What do the Cayman Islands, Switzerland, United Kingdom, Singapore, Ireland, and Bermuda have in common? Perhaps the term “tax haven” rings a bell.
According to the Organization for Economic Co-operation and Development (OECD), the United States currently has the highest statutory corporate income-tax rate in the world at 39.1%. Being 14.1% higher than the international average, many U.S. companies have employed a strategy known as a corporate inversion to ease the hefty tax burden they face.
What is a corporate inversion?
A corporate inversion is a when a company reincorporates itself in a country with lower tax rates in order to reduce its tax burden on income earned abroad. If 25% of its employees, assets, and sales are located outside the United States or 20% of the newly merged company stock is owned by stockholders other than those of the U.S. company, it can be designated as a foreign company. As long as profits and tax returns are accurately reported, the strategy is not technically considered to be tax evasion.
Over the past decade, there has been a rapid increase in corporate inversions, eight of which are currently pending. Pfizer’s controversial $120 billion proposed merger with AstraZeneca (has since been rejected), caught the attention of Wall Street and Congress.
In May 2014, Senator Carl Levin proposed a bill known as the Stop Corporate Inversions Act of 2014 which addresses the tax loophole that many U.S. companies are attempting to exploit. This bill attempts to raise the percent change in stock ownership required to enable an inversion from 20% to 50%. The bill is intended to be a stepping stone in the process of reforming the U.S. tax code in order to incentivize companies to remain stateside.
So what’s the big deal?
Laura Tyson, former chairwoman of President Clinton’s Council of Economic Advisors, says, “America’s relatively high rate encourages U.S. companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the U.S., which means slower growth, fewer jobs, smaller productivity gains, and lower real wages.”
Outspoken billionaire investor Mark Cuban isn’t too keen on the recent trend in corporate inversions either. He made several statements on Twitter saying, “If I own stock in your company and you move offshore for tax reasons I’m selling your stock… When companies move off shore to save on taxes, you and I make up the tax shortfall elsewhere. Sell those stocks and they won’t move.”
At the current rate, the U.S. Department of the Treasury expects to lose $17 billion over the next decade due to corporate inversions. Although they are technically legal, tax revenues play a huge role in building up and sustaining arguably the best infrastructure in the world. If America is to continue benefiting from this infrastructure, Congress needs to reform the country’s tax platform to encourage companies to remain stateside.
When preparing to execute a corporate transaction, consider seeking help from a tax consulting firm. Our partners will dissect the tax code for you and structure deals in a patriotic way that ensures you retain the highest possible amount. Contact us today.