Information was released publicly in the US last week showing that the number of US Companies re-incorporating in Offshore Tax Havens continues to climb.
The practice known as Corporate inversion is used by US companies, when bidding for (generally smaller) foreign companies, as a means of moving away from the higher American 35 percent corporate tax rate. Under current US law, a company that merges with an Offshore Company can move its headquarters Offshore (even though management and operations remain in the US), and take advantage of lower taxes offered Offshore, as long as at least 20 percent of its shares are held by the Offshore company’s shareholders after the merger.
The published list shows that 47 US corporations have reincorporated in Offshore Tax Havens through inversions in the last 10 years, as against only 29 in the previous 20 years. According to the data, there is estimated to be about ten prospective inversion deals that are pending completion.
To try and counter this ever increasing trend of Offshore Incorporation bills have been introduced into the House and the Senate in the US which propose to restrict corporate inversions by putting the minimum foreign shareholding at 50 percent.
However, the bills have yet to move forward with the house leaders reportedly preferring to deal with the question of Offshore re-Incorporation within the framework of future comprehensive tax reform. At the same time leading Republicans are said to have decided that using tax reform to lower the corporate tax rate and having a more internationally competitive tax code would be the better option.
With knee jerk positions on Offshore Tax Havens being released almost daily (following little if any reasoned debate) it is refreshing to see policy makers taking a more holistic approach to the issue of Offshore Tax Competition. In this instance the bigger picture sees that the practice of Corporate inversion is sending a clear message to Legislators… that if they want to retain the tax business of these companies they must be prepared to compete on price.
Whilst people are always resistant to change, in the commercial world – if a customer feels he/she is being taken for granted by a supplier – (and the customer knows that he/she can get a better deal elsewhere) what does he/she do? The customer weighs up the inconvenience of changing suppliers against the benefits of a move (ie fiscal savings).
It’s incumbent then on the supplier, knowing what the competitor is offering, to make it sufficiently attractive for the customer to stay loyal.
Why should the relationship between taxpayer and government be any different?