Corporate inversion a shady practice at best
It's not a very patriotic thing to do. But money talks and corporate board members who choose to have their companies reincorporate overseas to avoid our country's 35-percent corporate tax rate do so under the guise of serving their fiduciary responsibility to shareholders.
Scores of companies have done it; many more are considering it. Iconic American corporate names like Tyco, Fruit of the Loom and Ingersoll-Rand have done it. Others like Pfizer, Stanley and Walgreens have looked into it. Burger King, Chiquita Brands and Medtronic presently have deals in the works to reincorporate in foreign lands.
Since 1982, more than 40 U.S. companies have done it, 14 of them in the last two years. Eight companies have deals in the works expected to be completed in the next year.
Here's how it works. A U.S. company buys or creates a company in a foreign land whose tax rate is lower than that of America. In Burger King's case, it is buying Canadian coffee and doughnut chain Tim Horton's. The U.S. company then declares the merged entity to be domiciled in the foreign country in order to avoid America's higher corporate tax rate.
For the most part, these companies do not have to change a thing in where they operate, and it's business as usual at their physical U.S. locations; the move is all on paper.
Like other loopholes in the corporate tax code, tax inversion, as the practice is called, has the potential to save corporations billions in federal income taxes. That may be good for shareholders, but it doesn't make it right. In fact, the average American citizen who regularly pays all of his or her taxes at a standard rate determined by income level is the one who ultimately could bear a bigger burden to make up for all the lost revenue.
The American Jobs Creation Act of 2004 was supposed to remedy the situation but, as they are wont to do, corporate attorneys and tax specialists found ways around the legislation and a new wave of inversions has come around.
Most say the only way to stop the practice is by fully revamping America's corporate tax code, closing loopholes and lowering the tax rate. That would create a level playing field where all corporations pay a fair rate. But, of course, that would require cooperation across the aisle, something that has rarely happened in Congress over the last several years.
In response to the latest wave of inversions, new rules were hurriedly implemented last month by the U.S. Treasury Department to thwart the practice. While the rules have teeth that may cause some deals to be reconsidered, unfortunately, they likely will be nothing more than a speed bump that corporate attorneys and accountants have proven adept at avoiding.
It is clear that something greater needs to be done. An overhaul of the tax code – as difficult an objective as that may be in this era of hyper-partisanship, election-year wranglings and obstructionist tactics – is the only way to ensure that American companies providing American products and American jobs do not forsake their roots and the financial health of their country in the interest of higher profits elsewhere.
