Corporate Inversion

DEFINITION of 'Corporate Inversion'

Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, 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. Assets are then owned by the foreign company, and the old incorporation is dissolved.

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. If it incorporates abroad, it can bypass having to pay higher U.S. taxes on income that is not generated in the United States. This is a corporate inversion.

Corporate inversion is not considered tax evasion as long as it doesn’t involve misrepresenting information on a tax return or undertaking illegal activities to hide profits.

RELATED TERMS
  1. Capital Flight

    A large-scale exodus of financial assets and capital from a nation ...
  2. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  3. Foreign Direct Investment - FDI

    A foreign direct Investment (or FDI) is an investment made by ...
  4. Globalization

    The tendency of investment funds and businesses to move beyond ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at ...
  6. Corporate Tax

    A levy placed on the profit of a firm, with different rates used ...
Related Articles
  1. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  2. Stock Analysis

    2016's Most Promising Stocks (INTC, IBM)

    Learn about the most promising stocks of 2016 and the potential they hold to bring investors safe and reliable gains over the next year.
  3. Active Trading

    5 Big M&A deals in 2015 (PFE, AGN)

    Learn how these mergers and acquisitions helped make 2015 a boom year for M&A deals, with the total value of the companies involved surpassing the U.S. budget.
  4. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock (PFE)

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  5. Insurance

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  6. Taxes

    How Large Corporations Get Around Paying Taxes

    With the high tax rate of 35% imposed on large corporations in America, these companies still end up paying way below this rate.
  7. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  8. Personal Finance

    Pros And Cons Of Offshore Investing

    Tax loopholes are shrinking, but there are still plenty of viable prospects. Get the big picture.
  9. Taxes

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  10. Taxes

    Tax Avoidance Or Illegal Evasion?

    Find out how to avoid the most common tax filing mistakes and audit triggers, so you can deduct with a clear conscience.
RELATED FAQS
  1. Why would a multinational corporation conduct a vertical foreign direct investment?

    In many cases, multinational corporations conduct horizontal foreign direct investment (FDI) activities in order to expand ... Read Full Answer >>
  2. What is the purpose of a "repatriated tax break", and why is it so controversial?

    In 2004, Congress passed the American Jobs Creation Act to create new jobs in an effort to boost the economy. One of the ... Read Full Answer >>
  3. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  4. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  5. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  6. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center