Fact Sheet: Corporate Tax Inversions

Key Facts

  • Inversions largely occur on paper. Corporations typically do not move their executives or operations overseas.
  • Corporations that invert continue to enjoy the benefits of operating here — they just dodge a lot of taxes.
  • A dozen U.S. firms are currently considering doing a corporate inversion.
  • Walgreens could dodge up to $4 billion in U.S. taxes over five years if it inverts. One-quarter of its sales are from Medicare and Medicaid.
  • Medtronic plans to move its corporate address to Ireland, a tax haven, to avoid paying U.S. taxes on $20.5 billion in offshore profits.
  • U.S. corporations already dodge $90 billion a year in income taxes by shifting profits to subsidiaries — often no more than post office boxes — in tax havens.
  • U.S. corporations hold $2.1 trillion in profits offshore — much of it in tax havens — that have not yet been taxed here. An inversion can let firms dodge paying taxes on those profits.

Talking points

  • Corporations that renounce their U.S. “citizenship” and shift their address offshore are deserters. They are traitors to America. They want all the benefits of being an American company without paying their fair share of taxes. That makes the rest of us pick up the tab.
  • It is unpatriotic for a corporation to abandon America by shifting its address to a tax haven in order to dodge paying its taxes.
  • Congress must close tax loopholes that make it easy for corporations to shift profits and jobs offshore. Congress needs to level the playing field so that big corporations have to play by the same rules as Main Street businesses that are doing their part.
  • Big corporations say that the 35% U.S. corporate income tax rate is too high. But many companies pay much less because of loopholes in our tax code — many pay at a rate of less than 20%.
  • 26 corporations paid no U.S. income taxes from 2008 to 2012, including General Electric, Boeing and Verizon. 111 companies paid no income taxes in at least one of those five years.
  • We cannot win a race to the bottom. There will always be countries with tax rates that are much lower than ours — sometimes 0%.

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Overview

In recent months, several major U.S. corporations — among them Walgreens, Medtronic and AbbVie — have announced possible plans to renounce their U.S. corporate “citizenship” and move their corporate address offshore by merging with a foreign company. The merged corporation then pays most of its taxes to a foreign government — usually a tax haven — with a low tax rate. This allows it to dodge paying its fair share of U.S. taxes. The process, known as an “inversion,” takes place primarily on paper as most corporate operations remain here.

Why is the issue important?

If corporations use inversions to dodge their tax obligations, American taxpayers have to pick up the tab even though the firms will continue to enjoy the enormous benefits of being headquartered here. Inversions are likely to become a central issue in the debate over corporate tax reform. Conservatives claim that corporations are forced to leave America because the corporate income tax rate is too high. Progressives argue that corporations are already avoiding paying their fair share of taxes due to many loopholes, including inversions.

How does an inversion work?

A corporate inversion occurs when a U.S. company merges with a foreign one, dissolves its U.S. corporate status and reincorporates in the foreign country. The U.S. company becomes a subsidiary of the foreign one, but the foreign firm is controlled by the original U.S. firm.

A U.S. corporation can invert if after a merger the owners of the U.S. corporation retain less than 80% of outstanding stock of the new merged company, or if after the merger the new merged company has “substantial business activities” in the foreign country equaling at least 25% of operations. So, with just a 20% change in ownership, a company can become “foreign” even if it largely operates in and is controlled from America.

What is the tax advantage of an inversion?

Corporations undergo inversions to take advantage of much lower tax rates, usually in tax-haven countries. Once inverted, a company no longer pays U.S. taxes on its global income. Instead, it is only responsible for paying taxes on income generated in the U.S. For example, Walgreens, which had $72 billion in U.S. sales last year, would likely avoid $4 billion in U.S income taxes over five years if it inverts with a Swiss firm. Pfizer, which tried to do an inversion with AstraZeneca in the U.K., would dodge $1 billion a year in taxes here.

Also, U.S. companies with billions of untaxed profits offshore can escape paying taxes on those profits in America if a company inverts. Medtronic reportedly could use $20.5 billion in its untaxed profits now offshore to invest back here and avoid paying taxes on those funds.

Why inversions are unfair

Companies that invert will continue to take advantage of the things that make the U.S. the best place in the world to do business — our educated workforce, legal and transportation systems, and federally-funded research. And they will continue to be able to get government contracts and to sell products to millions of American consumers.

But they will pay far less than their fair share for these services, passing on the cost to American taxpayers and to other companies.

What is President Obama’s position?

Obama’s budget proposed to make inversions very difficult for companies that have the majority of their operations and ownership in the U.S. He would prevent them from reincorporating abroad if they are owned by at least 50% of the former U.S. parent’s stockholders (the current threshold is 80%). He would also require that the new foreign corporation be primarily managed and controlled from abroad.

What is happening in Congress?

Key members of Congress have introduced legislation based on Obama’s plan. Sen. Carl Levin (D-MI), Chairman of a subcommittee that has investigated tax avoidance by Apple and other corporations, has introduced the Stop Corporate Inversions Act of 2014 (S. 2360). Rep. Sander Levin (D-MI) has introduced a companion bill in the House of Representatives (H.R. 4679) that would raise $19.5 billion over 10 years.

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Drawn from Americans for Tax Fairness’ 2014 Tax Fairness Briefing Booklet.