Tax inversions are being used by American corporations to avoid paying taxes in the U.S. Basically, multinational companies avoid taxes by keeping their profits overseas. This became news, as word quickly spread how tax inversions are being used by corporations to minimize their tax liability in the U.S.
When tax inversions first became rampant in the late 1990s, the government changed a law to curb their use. As a result, tax inversions weren’t as popular for a while. The new law took effect in 2004 and companies thought that they would get a chance to get back their foreign earnings to the U.S. at a lower tax rate. When that did not happen, companies stockpiled their losses to be used against future earnings. Now that the losses have been used up, corporations are again reaching to inversions.
Of course, not everyone can take advantage of this loophole. With the associated costs involved in a merger, not every company can use it to avoid paying taxes. There is also the problem of finding a suitable partner for the merger, which can prove difficult.
Understandably, President Obama is unhappy with tax inversions. He said, “If you are doing business here, if you are basically an American company but you are simply changing your mailing address in order to avoid paying taxes, then you are really not doing right by the country and the American people.”
It has been reported that 14 U.S. companies have announced tax inversion deals with foreign companies in the past year.