Sometimes you hear in the news about a U.S. Company buying a foreign company and moving its headquarters overseas. Well, this can happen for many reasons. One of them is a tax inversion. But what are tax inversions, why are companies doing them and why should you care?

Here’s the reason why.  U.S. companies pay corporate tax rates of around 35 percent or more on their profits, while their foreign competitors pay much less in their countries. And if your company has locations or sells products in overseas, you get taxed on those profits in the foreign country and again when you bring that money back to the United States.  This is called double taxation and your foreign competitors don’t have to pay it.  This hurts your company’s ability to compete, grow and reinvest in new products and jobs. Hmmmm…now that doesn’t make sense.

So, back to the tax inversion.  If you’re a company based in the US and want to make sure you stay competitive with your foreign counterparts, and protect your company from foreign takeovers, what can you do?

The current U.S. tax system allows you to buy a foreign company and use their headquarters as your own.  That way you don’t have to pay the higher U.S. tax rates on foreign profits even though you still pay U.S. taxes on your profits in America. This move allows you to keep a lot more of your profits and invest in new factories, employees, and products.

Look at it this way: Let’s say you lived in one city but commuted to another. If the rules were set-up so you were taxed by both cities on your income—essentially double taxation—you would probably consider moving to the city with the lower tax rates. It wouldn’t mean you were greedy, or disloyal—you would simply be working within the system of rules that exists.

Now…that makes sense.

So the next time you hear a politician complaining about American companies moving overseas, remember it was politicians who passed the laws that encourage companies to move away in the first place.  If politicians would stop fighting with each other, lower corporate tax rates and end double taxation, U.S. companies could compete better and wouldn’t need to invert to protect jobs and their businesses.