In a few days, I will write more about the “extra” value in a multinational. Today, as promised, I want to talk about expatriot corporations.
A bunch of US corporations moved to Bermuda on paper to reduce US taxes. In such a transaction, technically, the old shareholders of the US operating corporation become shareholders of a new Bermuda holding company, which ends up owning the old US operating corporation. Because the old US corporation becomes a subsidiary of the new public Bermuda company, expatriation transactions are referred to as “inversions.” The tax benefits of inversions have been there for some time. But, inversions became popular only recently as corporate managers and the stock markets began accepting Bermuda corporations more.
The inversion alone saves no taxes, as the old US company continues to be taxed as before. (A good Treasury report is here: Treasury Inversion Report.) But, the inversion sets the stage for parking money offshore with US tax advantages. Most obviously, the new Bermuda parent and its foreign subsidiaries (not owned through the old US company) can earn foreign income free of US tax (until paid to US public shareholders as dividends). This benefit from inversions really is not that important, however, since real foreign income pays little US tax today (being parked in low-tax foreign corporations).
What is important is that foreign subsidiaries of the group now can get some US income — that's US income — at a reduced or zero US tax. As noted in an earlier post, to prevent artificially parking movable income, like interest and royalties, in tax havens, current US anti-abuse rules tax this movable income of foreign subsidiaries of US corporations as earned by the foreign subsidiaries. After an inversion, the group can have foreign corporations that are not owned by a US company. So, after an inversion, the US operating corporation can pay interest or royalties to a foreign member of the group and get a deduction that reduces the US corporation's (and, thus, the group's) US tax, while the payee corporation is subject to low or no US tax. (One popular technigue for securing a low US tax on the payee uses our income tax treaty with Barbados, as discussed in an earlier post.) Moving US income offshore in a deductible fashion is referred to as “stripping” US income.
Patriotic, huh? Note that business defends inversions by saying that inversions are a reasonable response to the US taxing foreign income of US persons. In fact, as just noted, the real juice in inversions is from stripping US income.The really interesting (pun?) issue here is why the US hasn't attacked stripping more forcefully. Tomorrow.