Inversion Acquisitions on the Rise

Can the U.S. limit the practice of corporate inversions?

The loss of corporate tax revenue as U.S.-based companies move overseas has been an issue dogging the Treasury Department for years and has recently become a topic of debate on the presidential campaign trail. Nonetheless, businesses are continuing to look for opportunities to minimize their tax liabilities by engaging in corporate inversions. Today, most inversions involve a U.S. corporation acquiring a much smaller foreign company and establishing a new entity in that jurisdiction.

What is the reason for corporate inversions?

Many U.S. based companies that conduct business internationally face high-tax costs and inefficiencies of the tax system. The U.S. is one of the few nations that taxes companies on their worldwide income. Moreover, income garnered by non-U.S. subsidiaries is taxed twice: first in the local jurisdiction and then when the earnings are repatriated.

While businesses receive tax credits in the U.S. on the repatriated earnings based on the amount of tax paid in the local jurisdiction, the income is generally subject to federal and state taxes of about 40 percent. The problem is compounded by the fact that many countries have reduced their corporate tax rates over the last 10 years, while the effective tax rate in the U.S. is the highest among OECD member nations. This leads many businesses to permanently reinvest earnings overseas which some observers believe amounts to at least $2 trillion.

What is the OECD?

The Organization for Economic Cooperation and Development is an international economic organization comprised of 34 countries that was established in 1961 to support economic progress and world trade. Today, OECD members span the globe from North and South America to Europe and the Asian-Pacific region and also include emerging countries like Mexico, Chile, and Brazil, as well as developing economies in Africa, Asia, Latin America and the Caribbean.

Other Business Motives

While companies in the U.S. have used inversions to minimize tax costs, the move is more often part of a strategic acquisition or merger. For example, Johnson Controls, Inc. recently announced a merger with Ireland-based Tyco International PLC. The new entity will be domiciled in that nation and reportedly save $150 million in taxes because the effective tax rate will be about 18 percent compared to Johnson’s 29 percent rate in the U.S.

While inversion acquisitions are not a new trend and have been in play since the 1980s, Congress has taken measures to curtail these transactions by enacting tax rules that were designed to make these transactions less attractive. Generally these rules have become less effective as other nations have dramatically reduced their effective rates.

Meanwhile, the U.S. continues to enforce higher comparative corporate tax rates, which is now giving rise to an increase in corporate inversions. Be that as it may, international tax laws also involve a number of complexities. If your company intends to conduct business overseas or is contemplating a corporate inversion, a qualified attorney with expertise in international tax law can provide you with crucial advice.

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