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“Competitiveness” Has Nothing to Do With It
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“Competitiveness” Has Nothing to Do With It

Edward D. Kleinbard
Tax Analysts, 2014
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9

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  • Innovative

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More and more US multinationals are undertaking corporate inversions – transactions in which a large firm becomes a “nominal subsidiary” of a smaller foreign company in a tax-friendly jurisdiction. Generally, companies structure such deals so that they can shelter income in a low-tax country. American corporations claim that these transactions are necessary if they are to remain globally competitive in a high US tax environment, but such assertions are “almost entirely fact free,” according to professor Edward D. Kleinbard. His rigorous examination of often-tedious tax rules contrasts with his fiery debunking of corporate complaints. getAbstract recommends Kleinbard’s intriguing, lively take on a timely topic – particularly as the White House moves to curtail inversions – to CEOs, legislators, and others with an interest in reforming the US corporate tax code and keeping American tax dollars in the United States.

Summary

Why Inversions Take Place

In a corporate inversion, a large company acquires a smaller, publicly held foreign company that is based in a tax-friendly nation. This practice has become popular among large American companies. The US firm structures the deal so that it becomes a “nominal subsidiary” of the smaller foreign company. Meanwhile, US shareholders must pay immediate capital gains tax resulting from the transaction. American firms claim that corporate inversions make them more competitive internationally by providing relief from the 35% nominal US corporate tax rate.

For example, Mylan is a US pharmaceutical company seeking an inversion via a Dutch enterprise. Heather Bresch, Mylan’s CEO, recently stated that her company is “reluctantly” pursuing the strategy after losing faith in US legislators’ commitment to fixing the American tax code. In light of the evidence, however, such claims ring false. Sophisticated companies routinely avoid US taxes on their foreign earnings by parking the money offshore. With aggressive tax planning, these multinational companies easily can shift money to low-tax jurisdictions.

Such “stateless income” leads to American firms...

About the Author

Edward D. Kleinbard is a professor of law and business at the USC Gould School of Law.

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