Newspaper article THE JOURNAL RECORD

Commentary: Should Our Tax Code Spur Firms to Leave U.S.?

Newspaper article THE JOURNAL RECORD

Commentary: Should Our Tax Code Spur Firms to Leave U.S.?

Article excerpt

Earlier this year, Stanley Works, a Connecticut tool company, announced plans to move to Bermuda. The move would significantly reduce Stanley Works' U.S. corporate tax liability and so make it more profitable for shareholders. But to Congress, the move was viewed as "unpatriotic."

For example, Rep. Richard E. Neal, D-Mass., recently testified that "the practice of reincorporating in a foreign country to avoid paying U.S. income tax is inconsistent with American corporate citizenship and unfair to those individuals and businesses who pay their fair share in taxes."

And many in Congress are working on legislation to keep American companies from moving overseas.

Transactions like the one proposed by Stanley Works are known in the tax trade as "corporate inversions," and they have been going on for years. A corporate inversion occurs whenever a U.S.-based multinational corporation reorganizes itself so that after the transaction, the ultimate parent of the corporate group is a foreign corporation.

For example, consider a typical U.S.-based multinational consisting of a U.S. parent corporation that owns a number of domestic and foreign subsidiaries. In a corporate inversion, the U.S. parent creates a new foreign parent corporation based in a low- tax country like Bermuda. The newly formed foreign parent then acquires all the outstanding stock of the U.S. parent from its shareholders in exchange for stock of the new foreign parent. After the transaction is complete, the resulting multinational corporate group consists of the new foreign parent corporation with a number of domestic and foreign subsidiaries.

It's all perfectly legal, and the tax savings can be huge. That's because of how the United States taxes international businesses. Basically, the United States uses a "worldwide" tax system under which U.S.-based corporations are taxed on all of their income, whether derived in the United States or abroad.

For example, we tax General Motors on its worldwide income.

On the other hand, the United States taxes foreign corporations only on income with a sufficient connection or nexus to the United States. …

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