Opinion

Nicholas Wapshott

Can I invert myself and not pay taxes?

Nicholas Wapshott
Aug 13, 2014 16:05 UTC

The Pfizer logo is seen at their world headquarters in New York

The hot tax-dodging business trend of the summer is inversion. A U.S. company buys a company in a country with a lower corporate tax rate, relocates its headquarters there and funnels its income through the new head office. As long as it does not repatriate profits, the self-exiled company can avoid paying U.S. corporate taxes.

The United States is the only country that taxes its citizens on their worldwide income.  Wherever you earn money, the Internal Revenue Service wants a slice of it. But if, as the 2012 Republican presidential nominee Mitt Romney said and U.S. Supreme Court justices ruled in Burwell v Hobby Lobby and Citizens United v Federal Elections Commission, corporations are people, shouldn’t the converse be true? Why can’t all Americans relocate their places of domicile abroad and dodge taxes just like a company?

If only it were that easy.

Let’s take it one step at a time. There has been considerable alarm at U.S. companies’ rush to the exits. Under a fiduciary duty to maximize dividends and share prices for stockholders, businesses are seeking to avoid the 35 percent federal corporate income tax they are liable for here. Many American business leaders believe high corporate tax rates put their companies at a competitive disadvantage with the rest of the world. As do many business-leaning, tax-hating and federal government-loathing politicians.

A general view of the Internal Revenue Service Building in WashingtonIf you add local and state taxes, U.S. corporations pay tax on their income at a nominal rate of 40 percent, far more than many other countries. Britain, for example, has a similar economy but its top corporate tax rate is just 21 percent. Germany, which also has a successful, mature economy, levies its companies at nearly 30 percent. While few U.S. companies end up paying this nominal rate, since they offset various expenses, exemptions are much the same in comparable economies. This disparity tends to beggar American businesses and discourage domestic investment, which means fewer U.S. jobs.

Hence the clamor to relocate. Eight major companies are planning to nominally move — though not actually transfer their bricks-and-mortar businesses — to low-tax countries in the next 12 months, joining about 41 U.S. companies who have already done so since 1982. All they have to do is buy a foreign company at least 25 percent their size and, on paper at least, they become a foreign entity — and avoid the U.S. corporate tax.

The analogue titans’ last gasp against the digital giants

Nicholas Wapshott
Aug 4, 2014 18:46 UTC

amazon-hachette

Amazon’s bullying of the book publisher Hachette and the uninvited bid by Rupert Murdoch’s 21st Century Fox to swallow rival TimeWarner has caused some economists and commentators to ask, why are such aggressive moves not attracting the attention of the Justice Department’s trust-busters? Both moves are textbook examples of how monopoly power can abuse — or so they would have seemed not long ago.

At stake are the benefits that consumers and employees alike enjoy from the proliferation of competing companies operating in a free market. For markets to work freely and fairly, there must be enough companies competing; when the critical mass of businesses sinks below a certain number, monopolies occur, which is bad for consumers. When that happens, governments in mature societies intervene to prevent over-consolidation and protect people from exploitation.

This isn’t socialism; it is how the free market is meant to work. It is the ordered way of doing business advocated by free-market gurus like Friedrich Hayek, who believed the integrity of free enterprise was paramount to ensure that prices are arrived at fairly.

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