FollowTreasury Secretary Jacob J. Lew wrote a fierce letter to Congress members focused on fiscal affairs. His complain regards the practice of inversion used by corporations to dodge tax payments. In economic terms, inversion means that a corporation uses a foreign branch in a country with lower corporate taxes to avoid U.S. taxation. While American teens are financial illiterates, according to a study, American corporations avoid taxes by knowing the financial legislation well enough to dodge taxes through loopholes.
“The firms involved in these transactions still expect to benefit from their business location in the United States, with our protection of intellectual property rights, our support for research and development, our investment climate and our infrastructure, all funded by various levels of government,” Treasury Secretary Jacob J. Lew wrote. Lew insists that the Congress must take proper action and apply the law retroactively to May in an effort to halt inversions.
American corporations avoid taxes by moving to countries like Ireland and the Netherlands
The Netherlands and Ireland are popular destinations for American corporations looking to practice inversion. The American 35 percent corporate tax is one of the highest in the developed world, while the Netherlands practice a 25 percent corporate tax. Pfizer attempted to engage with inversion by acquiring the UK pharmaceutical competitor Astra-Zeneca this April. The attempt was not successful, but it drew once again the attention to how corporations plan to doge taxes through inversion. Even if sometimes the U.S. suffers job losses because of inversion, the corporate movement overseas usually means just opening a small office in order to legally register. Because American corporations avoid taxes, the 2015 budget proposed by Obama suggested to raise the minimum level of foreign ownership needed by corporations to change the tax destinatination.
Congress must act to stop the practice of inversion because the rate has increased dramatically over the last years, according to Kenneth Serwin, director of Berkeley Research Group. CEOs are obliged to increase profit rates as much as possible and when available, inversion seems to be an irresistible practice.
Conservative supporters like Club for Growth claim that the Obama administration turned America into an unattractive place for business, insinuating it is natural for corporations to adapt to such an environment. But because there are only 24 legislative days before the midterm election in November, there are slight chances to see the topic tackled by the Congress. Some American corporations avoid taxes through inversion and only a bipartisan action will manage to change the taxation system in order to avoid the phenomenon.
