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 Debt.
