The Ramifications of Tax Inversions: Is There Anything to be Done?

It’s no secret that tax inversions have become increasingly appealing to U.S. companies in recent years; from Herbalife International’s reincorporation in the Cayman Islands to Medtronic’s merger with a company in Ireland, the opportunity to side-step hefty taxes by merging with companies overseas has proven attractive. However, many in the financial industry, like Dawn J Bennett and President of 21st Securities, Bob Gordon, have their concerns.

The migration of U.S. companies to offshore entities is problematic for a number of reasons, including the fact that such decreases total U.S. federal revenue and can result in an outflow of American jobs. Forbes estimates that U.S. companies are holding approximately $2 trillion dollars in foreign accounts to avoid paying steep corporate taxes back home. As Gordon notes, taking advantage of cheaper alternatives to business operations is a natural consequence of a capitalistic economy, but in the case of tax inversions, it’s the individual American taxpayer that’s footing the bill, specifically the individual shareholder. Why? Interestingly, shareholders are not exempt from taxes on shares of companies that merge with foreign corporations. Even worse, the shares of about one-third of newly merged companies perform worse than they did when in the U.S.  Tax inversions undoubtedly impose negative consequences on the U.S. economy—but what’s to be done about them?

President Obama has recently stated that he would look into an executive order to limit the abilities of companies to move abroad to seek lower rates and has also considered dropping the corporate tax rate to 28%, two proposals he has yet to act upon. However, if we note that countries like Ireland boast a 12.5% corporate rates and the Bahamas have rates as low as 5%, cutting our own by a mere 7% may not be enough to significantly halt inversions.

Gordon notes that lowering the corporate tax rate to a truly competitive figure would indeed only resolve part of the problem. Preventing increases in inversions may also depending upon changing the way in which we calculate our taxes, specifically our practice of taxing a company’s income no matter its location in the world.  Whereas other countries only tax income generated within the confines of its own borders, the U.S. proves a unique exception, spurring companies to completely merge with foreign corporations. Gordon believes that companies are primarily drawn to countries abroad for their territorial tax leverages, for it’s this difference in policy that truly affords companies significant savings on the balance sheet.

Bennett and Gordon agree that reform is imperative and could begin by introducing a revenue-neutral proposal in Congress, a process which ideally would have been initiated years ago. What we need, they argue, is not just the closure of loopholes or the type of partial fixes that have been implemented unsuccessfully for the past few years, but a comprehensive overhaul of the entire corporate tax system.

With the highest corporate tax rate in the world at 35 percent, and revenue less than the average of the entire OECD, the United States has every reason to reconsider policy, and soon.


Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.

For more information, call 866-286-2268 or visit

Securities offered through Western International Securities Inc. (WIS), member FINRA/SIPC. BGFS and WIS are separate and unaffiliated entities.

About Dawn Bennett

Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett

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