Corporate inversions occur when a corporation reincorporates in another country to reduce its tax burden from income earned abroad. The U.S. has the highest corporate tax rate among OECD countries, incentivizing inversions. Legislation in 1984 and 2004 attempted to curb inversions, but many still occur to take advantage of lower foreign tax rates. The Stop Corporate Inversions Act of 2014 aimed to further limit inversions by increasing the foreign ownership threshold, but was opposed by business groups and Republicans concerned about lost jobs and competitiveness. Views on inversions differ, with some seeing them as unpatriotic and others as a natural response to tax incentives.
2. Vocabulary
Corporation- A legal entity that is separate and distinct from its owners. Corporations have most
of the rights and responsibilities that an individual possesses; that is, a corporation has the right to
enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay
taxes.
Corporate Inversion- reincorporating a company in order to reduce the tax burden on income
earned abroad. Inversion as a strategy is used by companies that have a large portion of income from
foreign sources since the income is taxed abroad and in the country of incorporation.
Headquarters-the place or building serving as the managerial and administrative center of an
organization
OECD (Organization for Economic Cooperation and Development)- forum where the governments
of 34 democracies with market economies work with each other, as well as with more than 70 non-
member economies to promote economic growth, prosperity, and sustainable development.
Repatriation- measures taken by a country to reduce foreign capital investment.
10. Where are they going?
3%
30%
3%14%
3%
8%
19%
3%
3% 8%
3% 3%
New Headquarters Location
netherlands
bermuda
panama
cayman islands
antigua
england
ireland
austrialia
UK
canada
luxemburg
denmark
16. The result?
In 1984, Congress added a new rule to the tax code which was intended to tax all
unrepatriated earnings of a foreign subsidiary, of which a US parent owned more than 10%,
involved in a share inversion.
This insured that temporary tax deferral via inversion would not be made permanent.
McDermott Inc. saves over $220 million in revenue over 5 year span.
17. History
1994- Helen of Troy
Began using US stock to “reorganize” foreign stock in a subsidiary company which was a tax free
action.
Another form of inversion that was allowed via US tax codes.
Two months later, the IRS issued new guidelines for share inversion to be tax free.
19. The result?
These guidelines were not a strong deterrence to the perceived benefits of inversions.
An unprecedented amount of inversions followed in the late 1990’s and into the early 2000’s
20. American Jobs Creation Act of 2004
If a foreign corporation meets the test for a surrogate foreign corporation
(substantially all property held by US company, 60% owned by shareholders or corporation with
the U.S., or after incorporation company has little business in US)
the tax benefits from engaging in a corporate inversion will be eliminated. Thus, § 7874 deters
corporate inversions. It was expected in 2008 to increase tax revenue by approximately $937
million over ten years.
This was revised in 2009 and created a bit more confusion over definition of “substantial
business activity” and increased shareholder ownership to 80%.
24. Reason #1 Tax incentive
The United States has the world’s highest corporate tax rates among OECD countries.
• Countries like Luxembourg, Ireland, and London, have used favorable tax incentives as a
centerpiece in highly successful business attraction programs.
The United States ranked 69th among 185 countries in its tax burden, according to the World
Bank’s June 2013 ease of doing business index.
According to a study done at University of Calgary found that the U.S. federal and state tax rate
on new capital investment, considering credits and deductions, was 35% relative to a 19.5%
OECD average and an 18% global average.
25. Reason #2 Competition
Subpart F of the US tax code is seen as particularly burdensome by taxing US companies passive
investment income (royalties, rents, interest, dividends)
Company moves as a result of other companies moving in a domino effect of inversion.
26. Political Landscape
LIBERAL
Corporate inversions are unpatriotic and
corporations should pay taxes to their country
of origin.
CONSERVATIVE
Forbidding corporate inversions would cost
42,000 U.S. Jobs and incentivize more
corporations to move overseas.
27. Stop Corporate Inversions Act of 2014
Introduced May 2014 by Sander Levin
Problem: There has been a rapid increase in the number of U.S. based companies moving
overseas to avoid paying U.S. tax rates
Cost: $20 Billion over ten years
Changes: Foreign company threshold from 20% to 50%
Prohibits: Inversions by U.S. companies if the foreign entity is managed and controlled in the
United States by conducting significant domestic business activities in the United States
28. Stop Corporate Inversions Act of 2014
NOTABLE AYES
Building Trades Unions
Transportation/Automotive Unions
Teachers Unions
Nancy Pelosi (Ca 12th)
NOTABLE NAYS
Banks and Bank Holding Companies
Defense Aerospace Contractors
John Boehner (Oh 8th)
Eric Cantor (Va 7th)
Paul Ryan (Wi 1st)
29. What do I think?
Corporate inversions aren’t bad but they can be.
◦ In fact they’re quite natural, but need to be addressed.
Incentives
◦ Drive growth and prosperity
◦ Keep our U.S. Companies and
◦ The United States Should Incentivize Foreign Companies to Come Here
◦ Our High Taxes Rates Vs. Their Low Rates
◦ Or Through Other Business Opportunities (networking, growing business)
A Corporations Responsibility
◦ Maximize the Dividends They Distribute to their Shareholders
◦ Not to be patriotic
◦ Being patriotic may cost them money