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Abstract

The compound effect of a high tax rate and a taxable base that includes not only U.S. based income but worldwide income has incentivized some U.S. based corporations to lower their tax bills through a transaction known as a tax inversion.  Under an inversion, the U.S. corporation restructures to become a subsidiary of a parent corporation domiciled in a jurisdiction with a lower tax rate and a taxable base limited to territorial rather than worldwide earnings.

 

While the tax inversion results in considerable tax savings for the company, critics, including President Obama have branded the practice as an “unpatriotic†act undertaken solely to avoid payment of a fair share of taxes which support the country, and system, which facilitated success. Multinational U.S. corporations have defended their actions by citing Milton Friedman’s widely accepted theory of shareholder wealth maximization as the goal of American business, and pointing to their “duty’ to shareholders as justification for restructuring.

 

This paper explores technical compliance with the Internal Revenue Code and Treasury regulations related to tax inversions, together with the norms of corporate social responsibility.  We address the question of whether technical compliance with the law relieves the U.S. corporation of concern for the negative effects of its actions.  Further, we examine the anti-inversion regulations initiated by the Obama administration and their likely impacts on inversion activity.  We conclude with an analysis of the underlying issues implicated by inversions, and consider reforms that might resolve the debate over multinational taxation.

 

Ethics, U.S. corporate tax reform, tax inversion, U.S. corporate tax sustainability, multinational tax planning