Saving money and avoiding taxation pitfalls is a major concern of corporations, especially in the United States where taxes are professed to be higher than in most other nations. A corporation owned and organized in the United States pays federal taxes on corporate global income. A foreign corporation pays federal taxes and state taxes only on U.S. income generated. As a result, a technique known as corporate inversion is commonly employed to lower U.S. tax impact. Without a corporate inversion, all sources of income are subject to taxation in the United States.

A United States corporation that undergoes a corporate inversion becomes a subsidiary of a foreign corporation or parent corporation organized in a tax haven country. This tax haven country imposes little or no tax on corporations. The new parent corporation receives income globally and pays U.S. taxes only on the United States income generated by its new U.S. subsidiary, the former United States "parent" corporation. The corporation no longer pays federal income taxes on foreign income.

Another bonus of corporate inversion is that tax-deductible payments transferred from a U.S. corporation to its foreign parent corporation create a tax-free transfer of income to the foreign parent. This legal transfer is known as "earnings stripping". U.S. tax law attempts to limit earnings stripping, but techniques have been developed to maximize tax-free transfers. U.S. subsidiary corporations commonly pads loan funds transferred to the foreign parent company. Earnings stripping can apply to all types of transfer payments from the U.S. subsidiary to the foreign parent corporation. This includes research and development, labor expenses, licensing, and royalties along with overhead and administrative expenses. The transfers are often very complex with the sole intent to avoid taxation of any kind. In theory, U.S. tax law attempts to reign in the most abusive transfer payments. Corporate transactions provide plenty of opportunity to shift income away from the U.S. subsidiary corporation to the foreign parent corporation.

A corporate inversion is not a tax-free sale or reorganization. Taxes are based on any appreciation of assets held. Inversions are often performed during downturns in the market when corporate assets have taken a hit in value. The United States is going through a downturn now and is legislatively up-in-arms to prevent a rash of inversions.

Congress has been concerned about the number of

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