AlanKondo-238x300By ALAN KONDO, CFP, CLU

Lately, there has been a lot of attention focused on inversion. This is the corporate strategy to move operations out of the U.S. in order to take advantage of lower tax rates abroad.

American firms are believed to be holding more than $2 trillion outside of the United States. Congress’ Joint Committee on Taxation reported that inversions will cost the U.S. Treasury $42 billion this year alone.

In reality, this is only the latest tweak on corporate tax-avoidance that has continued for decades. In the old days, corporations used to incorporate in tax havens like Bermuda or the Cayman Islands, where the tax hit was zero. This strategy was overturned by the JOBS Act of 2004, which disallowed corporate domicile in a country where no actual economic activity was taking place.

However, the law left gaping loopholes. If a U.S. corporation merged with a foreign partner, inversions were still allowed. This has spurred mega U.S. companies like General Electric, Apple, Herbalife and Carnival to domicile their companies in countries with low corporate tax rates, like Ireland, the Netherlands, Switzerland and Canada. The Congressional Research Service identified 47 inversions in just the last decade. Others are lining up to leave.

Corporations have argued that they have been forced to do this by the high U.S. tax rate, nominally at 35%. However, this is a shallow argument. Through heavy use of tax loopholes and savvy tax attorneys, the actual corporate tax rate is about 17%, including state and local taxes, according to the Government Accountability Office. This is lower than the tax rate paid by many American families.

The Los Angeles Times (8/14/2014) reported that in 1952 32% of federal revenues came from corporate tax. Since then, it has declined to 8.9% of tax revenue. During the same period, payroll tax rose from 9.7% of federal revenue to 40%. In other words, “America’s working men and women have financed the decline in corporate tax.” In addition, the lack of investment in the U.S. has resulted in lower economic growth and lost jobs.

While they have avoided paying their fair share of the U.S. tax burden, corporations have nevertheless continued to benefit from the transparency of U.S. laws, the huge consumer market, national research, and infrastructure. Medtronic, the multinational medical device manufacturer, shelters $14 billion offshore, saving $4.2 billion in U.S. taxes. This is after the government awarded it half a billion dollars in federal contracts over the last five years. (Washington Post, 7/12/2014).

Ironically, these corporate maneuvers have also hurt U.S. investors by triggering higher individual taxes. When a U.S. corporation decides to domicile abroad, the U.S. shares have to be converted to the shares of the new offshore company. Any embedded capital gains come due, and capital gains taxes must be paid.

Many investors had planned to hang on to their U.S. shares and take advantage of the “step-up in basis.” This occurs when a shareholder passes away, and the investment is passed on to heirs. Even though the original investor would have had to pay hefty capital gains taxes, when beneficiaries receive the investment, the “step-up” enables them to avoid capital gains taxes. Inversion has dashed this strategy.

In the last few weeks we have seen corporations like Bank of America, J.P. Morgan Chase, and Citigroup settle with the Justice Department by paying fines after they caused the devastating financial collapse in 2008 and 2009. Countless American families lost their homes, livelihoods and retirements, from which they have yet to recover, while corporate executives walked away without a day of jail time. Inversions are just another consequence of a government run for the benefit of corporations rather than its people.


The opinions expressed above are solely those of Kondo Wealth Advisors, LLC (626-449-7783,, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

Leave a comment

Your email address will not be published. Required fields are marked *