The Ethics of Corporate Inversions

by Ken Vincent, Featured Contributor

FOR THE PAST 30 YEARS or so corporations have found it both legal and practical to do an inversion. That is where a US company establishes a corporate entity in another country, usually by buying a small off shore corporation. Then that off shore company becomes the official parent corporate entity, managed from a US site. This allows off shore profits to be sheltered from US taxes.

The maximum federal corporate tax rate in the US is 35%. The highest in the world. Add that to the average local and state corporate tax and a US corporation can be faced with taxes as high as 39+%. That gives companies a powerful incentive to have a foreign parent where corporate taxes can be as low as 12% or in some cases like Bermuda 0%.

The rate at which companies are fleeing the US is increasing with half a dozen doing so in late 2014 and January of 2015. The result of these inversions is that an estimated 2.1 trillion dollars of profits are being held off shore by US corporations. Those are profits made overseas and are not taxable in the US unless the money is brought into the country. Of course by holding the profits off shore it greatly diminishes the ability to expand their plants, equipment and employment bases here in the states. In short it stunts the growth of business in the US and significantly decreases the US tax income.

The decision to do an inversion is of course made by the Board of Directors with the input of legal and accounting experts. Doing so is consistent with their responsibility to the stock holders.

Do you think that this is an ethical issue? If it is in fact detrimental to our country, and it’s economic health, what should be done to reverse this trend of inversions?