|An aspect of fiscal policy|
Tax inversion, or corporate inversion, is a largely American term for the relocation of a corporation's headquarters to a lower-tax nation, or corporate haven, usually while retaining its material operations in its higher-tax country of origin. The term is most frequently used in relation to US corporations. Corporate inversions are a relatively recent phenomenon. Although it is difficult to be definitive, the practice first became prevalent in the 1990s, with US corporations seeking to relocate to tax havens such as Bermuda; more recently, because of changes in US law, publicity has focused upon corporate inversions conducted by way of merger with companies in lower-tax foreign countries. The issue was first subjected to a great deal of publicity in April 2014 by the proposed merger between Pfizer and AstraZeneca. While large multinational public companies have received most of the recent press coverage on corporate inversions, middle-market companies and privately held companies can invert and achieve similar tax benefits.
Tax inversions are a form of tax avoidance. They are driven by a combination of factors, but the most prevalent factor is that the US tax code (uniquely among developed nations) seeks to impose income tax on profits earned abroad by American corporations. This creates a strong incentive for American companies with large overseas markets to seek to recharacterize themselves as a foreign corporation if they want to return foreign earnings to stockholders without double taxation.
The Economist explains:
|“||The incentive is simple. America taxes profits no matter where they are earned, at a rate of 39% — higher than in any other rich country. When a company becomes foreign through a merger, or “inverts”, it no longer owes American tax on its foreign profit. It still owes American tax on its American profit.||”|
Because other countries do not generally tax foreign earned income in the same way that the United States does, the concept of corporate inversion (and the potential tax relief that such inversions seek) is a largely limited to the U.S.A.
Tax inversions as a tax reduction maneuver have become a public policy issue in 2014, as substantial tax revenues are lost. American politicians and government officials, including President Barack Obama and Treasury Secretary Jack Lew. have issued statements calling tax inversions "unpatriotic", and various proposals have been discussed to prevent tax inversions where the relevant corporation is less than 50% foreign owned.
The Economist has called recent calls in America to restrict companies from relocating abroad by way of merger "misguided" and called for wider tax reform to address what it describes as more fundamental flaws in the American corporate tax system instead. Democratic lawmakers attempted again in September 2014 to propose a tax reform that would focus on slowing the number and rate of corporate inversions via taxing any earnings outside the U.S. as income, until the inversion occurs. Republicans and Democrats have several proposals that could possibly address the issue.
Mechanics of inversion
Journalist Matt Levine described how an inversion works in Bloomberg during August, 2014. U.S. companies pay a tax rate of 35% on income they earn in the U.S. and abroad, but they obtain a credit against their U.S. tax liability for the amount of foreign tax paid. This is referred to as a "worldwide approach" as opposed to the territorial system used by most other developed countries. Levine explained: "If we're incorporated in the U.S., we'll pay 35 percent taxes on our income in the U.S. and Canada and Mexico and Ireland and Bermuda and the Cayman Islands, but if we're incorporated in Canada, we'll pay 35 percent on our income in the U.S. but 15 percent in Canada and 30 percent in Mexico and 12.5 percent in Ireland and zero percent in Bermuda and zero percent in the Cayman Islands."
By changing its headquarters to another country with a territorial tax regime, the corporation typically pays taxes on its earnings in each of those countries at the specific rates of each country. Further, the corporation executing the tax inversion may find additional tax avoidance strategies allowed to corporations domiciled in foreign countries not available in the U.S. For example, the corporation may find ways of defining its revenue or costs such that they are taxed in lower-tax countries, although the customers may be in higher-tax countries.
Treasury Department responses
On September 22, 2014 The Treasury Department enacted several regulations that will, among other things, make inversion abroad more difficult or reduce benefits to companies who have already done so. The September 22, 2014, Notice describes future regulations that can be separated into two categories: (i) special rules regarding ownership threshold requirements (ii) rules targeting certain tax planning after an inversion, primarily to access foreign earnings of the US acquired corporation.
- McDermott International to Panama, 1982
- Helen of Troy to Bermuda, 1994
- Tyco International to Bermuda, 1997
- Fruit of the Loom to the Cayman Islands, 1998
- Ingersoll Rand to Bermuda, 2001
- Transocean to Switzerland, 2008
- Ensco plc to the United Kingdom, 2009
- Eaton Corporation to Ireland, 2012
- Actavis to Ireland, 2013
- Liberty Global to the United Kingdom, 2013
- Chiquita to Ireland, 2014 (pending)
- Applied Materials to the Netherlands, 2014 (pending)
- Abbvie to Ireland, 2014 (pending)
- Medtronic to Ireland, 2014 (pending)
- Mylan to the Netherlands, 2014 (pending)
- Burger King to Canada, 2014 (pending)
- Tax exporting
- How potential changes in Tax Inversion laws affected markets
- Bloomberg-Tax Inversions-Quick Take-December 2014
- Corporate Inversion
- Subcommittee on Select Revenue Measures of the House Committee on Ways and Means (June 25, 2002). Statement of the Hon. Richard Blumenthal, Attorney General, Connecticut Attorney General's Office, Hearing on Corporate Inversions. Retrieved September 5, 2004.
- "Twenty years ago inversions were rare. But as other countries chopped their rates and America’s stayed the same, the incentive to flee grew. Until a decade ago Bermuda and other tax havens were the destination of choice". "How to stop the inversion perversion". The Economist. 26 July 2014.
- "Pfizer Ends AstraZeneca Bid But The Tax Issues It Raised Live On". Forbes. 26 May 2014.
- Sander Levin (22 July 2014). "Inversions Highlight Unfairness of the Tax Code". New York Times.
- Camacho, Ramon; Scaliti, Matthew. "Anti-inversion Legislation Could Affect Middle Market Companies". Transaction Advisors. ISSN 2329-9134.
- "America levies tax on a company’s income no matter where in the world it is earned. In contrast, every other large rich country taxes only income earned within its borders." "How to stop the inversion perversion". The Economist. 26 July 2014.
- It also creates an incentive to stockpile earnings abroad, as the foreign earned income is usually only taxed when it is returned to the US. "With All Of Apple's Cash, Why Is It Issuing Bonds?". Forbes. 30 April 2013.
- "Inverse logic". The Economist. 20 September 2014.
- Corporate Inversions
- Corporate inversion transactions: Tax policy implications
- Eicke, Rolf (2009). Tax Planning with Holding Companies. The Netherlands: Kluwer Law International. pp. 23–29. ISBN 978-90-411-2794-5. Retrieved 27 July 2014.
- "Developments in the law: jobs and borders". Harvard Law Review 118 (7): 2270. May 2005.
- "Obama Urges Quick Action to Stop 'Inversions'". Wall Street Journal. 24 July 2014.
- "Jack Lew pushes Congress to crack down on tax ‘inversions’". CNBC. 16 July 2014.
- "How to stop the inversion perversion". The Economist. 26 July 2014.
- Stephenson, Emily. "U.S. Senate Democrats propose exit tax for inverting companies". Reuters. Retrieved 19 September 2014.
- CBO-Options for Taxing U.S. Multinational Corporations-January 2013
- Drawbaugh, Kevin. "U.S. Treasury moves against tax-avoidance 'inversion' deals". Reuters. Retrieved 22 September 2014.
- DeNovio, Nicholas; Stein, Laurence; Doyle, Diana; Murphey, Lauren. "Treasury Announces Inversion Regulations; Reach Extends to Other Cross-Border M&A". Transaction Advisors. ISSN 2329-9134.