Abuses and Penalties of a Corporate Tax Inversion

James G. S. Yang, Leonard J. Lauricella and Frank J. Aquilino
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James G. S. Yang: Department of Accounting & Finance Montclair, Montclair State University, Montclair, NJ 07043, USA
Leonard J. Lauricella: Department of Accounting & Finance Montclair, Montclair State University, Montclair, NJ 07043, USA
Frank J. Aquilino: Department of Accounting & Finance Montclair, Montclair State University, Montclair, NJ 07043, USA

IJFS, 2019, vol. 7, issue 1, 1-12

Abstract: There is a serious problem in international taxation today. Many United States (U.S.) multinational corporations have moved abroad to take advantage of a lower tax rate in a foreign country. As a consequence, the tax base in the U.S. has been seriously eroded. This practice is known as “corporate tax inversion”. This paper discusses the abuses and penalties of this phenomenon. It is rooted in some deficiencies in the U.S. tax law. This paper points out that the U.S. has the highest corporate tax rate in the world. It imposes tax on worldwide income. It permits deferral of tax on foreign-sourced income until dividends are repatriated back to the U.S. As a result, it creates tax loopholes. This paper reveals six actual cases of corporate tax inversion. This practice has triggered the Congress to enact §7874, the Internal Revenue Service (IRS) to issue Notices IR 2014-52 and IR 2015-79, and the U.S. Treasury Department to promulgate TD 9761. This paper investigates some details of these penalties. This paper further demonstrates an example in determining the amount of tax savings by engaging in a corporate tax inversion. It also offers many strategies.

Keywords: corporate inversion; controlled foreign corporation; international taxation; U.S.-sourced income; foreign-sourced income; merger; worldwide income; territorial income (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2019
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