Loading the player...

What is a 'Corporate Inversion'

Corporate inversion is the process which companies, primarily U.S.-based companies, use to move overseas to reduce the tax burden on income. Companies who receive a significant portion of 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 which has a lower tax rate and less stringent corporate governance requirements than their home country.

BREAKING DOWN 'Corporate Inversion'

Corporate inversion is one of the many strategies companies employ to reduce their tax burden. A company can reincorporate abroad by having a foreign company purchase its current operations. The foreign company then owns the assets, the old corporation is dissolved, and the business, while remaining the same in its daily activities, is now domiciled effectively in the new country. Companies may also buy or merge with a foreign business and use that entity as their new headquarters.

Practical Uses of Corporate Inversions

For example, consider a manufacturing company that incorporated itself in the United States in the 1950s. For years, most of its revenue came from U.S. sales, but recently, the percentage of foreign sales has increased. Income from abroad is taxed in the United States, and U.S. tax credits do not cover all taxes which the company must pay elsewhere. As the percentage of sales coming from foreign operations grows relative to domestic operations, the company pays more in U.S. taxes because of where it is domiciled. In addition, its U.S. income is taxed at a high domestic rate. 

If the business incorporates abroad, it can bypass paying higher U.S. taxes on income not generated in the United States. The company would advance to a corporate inversion to achieve this aim. Other advantages include the U.S. operations being financed by loans from the foreign parent company. As they form a new U.S. operating company, which creates U.S. tax deductions and reduce the tax payable on domestic income as well.

Controversy Surrounding Tax Inversions

Corporate inversion is a legal strategy and is not considered tax evasion as long as it does not involve misrepresenting information on a tax return or undertaking illegal activities to hide profits.

However, there has been controversy surrounding the ethics of the companies that opt for corporate inversions. Several high-profile inversions have brought this 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. Also, Pfizer Inc. announced it would move to Ireland as part of a merger with Allergan PLC. 

These and others relocations 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.

RELATED TERMS
  1. Inverse Floater

    An inverse floater is a bond or other type of debt whose coupon ...
  2. Corporate Tax

    A corporate tax is a levy placed on the profit of a firm, with ...
  3. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  4. Bilateral Tax Agreement

    An arrangement between two jurisdictions that codifies tax laws ...
  5. Foreign Tax Deduction

    The foreign tax deduction is a deduction that may be taken for ...
  6. Skinny Down Distribution

    Skinny down distribution is the practice of cutting a domestic ...
Related Articles
  1. Financial Advisor

    Inversions and Transfer Pricing Will Hurt the US Economy

    Corporate inversion, while it benefits large corporations, costs the U.S. economy billions of dollars in federal tax revenue. How does that affect you?
  2. Investing

    Shorting an ETF vs. Buying an Inverse ETF

    Investors who want to bet against specific sectors or indexes can either short an ETF or buy an inverse ETF. Which is better depends on the circumstances.
  3. Investing

    IHS, Markit Merge in Latest Corporate Inversion (IHS, MRKT)

    Englewood, Colorado-based IHS Inc. (NYSE: IHS) announced Monday that it would combine with London-based Markit Ltd. (NASDAQ: MRKT) in a "merger of equals" to form a $13 billion company based ...
  4. Investing

    Top 4 Inverse Equities ETFs (SH, SDS)

    Explore analysis of some of the most popular inverse and leveraged-inverse ETFs that track equity indexes, and learn about the suitability of these ETFs.
  5. Investing

    Top 4 Inverse ETFs for a Bear Market

    These four bear-market inverse ETFs will keep you safe when the market drops.
  6. Taxes

    Do U.S. High Corporate Tax Rates Hurt Americans?

    The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
  7. Investing

    RYURX, RYTPX, PSSAX: Mutual Funds to Short the S&P 500

    Discover the four best mutual funds for shorting the S&P 500 and learn which funds may be suitable for your portfolio during a market sell-off.
  8. Investing

    The 3 Best ETFs to Short Global Equities (RWM, EUM)

    Learn about three global equity ETFs that profit from declining equity prices. Look at how these funds have performed and how they execute their strategies.
  9. Investing

    These Companies Hold the Most Cash Abroad

    Technology companies are five of the top 10 companies holding a total of $2.5 trillion cash abroad.
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center