Inversion just another name for 'dodge'
Members of Congress, like most Americans, don't like the idea of corporations evading their tax obligations. That's why Congress passed a bill a few years ago precluding U.S. corporations from simply incorporating in a foreign tax haven to avoid paying U.S. taxes.
Many corporations have gotten around the prohibition, however, by "merging" with substantially smaller foreign firms and claiming to be headquartered in the smaller company's home country, even though the merged entity's operations and markets continue to be in the United States.
According to the Department of the Treasury, at least 47 major American companies have used the tax-avoidance tactic over the last decade, and the pace is accelerating. At least four major U.S. companies are in the process of inversions.
Just about everyone understands that the ultimate answer is a reworked corporate tax code that limits or eliminates special tax breaks for some enterprises while reducing the rate. The U.S. corporate rate is 35 percent but the average effective rate that corporations actually pay is about 28 percent. Rates in the tax havens where the tax inverters seek to "relocate" usually are much lower, such as the 12.5 percent rate in Ireland. And, the potential host countries usually don't tax a company's foreign income.
This politically fractured Congress has zero chance of undertaking corporate tax reform, however. But several stopgap measures have been introduced to make tax inversions unattractive. For example, one would allow an inversion only if more than 50 percent of a company's stockholders are foreign; another would preclude inversion if a company is managed and controlled in the United States and has "significant domestic business activities."
Congress should preclude inversions now while launching an effort to reform the corporate tax code.