The U.S. government is currently looking carefully at frequent acquisitions of U.S.-based transnational corporations for outbound enterprises, outlining relevant acts to prevent American domestic enterprises from moving abroad to reduce their tax bill. This action is known as tax inversion.

Essentially, enterprises engage in tax inversion to avoid tax, to optimize their profit management, and to allocate resources globally. Differential tax rates between countries provide systematic conditions for tax inversion in the course of economic globalization, incentivize transnational investments, and generate extra income for the investments. For U.S. companies, transnational investments can decrease management costs and increase profits.

The U.S. government's restrictions on tax inversion could help reindustrialization in America, providing more job opportunities and stabilizing revenues to support a current high-tax and high-consuming macroeconomic policy. However, the U.S. is the biggest importer and exporter of capital in the world, and controls on inversion will certainly have an impact on the stability of global capital flows. As the U.S. has not yet implemented the new tax rules, major transnational corporations are accelerating their acquisition process in order to avoid the restrictions. The fluctuating stock market is a reflection of the new rules.

Given the fact of global economic downturn, technology and markets are not the main elements to attract capital flow. Profits generated by systematic elements are more attractive to investors. The slowness of systematic transformation in the U.S. is making it less competitive. Furthermore, restrictions on tax inversion are a negative remedial measure to manage transnational capital flow.

To control tax inversion is to set a restriction on the outbound investments of American enterprises. This action will restrict American capital, decrease the cost of financing, make foreign capital less competitive in the U.S, and make it difficult for America to carry out the adjustment of its industrial structure.

America's economic goals are in conflict with its tax rules. The key to resolving this conflict is to reform the rules, to lower high corporation tax and to adjust macroeconomic policy so that the U.S. will be more attractive to foreign capital, and businesses will not be so eager to avoid high taxes.

The article is edited and translated from《美国何奈“税之愁”（经济透视）》, source: People's Daily, author: Feng Lei