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Tax inversion

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Tax inversion

Tax inversion, or corporate inversion, is a largely American term for the relocation of a corporation's headquarters to a lower-tax nation, or corporate haven, usually while retaining its material operations in its higher-tax country of origin.[1][2] The term is most frequently used in relation to US corporations. Corporate inversions are a relatively recent phenomenon. Although it is difficult to be definitive, the practice first became prevalent in the 1990s, with US corporations seeking to relocate to tax havens such as Bermuda;[3] more recently, because of changes in US law, publicity has focused upon corporate inversions conducted by way of merger with companies in lower-tax foreign countries. The issue was first subjected to a great deal of publicity in April 2014 by the proposed merger between Pfizer and AstraZeneca.[4][5] While large multinational public companies have received most of the recent press coverage on corporate inversions, middle-market companies and privately held companies can invert and achieve similar tax benefits.[6]

Tax inversions are a form of tax avoidance. They are driven by a combination of factors, but the most prevalent factor is that the US tax code (uniquely among developed nations) seeks to impose income tax on profits earned abroad by American corporations.[7] This creates a strong incentive for American companies with large overseas markets to seek to recharacterize themselves as a foreign corporation if they want to return foreign earnings to stockholders without double taxation.[8]

The Economist explains:

Because other countries do not generally tax foreign earned income in the same way that the United States does, the concept of corporate inversion (and the potential tax relief that such inversions seek) is a largely limited to the U.S.A.

Recent publicity

Tax inversions as a tax reduction maneuver have become a public policy issue in 2014, as substantial tax revenues are lost.[10][11][12][13] American politicians and government officials, including President Barack Obama[14] and Treasury Secretary Jack Lew.[15] have issued statements calling tax inversions "unpatriotic", and various proposals have been discussed to prevent tax inversions where the relevant corporation is less than 50% foreign owned. The Economist has called recent calls in America to restrict companies from relocating abroad by way of merger "misguided" and called for wider tax reform to address what it describes as more fundamental flaws in the American corporate tax system instead.[16] Democratic lawmakers attempted again in September 2014 to propose a tax reform that would focus on slowing the number and rate of corporate inversions via taxing any earnings outside the U.S. as income, until the inversion occurs. Republicans and Democrats have several proposals that could possibly address the issue.[17]

Treasury Department responses

On Monday September 22, 2014 The Treasury Department enacted several regulations that will, among other things, make inversion abroad more difficult or reduce benefits to companies who have already done so.[18] The September 22, 2014, Notice describes future regulations that can be separated into two categories: (i) special rules regarding ownership threshold requirements (ii) rules targeting certain tax planning after an inversion, primarily to access foreign earnings of the US acquired corporation.[19]

Notable inversions

See also

  • Tax exporting
  • How potential changes in Tax Inversion laws affected markets


  1. ^ Corporate Inversion
  2. ^ Subcommittee on Select Revenue Measures of the House Committee on Ways and Means (June 25, 2002). Statement of the Hon. Richard Blumenthal, Attorney General, Connecticut Attorney General's Office, Hearing on Corporate Inversions. Retrieved September 5, 2004.
  3. ^ "Twenty years ago inversions were rare. But as other countries chopped their rates and America’s stayed the same, the incentive to flee grew. Until a decade ago Bermuda and other tax havens were the destination of choice". "How to stop the inversion perversion".  
  4. ^ "Pfizer Ends AstraZeneca Bid But The Tax Issues It Raised Live On".  
  5. ^  
  6. ^ Camacho, Ramon; Scaliti, Matthew. . Transaction Advisors.  
  7. ^ "America levies tax on a company’s income no matter where in the world it is earned. In contrast, every other large rich country taxes only income earned within its borders." "How to stop the inversion perversion".  
  8. ^ It also creates an incentive to stockpile earnings abroad, as the foreign earned income is usually only taxed when it is returned to the US. "With All Of Apple's Cash, Why Is It Issuing Bonds?".  
  9. ^ "Inverse logic".  
  10. ^ Corporate Inversions
  11. ^ Corporate inversion transactions: Tax policy implications
  12. ^ Eicke, Rolf (2009). Tax Planning with Holding Companies. The Netherlands: Kluwer Law International. pp. 23–29.  
  13. ^ "Developments in the law: jobs and borders". Harvard Law Review 118 (7): 2270. May 2005. 
  14. ^ "'"Obama Urges Quick Action to Stop 'Inversions. Wall Street Journal. 24 July 2014. 
  15. ^ "Jack Lew pushes Congress to crack down on tax ‘inversions’". CNBC. 16 July 2014. 
  16. ^ "How to stop the inversion perversion".  
  17. ^ Stephenson, Emily. "U.S. Senate Democrats propose exit tax for inverting companies". Reuters. Retrieved 19 September 2014. 
  18. ^ Drawbaugh, Kevin. "U.S. Treasury moves against tax-avoidance 'inversion' deals". Reuters. Retrieved 22 September 2014. 
  19. ^ DeNovio, Nicholas; Stein, Laurence; Doyle, Diana; Murphey, Lauren. "Treasury Announces Inversion Regulations; Reach Extends to Other Cross-Border M&A". Transaction Advisors.  
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