NEW BRUNSWICK—The U.S. presidential election campaign triggers debate every four years over off-shoring, outsourcing, and tax-avoidance schemes by corporations. This year is no exception, and the issue of “inversions”—companies moving their headquarters abroad to reduce taxes—has candidates from both parties crying foul. The issue highlights the negative consequences of globalization and serves as an effective battle cry to rally voters. A closer look shows why this is a visceral political issue even though the economic impact is less than meets the eye.
In simple terms, an inversion is when a U.S. company shifts corporate headquarters to a country like Ireland where corporate taxes max out at 12.5 percent, as compared to the maximum 35 percent U.S. tax rate, not including additional taxes imposed by states. For large multinational firms, the annual savings for companies—and lost tax revenues for the government—can be in the billions.
Inversions are not just a matter of declaring a new address and printing new stationery. A U.S. company must acquire a foreign firm large enough to qualify, and U.S. shareholders must own less than 80 percent for the new firm to be considered a foreign firm for tax purposes. More than 20 U.S. firms shifted headquarters since 2012, including Mylan to the Netherlands, Burger King to Canada, and Medtronic to Ireland—all countries that offer lower corporate tax rates than the United States.
