What is 'Corporate Inversion'
Corporate inversion is the process by which companies, especially U.S.-based companies, move overseas to reduce the tax burden on income. Companies that receive a significant portion of their income from foreign sources employ corporate inversion as a strategy, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
BREAKING DOWN 'Corporate Inversion'Corporate inversion is one of the many strategies companies employ to reduce their tax burden. One way that a company can re-incorporate abroad is by having a foreign company buy its current operations. The foreign company then owns the assets, the old corporation is dissolved, and the business – while it remains the same in its daily operations – is now effectively domiciled in a new country
Practical Uses of Tax Inversions
For example, take a manufacturing company that incorporated itself in the United States in the 1950s. For years, the majority of its revenue came from U.S. sales, but recently the percentage of sales coming from abroad has grown. Income from abroad is taxed in the United States, and U.S. tax credits do not cover all taxes that the company has to pay abroad. As the percentage of sales coming from foreign operations grows relative to domestic operations, the company will find itself paying more U.S. taxes because of where it incorporated. In addition, its U.S. income is taxed at a high domestic rate. If it incorporates abroad, it can bypass having to pay higher U.S. taxes on income that is not generated in the United States. To achieve this, the company would proceed to a corporate inversion.
Often, the U.S. operations are then financed by loans from the foreign parent to a new U.S. operating company, creating tax deductions in the U.S. and reducing the U.S. tax payable on domestic income as well.
Controversy Surrounding Tax Inversions
However, there has been controversy as to the morality, as corporate citizens, displayed by the companies that proceed with corporate inversions. Several high-profile inversions have brought the strategy to the forefront, and many are calling for legislative changes to prevent them.
For example, Burger King Worldwide Inc. left the United States for Canada in a corporate inversion when it purchased the donut chain Tim Horton's Ltd. Pfizer Inc. announced it would move to Ireland as part of a merger with Allergan PLC. These and others prompted a strong reaction from the U.S. government which, in April 2016. announced new measures that make inversions more difficult. After the announcement of these measures, Pfizer and Allergan called off their merger.