A corporation organized in the U.S. pays federal taxes on its worldwide income, whereas a foreign corporation pays federal taxes only on its "U.S. source" income.
When a U.S. corporation undergoes a corporate inversion, the U.S. corporation becomes a subsidiary of a foreign corporation ("parent") organized in a tax haven country - a country that imposes little or no tax on corporations. The new parent corporation receives income throughout the world, and pays U.S. taxes only on the U.S.-source income generated by its U.S. subsidiary.
If the U.S. corporation did not engage in the corporate inversion, income from all sources, whether U.S. or foreign, would be subject to U.S. taxes. By engaging in a corporate conversion, the corporation no longer pays federal income taxes on its foreign source income.
Here’s how a corporate inversion works. A U.S. corporation creates a parent company in a tax-haven country, a country that imposes little or no taxes on income received by international corporations headquartered in that country. The U.S. corporation then engages in a merger or reorganization, the result of which makes the U.S corporation a subsidiary of the foreign parent.
Clearly, this is a massive tax loophole.
My recommendation is for the US government to either require the legal reversal of all existing corporate inversions that now exist.
Or alternatively, you could keep legally the corporate inversion structures the way they are now. However, for US federal income tax purposes, the parent corporation, located in the tax-haven country, must file a US corporation income tax return and is taxed in the US each year on its worldwide income…thus, tax based on economic substance rather than based on legal form. The economic substance here is that the only reason this corporate inversion occurred was to save worldwide corporate taxes. It has no other legitimate purpose.
The money raised under this proposal should be used to reduce the US Deficit.
