For decades big companies have done their best to avoid hefty corporate tax rates levied by Uncle Sam. The U.S. government collects 35 percent of a domestically based corporation’s income, a figure based on the entirety of the company’s worldwide revenue. This mighty bite from the bottom line leads many firms to reincorporate their companies in places like the Cayman Islands or Ireland, where the corporate tax rate is just 12.5 percent. While this process of “inversion” is entirely legal, so many companies are doing it these days that the U.S. could face a major income shortage in coming years.

In fact, some businesses are now forgoing incorporation in America altogether. For instance, the tech firm Seagate went private in a 2000 buyout and then moved to the Cayman Islands. From there it incorporated in Dublin ten years later, even though its headquarters and principal offices are all in California. Companies like these can dodge American taxes without fear of reprisal because they were never technically based here in the first place. So far 60 U.S. companies have either inverted or chosen this “never-here” course of action, and experts predict that more will follow their lead.

This creates an environment where businesses can benefit from public services that they don’t pay for. Carnival Cruise Lines, for example, is headquartered in Miami but incorporated in tax friendly Panama. As a result, Carnival doesn’t pay its fair share to the U.S. Coast Guard, an organization that helped rescue the company’s burning vessel Triumph last year. Although the cruise line eventually reimbursed the Coast Guard for its assistance, the government could never hope to recoup the billions it loses each year due to similar loopholes. As it stands now, legislators have two clear options for stemming this tax exodus: draft a law making inversion more difficult or reform the tax code altogether. Many business leaders argue that U.S. tax laws are uncompetitive, while opponents feel that corporations should simply be restricted to paying their fair share. What do you think?

Questions:

1. Is there a solution to the “inversion” taking place in some U.S. companies?

2. Can U.S. companies incorporate in any state or country they choose?

Source: Allen Sloan, “Positively Un-American Tax Dodges,” Fortune, July 7, 2014. Photo by Micheal Osmenda.