A corporate inversion is a deal in which a US company acquires or merges with a foreign one (that operates a similar line of business) and shifts its domicile abroad to benefit from a more favourable tax regime there. Thus, a company previously incorporated in the US becomes newly incorporated in a foreign country while retaining its material operations in the US.
The first inversion occurred in 1982, when McDermott, a New Orleans-based construction company, became Panamanian. In the last years, a series of high-profile inversion deals took place or were under consideration. In 2014 Burger King shifted its domicile to Canada after merging with Tim Horton's, a Canadian coffee-shop operator. A year later, Medtronic moved to Ireland and Mylan to the Netherlands. Last month, CF Industries (fertilizer maker) and Coca-Cola Enterprises announced they would move their headquarters to the United Kingdom.
Although Barack Obama labelled inversions as "unpatriotic" and the Treasury issued rules to eliminate such practices, US companies still seem to be on the move. The Treasury's efforts led to the collapse of some pending inversion deals but did not put an end to the wave of corporate emigration.
Why are companies leaving the United States through inversion deals? The United States levies a very high corporate tax rate of 35% (plus state-level taxation). In contrast, the tax rates in the United Kingdom, the Netherlands or Ireland are much lower: 20%, 25% and 12.5%, respectively. US tax is also levied on profits earned abroad as soon as those profits are brought to America. To avoid taxation of their foreign earnings, US corporations designed complex structures that enable them to keep their profits offshore indefinitely. Needless to say that large amounts of cash accumulated abroad attract potential acquirers.
The most efficient solution to the inversion issue would be not to try to make it more difficult for companies to leave America but to fix the situation within America by lowering the corporate tax rate. Should that happen, locked-in foreign earnings would be more likely to be repatriated to the US and US companies would be more likely to buy foreign firms than be bought by them. Otherwise inversions will continue to be an attractive way for US companies with overseas earnings to reduce their tax bills.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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