DEFINITION of `Corporate Inversion`

DEFINITION of 'Corporate Inversion'
Re-incorporating a company overseas in order to reduce the tax burden on
income earned abroad. Corporate inversion as a strategy is used by companies
that receive a significant portion of their income from foreign sources, since that
income is taxed both abroad and in the country of incorporation. Companies
undertaking this strategy are likely to select a country that has lower tax rates and
less stringent corporate governance requirements.
Corporate inversion is one of the many strategies companies employ to reduce
their tax burden. One way that a company can re-incorporate abroad is by having
a foreign company buy its current operations. Assets are then owned by the
foreign company, and the old incorporation is dissolved.
For example, take a manufacturing company that incorporated itself in the United
States in the 1950s. For years the majority of its revenue came from U.S. sales,
but recently the percentage of sales coming from abroad has grown. Income from
abroad is taxed in the United States, and U.S. tax credits do not cover all taxes
that the company has to pay abroad. As the percentage of sales coming from
foreign operations grows relative to domestic operations, the company will find
itself paying more U.S. taxes because of where it incorporated. If it incorporates
abroad, it can bypass having to pay higher U.S. taxes on income that is not
generated in the United States. This is a corporate inversion.
Corporate inversion is not considered tax evasion as long as it doesn’t involve
misrepresenting information on a tax return or undertaking illegal activities to
hide profits.
A corporate inversion does not typically change the operational structure of a
company. In most cases, an inversion simply means the addition of a small office
in the company’s new foreign "home." Therefore, a re-incorporation rarely, if
ever, leads to the loss of American jobs. In fact, to the extent that a corporate
inversion leads to significant savings from a lower tax burden, employees may
benefit through increased wages or more jobs.
The practice of shopping around for a business-friendly environment in which to
incorporate is nothing new. For decades, corporations (and non-profit
organizations) have flocked to Delaware as the best place to incorporate because
of that state’s well-established legal precedents, relatively open corporate
governance regulations, and fully-developed insurance market. More than
308,000 companies are incorporated in Delaware, including 60 percent of Fortune
500 firms and 50 percent of the corporations listed on the New York Stock
Exchange. Clearly, most of these companies do not have their headquarters or
even a significant presence in Delaware. A company’s state (or country) of
incorporation merely provides a point of presence by which the company can take
advantage of certain laws and policies to better fulfill its mission of serving
customers, employees, and shareowners.
10 Questions on Inversions:
1. Do you feel it is unethical for a firm primarily based in New Jersey to
incorporate in Delaware in order to reduce its tax bill and/or be subject to
Delaware business laws?
2. Do you feel it is unethical for a firm primarily based in the USA to
incorporate in Ireland, the Bahamas, or another low-tax country?
3. Do corporate inversions cost the USA jobs?
4. Do corporations have a duty to pay more tax than laws mandate?
5. If not, why do politicians criticize them for perfectly legal inversions?
6. Can the USA pass laws preventing companies who invert from doing
business in the USA? ________ Inversions completed in the past year
included Chiquita Bananas and Burger King. How would voters react to
shutting down these companies’ American operations?
7. A huge proposed inversion which did not go through was Pfizer, the big
drug company. Can we risk removing their products from US consumers?
8. What type of law could the USA pass to prevent inversions?
9. Do you think we will continue to see corporate inversions?
10.What types of opportunities do inversions create for young professionals?