US IRS continues to lose battle to effectively tax corporations
Many corporations (and all corporations set up under Subchapter S of Chapter 1 of the IRS code) are not taxed. And for those that are taxed, many pay much lower than the maximum 40% tax rate. In fact in 2011, the 10 most profitable companies paid an average tax of just 9%
US law disallows taxation of US company profits overseas. In the 1990’s several US companies moved to tax havens such as Bermuda and the Cayman Islands, a maneuver called “self-inversion”, to reduce their tax burden. Since 2004, tighter US regulations have done away with this practice.
Since 2004, US companies have looked for other ways to reduce the taxes that they pay, typically with the approval of shareholders. One of the most popular ways is through a process of “inversion by merger”, whereby for example, a US corporation merges with a corporation which resides in a foreign country that has lower taxes than the US, followed by moving the newly created holding company to the foreign country. This has been done several times over the past several years, which effectively moves dollars previously taxed and collected by the US to remain in the pockets of the foreign company and it’s shareholders. The most recent example of an attempted “merger by inversion” in the news is the attempt by US-based drug company Pfizer to buy/merge with UK-based AstraZeneca.
Inversion activity is a symptom of problems in the international tax system that needs to be addressed. At the very least, vague or nonspecific language in the current regulations such as requiring the company to perform “substantial business activities” in the foreign country, should be clarified in order to create a level playing field and to improve fairness to all countries in international tax reform. However, the news is not all bad for the US IRS. For example, there are still instances where it is advantageous for a US-based company to repatriate funds from overseas to the US, such as for reinvestment in the US. A recent example is the US e-commerce company EBay, which recently said it will bring as much as $9 billion back into the US, which will create an additional $3 billion tax charge.