Rules Against Earnings Stripping: Wrong Answer to Corporate Inversions

Gary Hufbauer and Ariel Assa
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Ariel Assa: Peterson Institute for International Economics

No PB03-07, Policy Briefs from Peterson Institute for International Economics

Abstract: The tax-driven expatriation of US corporations is a troubling phenomenon. In a "corporate inversion," a new foreign corporation, typically located in a low-tax or no-tax country, replaces the existing US parent corporation of a multinational enterprise (MNE). The US corporation then becomes a subsidiary of the new foreign parent. Since the US tax treatment of an MNE operating in the United States is sig-nificantly less favorable when the top-tier parent corporation is a domestic rather than a foreign corporation, the inversion transaction averts a substantial amount of US tax. Inversions have attracted adverse attention from tax specialists, media, the US Treasury Department, and Congress. In the wake of September 11, it seemed downright unpatriotic for US firms to invert as a way of skimping on their tax payments.

Date: 2003-05
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