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Corporate Inversions – This Loophole Needs Fixing

A corporate inversion, simply put, is a method corporations use to reduce their tax responsibilities. While this loophole may present a sound tax solution for the corporation in question, it has a direct impact on tax revenue collected by the United States government, as well as on competition between companies.

Corp InversionsA corporate inversion takes place when a U.S. corporation renounces it’s citizenship by merging with a smaller company in a foreign country. This country typically has a more favorable corporate tax structure as well as tax rules that allow the U.S. corporation to reduce its tax burden.

Once the corporation merges with the foreign entity, it declares the new country as its place of residency. At that point, the United States can no longer impose or collect taxes on the corporation for future or past income. While this may be a positive situation for the company, it does has a negative effect as it reduces tax revenue for the U.S. as well as creates an atmosphere of unbalanced competition between corporations that have transacted an inversion and those that have not.

Over the last decade, corporate migration has increased to the point that now only one-tenth of total tax revenues collected come from corporations. That’s down from one-third in the 1950s. In fact, in the past ten years, a total of 47 U.S. corporations have performed corporate inversions and changed their legal residences to countries outside of the United States.

While it stands to reason that a corporation should do all it can to reduce its tax burden, and it could even argue that doing so is its fiduciary responsibility to its shareholders, this particular tax loophole is stripping tax revenues from the U.S. government at an unsustainable rate.

In addition it is also pitting the corporations that have made an inversion against the corporations that have not creating a toxic business environment which is why this is one loophole that needs to be fixed.