Question

In what ways are tax inversions beneficial to both the United States and the host country of the inversion?

Answer 1

A corporate inversion (or tax inversion) is a process by which companies, primarily based in the U.S., relocate operations overseas to reduce their income tax burden. Companies who receive a significant portion of income from foreign sources employ corporate inversion as a strategy since that income is typically taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country which has a lower tax rate and less stringent corporate governance requirements than their home country.

For example, consider a manufacturing company that incorporated itself in the United States in the 1950s. For years, most of its revenue came from U.S. sales, but recently, the percentage of foreign sales has increased. Income from abroad is taxed in the United States, and U.S. tax credits do not cover all taxes which the company must pay elsewhere. As the percentage of sales coming from foreign operations grows relative to domestic operations, the company pays more in U.S. taxes because of where it is domiciled. In addition, its U.S. income is taxed at a high domestic rate.

If the business incorporates abroad, it can bypass paying higher U.S. taxes on income not generated in the United States. The company would advance to a corporate inversion to achieve this aim. Other advantages include the U.S. operations being financed by loans from the foreign parent company. As they form a new U.S. operating company, which creates U.S. tax deductions and reduce the tax payable on domestic income as well.