantastic deal for inverted corporations doesn't bode well
for U.S. taxpayers, though. The Obama administration is concerned
about the loss of tax revenue, which it estimates to be around
$20 billion over the next 10 years. In a recent post on the
White House blog
, it is crystal clear who will be expected to make up that lost
revenue: U.S. workers.
While that may sound more like a threat than a prediction,
it's probably a bit of both. The
National Priorities Project
notes that the corporate share of the nation's tax burden has
lightened steadily over the past few decades, with a commensurate
rise in the heft of the individual taxpayer's bill.
Shareholders will pay a price for an inversion, as well. When
any merger occurs, it is considered a taxable event - but, unlike
in a domestic union, there will be
no cash payout
to help offset the capital gains tax generated by the
transaction. Because of this, investors holding shares of such
companies as part of their long-term estate-planning strategy
will find themselves paying a capital gains tax that they
otherwise would not have incurred.
In an effort to curb the inversion craze, the
Stop Corporate Inversions Act of 2014
has been introduced, and would halt many inversions by making
them less lucrative. For example, it would change the 20%
ownership rule to 50%, and would prevent inversion deals when
there is no real transfer of corporate control from the U.S. to
the foreign location.
There may not be much congressional enthusiasm for such a
move, however. At the end of July, Senate Republicans
blocked a bill
that would have ended the tax break that allows U.S. companies
engaging in inversions to deduct their costs of moving
One of the reasons the GOP criticized the bill was because
they believe that the country's tax laws should be less punitive,
which would encourage companies to move to the U.S.
Interestingly, the hobbled legislation included tax breaks for
corporations moving to U.S. shores - the cuts would have applied
to U.S companies only.
With such underwhelming interest in evening out the federal
tax allocation between corporations and individuals, President
Obama has indicated that he may act on his own to change the
system. Could the days of corporate inversions be on the wane? We
should know soon.
More from The Motley Fool:
Warren Buffett Tells You How to Turn $40 into
Corporate Inversions: What They Are and How They
Cost You Money
originally appeared on Fool.com.
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