Inversions: What They Are and Why They’re a Problem

Main Street has supported changes to the U.S. tax code for quite some time. While there are a number of problems with the current tax code, one of the most egregious issues is the corporate tax rate. U.S. Corporations are taxed at a rate of 35%. This is well above the world average and U.S. companies frequently look for loopholes in the tax code in order to lower their burden. Recently, a number of U.S. companies have taken advantage of a loophole known as “inversion.”

The Wall Street Journal’s Edward Kleinbard wrote an article last week titled “Tax Inversions Must Be Stopped Now” that thoroughly explains the inversion process. In very simple terms, inversion occurs when a large U.S. company acquires a smaller company in a foreign country with a much friendlier tax rate; however, the acquisition is structured so that the small foreign company becomes the “parent” company and the larger U.S. company becomes the subsidiary. This allows the company to avoid paying U.S. taxes on their foreign earnings. It can also do serious damage to our domestic corporate tax base.

There has been quite a bit of discussion in the media lately about U.S. companies who are taking advantages of inversion and about possible ways to stop them. Among the suggested solutions are making it more difficult for companies to invert by requiring the foreign company to own more of the new entity; depriving inverting companies of some of the benefits that U.S. corporate “citizens” enjoy; and the creation of a “tax holiday” that would temporarily and significantly lower the corporate tax rate in order to encourage these companies to bring foreign earnings back into the U.S.

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