USPIRG: Who’s Afraid of Inversion?

Congress Can Clamp Down on Offshore Tax Havens

Many large U.S. companies avoid U.S. taxes by using accounting gimmicks to shift profits legitimately made in the U.S. to offshore tax havens that levy little to no tax. The most recent academic estimates put the revenue lost due to corporate tax haven abuse at $90 billion annually. According to a 2008 study by the Government Accountability Office, at least 83 of the top 100 publicly traded companies in the United States maintain subsidiaries in offshore tax havens.

As Congress considers closing the loopholes that allow aggressive offshore profit shifting, lobbyists for some companies are resorting to blackmail: “If you prevent us from using offshore tax havens to avoid paying taxes, we may re-register our company outside the country or rearrange our corporate structure with a foreign headquarters to avoid U.S. taxes altogether. Don’t mess with our loopholes or we’ll become a company based in a tax haven like the Cayman Islands!”

Manipulating corporate structure to appear like a foreign company for tax purposes is called “inversion” or “expatriation.” It sounds like an easy option for companies to reap the benefits of conducting business in America while paying next to nothing in taxes. While U.S. companies can only defer paying taxes on offshore profits until they repatriate them, foreign companies don’t have to pay any U.S. tax on their foreign income. There are many tax maneuvers that companies can use to make their profits appear to have been earned overseas.

But these days the threat of inversion is mostly bluster. To understand why, it is important to distinguish among three ways that a company can “move” abroad:

1. It can physically relocate business activities overseas, thus foregoing the benefits of America’s legal system and proximity to our country’s markets, workforce and infrastructure.
2. It can use legal and accounting maneuvers to designate profits on tax forms as accruing to overseas affiliates.
3. It can reorganize the corporate structure of a company to register the headquarters overseas.

While most companies would not forgo the benefits of doing business in America simply for tax purposes, many companies avoid U.S. taxes by exploiting a host of tax loopholes to make what are really U.S. profits appear to be earned by overseas subsidiaries, such as overpaying a foreign subsidiary for services to transfer income or to convert one kind of income to another less taxed form. But changing the designated location of the corporate headquarters is rarely a practical way to go about it. In the last decade Congress has erected several protections that made it very difficult for companies to portray themselves to the IRS as a foreign company while simultaneously maintaining the same level of activity within the United States. Congress has created new laws, and new rules issued by the Treasury on June 7, 2012, raise the bar prohibitively high for most companies.

Congress can better shore up our tax code by shutting down loopholes that allow profit shifting without being held hostage to the empty threat that companies will simply exempt themselves from U.S. laws by inverting their place of registration.

Download Report