Through “inversions” U.S. companies are unilaterally rejecting U.S. citizenship based taxation and embracing the world standard of “territorial taxation”
U.S. Corporate “citizenship-based taxation” vs. the world standard of territorial taxation
Vice-President Biden opposes “territorial taxation” but he doesn’t know why
It’s not just U.S. citizens who are renouncing U.S. citizenship. An exchange between Senator Carl Levin and Apple CEO Tim Cook explains why corporations are doing the equivalent – i.e. corporate renunciation of U.S. citizenship. To be specific, U.S. corporations are merging with non-U.S. companies in order to:
1. Change the domicile of the U.S. company outside the U.S.;
2. Which means that the new company will NOT pay U.S. tax on profits earned outside the U.S. The company will continue to pay U.S. tax on income earned in the U.S.
The new company will, like all non-U.S. companies, pay tax only profits earned in the country where the profit is earned. By ceasing to be a company domiciled in the U.S., the new company will – like all non-U.S. companies – be subject to a “territorial” tax system.
The process of “changing the domicile” to no longer be a U.S. company is called an “inversion”. It has been a popular topic as of late. President Obama, Senator Carl Levin and Treasury Secretary Lew (and others) have proposed retroactive legislation to both discourage and penalize “inversions”. It’s important to note that “inversions” are perfectly legal. It’s just that the Obama Democrats don’t like them and regard companies who engage in “inversions” to be “unpatriotic” or “corporate deserters” or “renouncing U.S. citizenship” or all three. Once again, please understand that:
An “inversion” means that the company still pays full tax on profits earned in the U.S. After the inversion the company does NOT pay tax on profits earned outside the U.S.
Therefore, the issue is NOT one of “patriotism” (whatever that means). The issue is whether it is reasonable to tax profits earned in other countries (which are already taxed in the countries where they are earned). It’s just like citizenship-based taxation on Americans abroad. This was identified as the central issue in the following comment to a Robert Wood post: