Corporate inversions are not a new issue, but it has had its run-ups over the years, as illustrated by Google’s Ngram Viewer:
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.
But based on the anecdotal evidence alone, this issue is going to heat up. The Wall Street Journal has hosted an excellent short take on how these inversion deals work:
The race by companies to sidestep U.S. taxes reached a fever pitch as two drug firms unveiled foreign mergers that will help them slash their tax rates…[there is a] growing craze for so-called inversions, in which a U.S. company buys a foreign target and adopts its lower tax rate or establishes a holding company in a country with a low tax rate.
The deals, mostly in the pharmaceutical industry but also cropping up in retail, consumer and manufacturing, have come fast and furious amid two trends: rebounding appetite for large, transformative mergers and acquisitions; and fear that the opportunity to use the cross-border tax strategy soon could disappear.
Regardless of the cause, the reality is that the U.S. government stands to lose significantly from this export of tax revenue. From an another WSJ article:
How much revenue does the U.S. Treasury stand to lose from corporate tax inversions? It is difficult to say precisely, but one estimate puts the figure at close to $20 billion.
A nonpartisan congressional research panel said the U.S. would receive an additional $19.46 billion over a decade if most new tax inversions were essentially halted with proposed changes to the tax code. The estimate, by researchers at the Joint Commission on Taxation, is based on estimates from previous inversions, in which U.S. companies make overseas acquisitions to gain tax advantages, and doesn’t take into account deals being made now…calculating how much the U.S. Treasury would lose is nearly impossible because of a dearth of reliable tax data from companies’ public filings and the variables in how companies can structure their businesses, tax experts say.
However this is resolved, I think we can all agree that when a corporate trend that generates the above results is being referred to as, “all the rage,” or, “too good an opportunity to waste,” one wonders how, as yet another Wall Street Journal article reports, Congress Is Split on Taxing of Corporate Inversions.