Tax Inversions Are Immoral, Signal Need For Reform

by: Orange Peel Investments


Tax inversions are allowing companies to "back into" other countries to tax advantage of tax laws and skirt the U.S. tax code; all while trading on U.S. exchanges.

The rate at which tax inversions are occurring is growing extraordinarily quickly.

Corporate inversions are immoral and not the way to deal with the need for tax reform.

Tax inversions have been the popular topic in the news media over the last couple of months due to the growing number of them.

In short, a tax inversion, if you're not familiar with them, is simply a way to avoid paying taxes owed by being a U.S. corporation. A company backs into another company located abroad (where tax regulations are less strict) and marks that as its company headquarters.

Bermuda and Ireland are two havens for companies that aren't interested in paying their fair share here, while still getting the benefits of trading on a U.S. exchange and doing tons of domestic business.

(click to enlarge, source FT)

As you can see, it's basically the same as when a U.S. company buys a public shell to become listed. You basically "back into" the process.

A lot of companies take these inversions to actually avoid paying taxes on sales made abroad; which the U.S. thinks they should be receiving taxes on if you're headquartered here. Regardless of the reasoning and how desperately we actually do need corporate tax reform in the U.S., this isn't the right thing to do.

As forecasts for domestic corporation taxes continue to rise, the issue is going to become more and more scrutinized. What's going to happen when every U.S. listed company doing business in America has their "headquarters" outside of the U.S.?

(click to enlarge - source Statista)

The extremely alarming thing is the rate at which these are occurring. Now that the "loophole" secret is out, it's spreading more virally than the ALS ice bucket challenge. "Everybody's doing it."

One article points out that 3 inversions occurred in 2010, while that has jumped to over an attempted 10 this year.

The interesting thing is that when investors are holding companies that perform inversions (in taxable accounts), they're often hit hard with capital gains taxes. This is so because technically, an inversion is selling a U.S. company to a foreign entity, and shareholders have technically "sold their shares" for no cash, just a stake in the new company.

Reuters discovered, in addition, that investors don't usually reap the rewards in a tax inversion situation.

The Peel's Feel:

If you want to lobby for tax reform, that's fine.

We see the problem as a sign that something needs to be fixed within the U.S. tax code. It tells us something to begin with, that these types of things are happening. Perhaps it is time to address serious corporate tax reform in this country; if we don't do that and we continue to allow tax inversions, all it's going to do is hurt the U.S. economy and the U.S. taxpayer, who is paying his or her fair share and won't be able to have the full advantage of all that taxes provide.

There are estimates out there that are putting the U.S. as losing between $18-$20 billion over the next decade as a result of inversions.

We understand the need for tax reform for corporations in the U.S. However, what we don't support is pulling a move like this to avoid paying your fair share in the interim. There's not too much we agree with the President on when it comes to fiscal policy, but we found his comments on the issue of tax inversion (which you can read here) to be on the money.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.