Corporations changing their citizenship

Corporations changing their citizenship August 7, 2014

The corporate tax rate in the United States is 35%, the highest of all developed nations.  So more and more companies are practicing “inversion,” a transaction on paper that relocates their corporate home (while leaving most operations and employees where they are) to another country, such as Ireland, where the corporate rates are 12.5%.

Even President Obama wants to lower corporate rates–to 28%–and Republicans would like it much lower, but tax reform has been going nowhere, so lots of companies are making their move.  Do you blame them?  Are they un-patriotic or just doing what they have to do?

From Lori Montgomery, U.S. policymakers gird for rash of corporate expatriations – The Washington Post:

Washington policymakers are bracing for a wave of corporations to renounce their U.S. citizenship over the next few months, depriving the federal government of billions of dollars in tax revenue and stoking public outrage ahead of the Nov. 4 congressional elections.

So far this year, about a dozen U.S. companies — including such well-known brands as Medtronic medical devices and Chiquita bananas — have merged with foreign firms and shifted their headquarters offshore to avoid U.S. taxes, analysts say.

Dozens of additional deals are in the works, according to administration and congressional officials, and other companies are quietly contemplating the move. Last month, CVS Caremark chief executive Larry Merlo met with Sen. Charles E. Schumer (D-N.Y.) and urged him to act to stop the rash of expatriations. Otherwise, Schumer said that Merlo warned him, CVS “might be forced to do it, too,” to duck a total tax bill expected this year to approach 40 percent.

“There’s a huge number coming,” Schumer said in an interview. “We hear there are going to be several big announcements in August.”

The maneuver, known as tax “inversion,” has been around for decades, but the pace has accelerated in recent years as U.S. firms have expanded overseas and other nations have adopted lower tax rates. At the same time, company executives have grown increasingly frustrated with Washington, where political gridlock has stymied efforts to reduce a 35 percent federal corporate tax rate that is higher than in any other advanced economy. . . .

No one has yet measured potential job loss from the practice, said Mindy Herzfeld, contributing editor to the trade journal Tax Notes International. Inversions typically involve relocating on paper only, with company headquarters and executives remaining in the United States. . . .

While technically complex, inversions are conceptually simple: A U.S. firm moves its tax home to a nation with lower rates, often by merging with or purchasing a foreign company. The new company is still subject to a 35 percent rate on its U.S. earnings. But profits earned overseas — previously subject to U.S. taxes upon transfer back to the United States — are subject only to the lower foreign rates.

Ten years ago, inverted companies tended to flee to tax havens such as the Cayman Islands. These days, they are more likely to plant their flags in Europe, where many already have operations. Ireland, a popular destination, imposes a tax rate of just 12.5 percent.

 

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