Academic journal article Journal of Business and Accounting

Corporate Inversion and Its Impact on Corporate Tax Revenue

Academic journal article Journal of Business and Accounting

Corporate Inversion and Its Impact on Corporate Tax Revenue

Article excerpt

BACKGROUND

U. S. corporate tax inversion, subsequently referred to as inversion, is a common practice in today's business world (Jeffers, 2014). In a typical inversion, a U.S. multinational corporation merges with a foreign company. The entity that ultimately emerges from this transaction is invariably incorporated abroad, yet typically remains listed in U.S. securities markets. When structured to satisfy tax requirements, corporate inversions permit the domestic multinational corporation eventually to replace their U.S. tax treatments with foreign tax treatments of their extraterritorial earnings at a far lower effective rate (Talley, 2015). This discussion adds to the literature by identifying and illustrating domestic tax ramification compared to foreign treatment.

This discussion explores the pros and cons to develop an understanding of the growing concern regarding inversions. Inversions have developed over the past quarter-century into a problem where the blame is placed on every entity involved. Some find this strategy illegal while others deem it necessary for a corporation to stay competitive. It is unclear which party is more at fault, without knowing the facts. For example, a company finds a manufacturer with cheaper goods, or companies find countries with lower tax rates where they can establish a headquarters for their company. Would a consumer fault a company for choosing a company that sells products with a $1.00-unit cost versus a company offering the same product at a cost of $1.75? This would be a smart business decision by the company to lower their costs in order to lower the price of their own product or to create a wider profit margin thereby paying a smaller tax amount. Exhibit 1 displays the difference between paying US tax and foreign tax for operating revenues.

What is the issue? Is it the company for finding a country to house their production with a lower tax rate or is it the government for not being proactive to equalize tax rates? Companies say inversions are a logical response to high corporate tax rates in the U.S. This is because an inversion allows companies to retain all the benefits of operating in the U.S. while being responsible for none of the tax obligations. Companies also claim the debate over corporate inversions will continue until regulators intervene to resolve the issue (Bybee, 2016). Even with the need of change, repeated attempts by Congress through legislative and executive actions to stem the flow of firms abroad have not stopped the expatriations of U.S. firms (Rao, 2015).

The first inversion in the U. S. was in 1982 when McDermott International, Inc. moved its domicile to Panama. Congress reacted to the move by passing ?1248(j) to the tax code prohibiting inversions of the redomiciling form. (Rao, 2015). In 1994 Congress passed another tax code addition that made shareholders of U.S. target firms responsible for taxes on gains between the share purchase price at the time of inversions and the cost-basis when the shareholders owned more than 50 percent of the new corporation. Thanks to a large number of inversions in the late 1990s, congress again changed the tax code (Section ?7874) to disallow inversions when a U. S. firm simply re-incorporated abroad without a substantial presence in its new domicile (Rao, 2015).

By enacting a tax code change to prevent inversions that were only an address change and no movement of operations only made mergers with a foreign firm more attractive to firms looking to invert for tax purposes. Merging with a substantive foreign firm resolved compliance with the tax code Section ?7874 but made the loss of U.S. business activity including the loss of jobs and contribution to the U.S. tax base (Rao, 2015). According to Clausing (2014), U. S. corporations shifted more than $111 billion internationally through inversions and other taxsaving strategies. She estimates that multinational firms moving profits away from the U. …

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