CRS Report for Congress: Firms That Incorporate Abroad for Tax Purposes: Corporate "Inversions" and "Expatriation"

Over the past several years, reports indicate that an increasing number of U.S. firms have altered their structure by substituting a foreign parent corporation for a domestic one. Such "inversions" typically involve creation of a new foreign corporation in a country with low tax rates (a "tax haven") that becomes the parent of the firm's foreign and U.S. component corporations. A chief motive for inversions is apparently savings by firms on their U.S. corporate income tax. One source of savings is tax on a firm's foreign income: the United States taxes corporations chartered in the United States on both U.S. and foreign income but taxes foreignchartered corporations only on their U.S.-source income. An inversion can thus potentially reduce a firm's U.S. taxes on foreign income. Other tax savings apparently result from "earnings stripping," or the shifting of U.S.-source income from taxable U.S. components of the firm to the tax-exempt foreign parts. In the long run, inversions may be accompanied by some increased level of U.S. investment abroad; a firm that inverts reduces its tax burden on foreign investment. However, any such shift may be small, and the recent corporate inversions do not appear to be accompanied by substantive shifts of ...