The “inversion” issue is about whether the U.S. can tax income of other countries NOT patriotism!

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:

Mr. Wood – thanks for your series of educational articles on this issue. On your precise question which is “Are inversions unpatriotic?”

Inversions in NO WAY affect the U.S. tax paid on U.S. income. As you point out, what an inversion does, is shields profits made outside the U.S. from U.S. taxation. Note that U.S. companies do pay tax to those other countries where those “non-U.S. profits” are earned (which is consistent with the world standard). Note also that U.S. companies are at a competitive disadvantage when competing with foreign companies outside the U.S. (They have a second set of U.S. taxes to pay if the profits are brought back to the U.S.).

Therefore, the question should be phrased as follows:

Is it unpatriotic for U.S. companies to reorganize themselves so that they are not required to pay the U.S. taxes on money that is earned outside the U.S. and is in NO WAY connected to the U.S.? (For that matter should U.S. citizens abroad be required to pay the U.S. taxes on income earned outside the U.S., that is unconnected to the U.S.?)

What is unpatriotic is to NOT pay tax on profits connected to the U.S. The corporations are NOT being unpatriotic. They are simply trying to survive in a competitive world. U.S. tax policies make it very difficult for them to do business outside the U.S. Rather than support U.S. companies abroad, the U.S. Congress (stupid laws that don’t reflect the reality of a global world) and the Executive (calling them unpatriotic and attempting to impose retrospective/retroactive legislation) are failing to support U.S. companies and U.S. citizens abroad. They shouldn’t have tax breaks. But, they can’t be shackled by laws that make it difficult for them to compete against non-U.S. companies. Other countries support their citizens and companies abroad. The U.S. does not.

It’s extremely unpatriotic to NOT support your citizens and companies abroad.

U.S. companies are NOT unpatriotic. They are just trying to compete.

But, there are some very unpatriotic Americans which include:

Barack Obama, Carl Levin, Jack Lew …

If you support your troops overseas, then why not support your citizens and countries overseas?

To which Mr. Wood replied:

Thank you for restating the question. You do a nice job of expanding the simple inversion question into a much larger landscape. Of course, you are right that all these issues are related.

The soundbite of a U.S. company that built its fortunes at home, say Walgreens, thinking of “leaving” is what is being used by the President and others to turn the tables. I hope that most people do read a bit more, think a bit more, and ask the questions you are asking. After all, I think the questions you are asking really should answer themselves.

Both U.S. companies and citizens abroad are subject to U.S. tax rules which claim the right to levy taxes on profits earned by residents of other countries on profits earned in those countries. Yet, when considering the issue of “inversions” Senator Carl Levin (who has been aggressive in holding companies captive to U.S. tax rates) doesn’t acknowledge that this is an issue. The following tweet references a radio show that includes an interview with Senator Levin. It is an example of staggering “tunnel vision” at best and “extreme ignorance” at worst.

U.S. corporations and U.S. citizens are dealing with the same issue

So, don’t think that the “inversion” issue applies only to U.S. corporations. U.S. corporations and U.S. citizens abroad must unite to force the U.S. to stop taxing profits and incomes earned in other countries!

This principle is well explained by Andrew Henderson of Nomad Capitalist.

But U.S. Corporations doing business abroad are treated better than U.S. citizens abroad because …

U.S. corporations are not required to pay tax on non-U.S. profits until the profits are brought to the U.S.

U.S. citizens are abroad are required to pay tax on earnings outside the U.S. (and other forms of taxable income which often do not include earnings) at the point that the money is earned.

In conclusion, the problem is U.S. tax laws that are simply out of touch with the modern world! The U.S. is claiming the right to levy taxes on income/assets/people that are no way connected to the U.S.

Here is commentary coming from Ireland:







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