Everything you need to know about corporate tax inversion

By Robbie Citrino for Kapitall.

First some basics.

Many large corporations with sales overseas keep some money in foreign banks, often Irish or Dutch, in order to avoid the 35% corporate tax applied to profits brought back to the US. Unlike here, the Irish tax rate is only 12.5%.

Companies that do significant business in the United States are required to have a certain percentage of assets overseas if they want to incorporate anywhere else. And if you don't have enough assets abroad you do what's called  an inversion.

Quite simply, an inversion is where you buy a smaller company in a country with a better tax rate. 

Once an American company reincorporates overseas, they move their headquarters and operations to the new country, and in doing so they save as much as 17.5% of their profits.

So why is this important?

When they leave, the US looses significant tax revenue—money that would likely be reinvested into the country through jobs, manufacturing, and infrastructure improvements. 

The US government, increasingly concerned over  this trend over the past 5 years, has started to get more vocal about trying to find a way to stop it, which paradoxically appears to accelerate the rate of inversions. 

Democrats and President Obama believe that the companies are betraying their country of origin by moving to protect their profits and shareholders. Thus they are looking to close these tax ‘loopholes’, forcing the companies to stay incorporated in the US.

This is difficult because the notion of private property certainly assumes that the owner of a business is allowed to move if they want to. The practice of forcing people not to leave sets an uncomfortable precedent for some. 

Republicans, on the other hand, are pushing for a lower tax rate (around 20%), which they believe, while lowering tax revenue in the short term, will attract large corporations, stimulating the economy with new jobs. 

If you liked this article you might like

Cramer: Dominoes Are in Play Today

In Case You Missed It Weekend Edition: National Enquirer Trumps Energy Week

Former Walmart Exec Says Border Tax Opposed by Retailers Could Save Industry

Walgreen Looks Good However Rite-Aid Deal Pans Out