Corporate inversion is the strategy adopted by corporate organizations to reincorporate in foreign companies to escape the tax burden. In other word, corporate inversion is the strategy used by organizations to earn significant proportion of their income from foreign countries and leave the income in those countries in order to avoid the U.S. tax rate. In the United States, the government levy taxes on income realizes within the country and from foreign sources. However, organizations use corporate inversion strategy by incorporating in countries with less stringent tax requirements or corporate governance requirements to avoid the U.S. high tax rates.
The United States tax rate is the highest among the advanced countries where corporation pay corporate tax rate as high as 35%. Apart from taxing the income realized domestically, the government also taxes the income organizations bring into the United States from other countries. Thus, corporate inversion is the strategy employed to reduce the corporate tax burden.
Objective of this paper is to address the moral aspect of corporate inversions from role of manager of a company and from the perspective of the government taxing corporate earnings.
Moral aspect of Corporate Inversions from Company Perspectives
On May 2002, the Stanley Works stockholders voted unanimously to move part of its corporation to Barmuda. Although, the company headquarter would remain in Connecticut, however, the Stanley Works would no longer be the U.S Corporation, and its business would be run as usual. The aim of the Stanley Works is to engage in corporate inversion where the company income will remain in Bermuda to avoid the U.S. corporate tax rate. However, the company removed this decision from its agenda because of the public reactions and politicians labeling this action as immoral and unpatriotic. (McTague, 2002).
Using Kantian theory, a corporate inversion is immoral and unethical however, using the stakeholder theory; it is difficult to state that inversion is immoral because the primary goal of a business is to serve the interest of the shareholders. From the inversion perspective, shareholders will gain from the inversion method in the long-term. (Susan, Patricia, & Anne,2005).
Tax is a moral issue that all organizations must honor. In a contemporary business environment, organizations are required to pay income tax to assist government to implement the country's operations. Moreover, the corporate income collected assists the government to provide social amenities for her citizens. Despite the moral aspect to honor corporate tax, organizations have moral obligations for its stakeholders such as customers, shareholders, employees, creditors and other stakeholders. Thus, corporation organizations use the corporate inversion as the strategy to satisfy corporate obligations since organizations are required to satisfy their stakeholders if they want to remain in business. Essentially, corporate inversion is part of a business strategy that organizations use to increase their corporate income. In essence, the U.S. corporate tax is as high as 35%, thus, organizations use corporate inversion to reduce tax to increase in their incomes. For example, the U.S. pharmaceutical companies are merging with Irish drug companies to enjoy 13% corporate Irish tax rate. Other companies considering the corporate inversion are Pfizer, Salix Pharmaceuticals, Medtronic, Walgreen, Applied Materials, and Auxilium Pharmaceuticals. Typically, some CEO of big organizations is renouncing the U.S. citizenship to pursue their corporate inversion objective.
However, "Senator Charles Grassley (R-Iowa), the ranking Republican member of the Finance Committee, has called inversions "immoral." (Scott, & Lou, 2013 p 653). Moreover, member of congress has cries out the corporate inversion is an "Unpatriotic corporate behavior!." For example, Senator Charles has identified the inversion as immoral. Immoral in the sense, if a U.S. company takes over a company in Ireland for a tax purpose, the company will pretend being operating in the take-over country and enjoying the lower Ireland tax of 12.5%. These companies will act as if they are not operating in the United States because of tax purpose. In fact, these companies will continue to be run from the U.S. soil, receiving all the benefits that the U.S. offers, enjoy the deep financial and liquid markets, enjoy military protection accorded by the U.S. military operations. In this case, organizations pursing inversion are not conducting as patriotic corporate citizens.
Moreover, by pursuing the inversion, the corporate organization may not protect the interest of the shareholders they are required to protect. For example, shareholders will shoulder majority of the costs if a company goes ahead with a corporate inversion. Essentially, in the short-term, shareholders are likely record lower capital gain taxes. The only major reasons that many shareholders agree with corporate inversion is the possibility of increase the stock values in the long-term.
Meanwhile, politicians continue to label corporations engaging in re-incorporation as unpatriotic tax-evaders and tax dodgers. For example, a committee investigating about the corporate inversion makes the following comment:
"Congress must not allow corporate traitors to leave individual Americans stuck with the tax bill while they put profits over patriotism. The New York Times says, "Even in the best of times, it is outrageous for companies to engage in offshore shenanigans to avoid paying their fair share of taxes. Doing so after the Enron scandal, in dire fiscal times and when the nation is at war is unconscionable." (Scott, Luo, 2013 p 645).
Despite the outcry of politicians by labeling corporate inversion as immoral, however, the question to be answered is: Should a company pay taxes more than they are legally required to pay? In essence, it is equally immoral to overtax organizations. The paper analyzes the moral aspect of inversion from the role of government perspective taxing corporate earnings.
Moral aspect of Corporate Inversions taxing Corporate earnings from Government Perspectives
The primary objective of a corporate organization is to earn profits to satisfy the interest of its stakeholders. Specifically, the aim of a corporate organization is to earn as much profits as possible through the legal means. Although, the government is one of the major stakeholders of a corporate organization, however, excessive tax is likely to benefit the government at the expense of other stakeholders. From the perspective of stakeholder's theory, organizations are to satisfy all stakeholders. Lower tax rates and increase in profits will benefit all stakeholders, however, it will be immoral for one stakeholder to take largest share of the corporate earning while leaving the rest of the stakeholders small percentages of the corporate earnings.
The United States is one of the few countries that indulge in global income taxation. Global income taxation is the strategy of levying tax on the income earned domestically and income brought into the United States from other countries. However, other advanced countries tax only the income earned within their borders. Besides using global taxation method, the United States has the highest corporate tax rate in the world. In the OECD countries, the United States has 9% higher tax rates than other OECD countries. Ireland corporate tax is 12% and corporate tax of Switzerland is 8%. Other countries have also reduced their corporate tax rate to attract investments.
While the government accusing the corporate organizations indulging in inversion, it is also immoral from the government perspective to remove large part of a company earning in the name of taxation. Sloan (2014) argues that many companies are pro-American tax rate system and not willing to adopt inversion system. However, they do not have option than to opt for the inversion given that competitors are also doing so. Essentially, the U.S. government is immoral by not considering that large proportion of funds that corporate organizations use for business operations are from shareholders and creditor. If organizations fail to satisfy their shareholders and creditors, they can withdraw large proportion of their fund from organizations, which can make them go bankruptcy.
Essentially, lower corporate tax rates are likely to benefit the government in the long-term. First, the government will gain large proportion of…