The Financial Times (h/t Richard Murphy) reports on a new/old trend in tax avoidance by U.S. corporations: so-called "tax inversions" or "expatriations." In an inversion, a U.S. company reorganizes to make a foreign subsidiary the parent company, with the goal of taking advantage of lower tax rates and non-taxation of foreign profits. Currently, American corporations are taxed on their worldwide income, whereas many other countries only tax domestic profits (but combine this provision with anti-abuse rules to prevent profit stripping).
The FT reports that most of the new inversions are taking place in the context of a foreign acquisition. Two U.S. pharmaceutical companies, Perrigo and Activis, have bought Irish drug makers and are shifting their headquarters to Ireland, where the corporate income tax is only 12.5 percent. Other companies are relocating to the Netherlands or the United Kingdom after acquiring firms based there. I use the term "relocation" advisedly, because in fact these maneuvers will leave their U.S. operations unchanged.
There is no doubt that these inversions are legal, at least under current law. However, as Sen. Charles Grassley, R-Iowa, said in 2002 during an earlier rash of inversions, "These expatriations aren't illegal. But they're sure immoral." What we see is companies that want to benefit from everything the United States has to offer – markets, highways, educated workers, a legal structure and so on – but pay even less taxes than they do already.
As Richard Murphy commented on the FT piece, when corporate inversions to Bermuda were all the rage in the early 2000s, the United States clamped down on the practice when the abuses became too flagrant. In fact, Grassley and Sen. Max Baucus, D-Mt., teamed up to prohibit the federal government from doing business with inverted companies, and in 2004 Congress passed rules treating such firms as U.S. businesses for tax purposes unless they had "substantial business" in the new location. In June 2012, these regulations were strengthened further.
The newest inversions are attempts to game the rules by buying large enough companies to make the argument that they have "substantial business" abroad. As the FT points out, some of these acquisitions come to tens of billions of dollars, so you can see the method in their madness.
Despite all that, Murphy predicts that if inversions to Europe become too common, we will see a crackdown on them like the earlier Bermuda crackdown. If you ask me, there's no reason to wait.
Kenneth P. Thomas is professor of Political Science and fellow in the Center for International Studies at the University of Missouri-St. Louis. He is the author of "Competing for Capital: Europe and North America in a Global Era" and "Investment Incentives and the Global Competition for Capital." He blogs at Middle Class Political Economist.