What’s the big deal about tax inversions?

Joshua Nowack

September 30, 2014

So, here we are again. The White House is saying that corporations that pursue an off shore tax inversion strategy are unpatriotic and taking away from hard working Americans. It’s a populist statement. But here’s the problem…it’s absolutely legal and part of the Internal Revenue Code. Let’s think about that. A law was passed that made tax inversions an absolutely 100% legal transaction. Now, if I were to tell you of a strategy that could trim your tax bill by 20% and it’s 100% legal, but then proceeded to tell you NOT to do it because you should choose to pay more taxes. I’m thinking I’d be fired.

An inversion is a complicated way to change a corporation’s citizenship to a foreign country with a better tax structure so that its international sales aren’t subject to US taxation unless repatriated to the US. Further, since intellectual property may be held offshore a US subsidiary can shift profits offshore by paying royalties for use of this intellectual property to the foreign intellectual property holder. Now, to be clear, these companies are still paying US corporate income tax on what’s left. Further, companies will continue to pay payroll taxes to the various states and to the US government, but we won’t talk about that.

I can really appreciate the desire to have the all taxpayers that source profits from the US to pay their fair share. But Washington needs to realize, much like the corporations they are trying to regulate, that this is a global marketplace. There is extraordinary value in my US Passport. My US citizenship is something very near and dear to my heart. But if a corporation’s job is to maximize shareholder value and doesn’t care much for its passport, the US needs to do a better job of streamlining the tax structure. Companies will migrate to the most profitable path. If that path is to remain onshore, than that’s what will happen. Rather than publicly badgering corporations for following dollar signs, I would much rather see Congress and the White House own up to the notion that they passed this law and it’s up to them to find a reasonable solution. I won’t hold my breath – but I can dream right?

   

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