Working Together to End Tax Inversions

Businesses tend to move from places with high taxes to places with low ones, or so it’s argued. The concern in the United States is that corporations will take their business abroad to avoid “punishing” corporate taxes. Throughout most of the 20th century, this has not been the case. Moving a business overseas, even to stable and developed countries, is a risky and costly affair. So, big businesses have tended to remain physically in the country where they were founded.

However, late 20th century international business has been more complicated. Today, businesses can incorporate in so-called tax havens without physically moving their headquarters or operations to that country. According to The Guardian, the Cayman Islands is home to over 100,000 companies. Many of these companies, in this country of less than 60,000 people, own little more than a postal box.

Countries also typically allow companies to avoid paying taxes on international revenue, so long as the money is not brought home. This “tax inversion” is what companies like Apple have taken advantage of. By creating subsidiaries in low tax countries, such as Ireland, companies can report international revenue there and significantly lower their tax bill. Finding a way to bring this cash home and reap the tax revenue has not yet been worked out politically in the US.

The recent ruling by the European Union to collect on $14.6 billion in unpaid taxes from Apple suggests one path forward. The primary concern for any one country is that aggressive tax policies will drive companies abroad. Yet, by leveraging the power of a group of countries, there may be a straight-forward way of eliminating the advantages of tax inversions. Because Europe is a lucrative market, companies stand more to lose from withdrawing entirely than paying taxes as the EU requires.

If developed countries really want to prevent certain corporate behavior, they must work together in economic groups. The EU is just one example, but groups like APEC, ASEAN, OAS, and other regional economic cooperatives possess the size and power to effectively enforce international tax rules.