Corporate inversion is a tactic used by corporations to reduce the corporate income tax they need to pay in the United States. Inversion is the practice in which a U.S. company undergoes an acquisition by a smaller company in a foreign country with a lower tax rate. By doing this they can relocate their corporate headquarters to that foreign country and thus avoid having to pay the higher corporate tax rate in the United States. Many U.S. companies use corporate inversion to reduce their taxes in the U.S., which has one of the highest corporate tax rates at 35 percent.
Companies seek out countries that are tax havens or have some of the lowest rates. Corporate inversion is a relatively new strategy. It was fashionable in the 1990s, when U.S. corporations started merging with smaller companies in European or Asian countries where taxes were low. Today, corporate inversions are still being used for evading taxes legally.
When corporate inversions came to light in the 1990s, the government changed the rules around their use. This curbed inversion activity at the time, but the tactic has now come back to taunt the U.S. government.
Corporate inversions also allow companies to lower taxes on profits that have been compiling overseas. If they bring the profits to the U.S., they have to pay taxes on it. Through corporate inversion, companies can circumvent paying taxes in the U.S. while conducting business within the country.
It’s the United States’ high corporate tax rate that leads companies to look for ways to minimize their taxes. On the other hand, the government and many individuals argue that the high tax rate cannot be an excuse for evading taxes legally or illegally. President Obama commented that, “changing your mailing address in order to avoid paying taxes, then you are really not doing right by the country and the American people.”