What Is a Corporate Inversion?

A corporate inversion—also called a tax inversion—is a tax avoidance maneuver involving the reincorporation of a Uও.S. company in a foreign country to lower its income tax burden.

The strategy requires the U.S. company to ha🉐ve a foreign company buy its shares or other assets, thus enabling the U.S. company to reincorporate in the lower-tax country. As an alternative method, the U⛎.S. company can buy the foreign company and reincorporate in its jurisdiction.

Corporate inversion is used by companies that receive a significant portion of 🦹their income from another country. Once incorporated in another tax jurisdiction, the company will no longer have to pay U.S. corporate income tax on revenueඣ earned outside of the U.S. until and unless the money is repatriated.

The strategy has been used less often since 2016 when the U.S. corporate tax rate was cut to 21% from 35%.

How a Corporate Inversion Works

A corporate inversion is one of many strategies that companies employ to re⛄duce their tax burdens by altering their tax jurisdiction. In this case, a company reincorporates abroad by hꦦaving a foreign company purchase its current operations.

The foreign company then owns the as🌳sets and the U.S. corporation is dissolved.

The same goal is ac🌠hieved if a U.S. company buys the shares or assets of a foreign company and then moves its legal location to that country.

Notably, the existing operat𓆉ions of the U.S. business can remain unchanged while its tax jurisdiction is altered.

Efforts of the U.S. Department of the Treasury

The U.S. Treasur🦋y has taken steps over the years to discourage corporate inversions.

For example, it has issued regulations restricting the percentage of shares of the foreign company that a U.S. company can own ওand requirinᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚg the foreign company to contribute no less than a certain amount of shares to the merged company.

The Treasury has also challenged companies' ability to repatriate earnings accrued before the inversion without owing U.S. taxes on those earnings.

Benefit vs. Cost

From a profitability and competitiveness standpoint, corporate inversions represent a smart business move because they lower t🔥he tax burden on a company.

The ♏U.S. is on the losing side. The company contributes less in taxes to the nation where it was founded and where it still thrives.

Critics of corporate inversions point out that U.S. companies benefit from broader soc﷽ietal factors, such as a well-educated workforce and a business-friendly environment, but avoid or minimize their contributions as soon as they have the option.

Example of a Corporate Inversion

Consider a manufacturing company that incorporated itself in the U.S. in the 1950s. For yea𓄧rs, 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 U.S., and U.S. 澳洲幸运5官方开奖结果体彩网:tax credits do not cover all taxes which the coꦍmpany 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 legally domiciled.

If the business ജtransacts a corporate inversion, it can avoid paying higher U.S. taxes on revenue generated outside of the U.S. (until the money is brought back to the U.S.).

There are other potential advantages to corporate inversions, includin꧅g the p༒ossibility of more attractive financing options. But the primary benefit is paying less in U.S. taxes on foreign income.

Specific instances of corporate inversions include the 2014 acquisition by U.S. corporation Burger King of the Canadian restaurant chain Tim Hortons and the 2015 acquisition of Ireland's medical products manufacturer Covidien PLC by the U.S. healthcare technology company Medtronic.

Criticism of Corporate Inversions

Corporate inversion is legal and is not considered tax evasion as long as it does not involve misrepresenting information on a 澳洲幸运5官方开奖结果体彩网:tax return or undertaking illegal activitꦆies to hide profits.

However, there has been controversy surrounding the ethics of the companies that opt for corporate inversions. U.S. companies have been called out for leaving the country, as with Burger King's move to Canada in 2014 through a merger with the Canadian coffee and doughnut chain Tim Hortons.

Why Inversions Have Slowed

The controversy came to a head in 2015, when Pfizer Inc. announced it would move to Ireland as part of a merger with Allergan PLC, setting up one of the largest-ever corporate inversions.

This announcement met with widespread outrage in political circles. New rules were issued by the U.S. Treasury and the Internal Revenue Service that made the deal—and most large corporate inversions—much less attractive. As a result, Pfizer Inc. called the deal off in 2016.

A year later, the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act of 2017 addressed much of the tax disparity between the U.S. and other nations, slowing the use of this tax strategy.

The practice remains lega🀅l, but the tax savings are less sig𒁏nificant.

The Bottom Line

A corporate inversion occurs when a U.S. company buys a foreign company and re-establishes its legal location in the foreign country. The result of this transaction can be lower corporate taxes with no real change in the operations or functional location of the company. The company wi💞ll pay a combination of foreign corporate tax🔯es and U.S. foreign taxes.