CORPORATE INVERSION-2-1

CORPORATE INVERSIONDYLAN L. POTTER

Vocabulary Corporation- A legal entity that is separate and distinct from its owners. Corporations have most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.

Corporate Inversion- reincorporating a company in order to reduce the tax burden on income earned abroad. Inversion as a strategy is used by companies that have a large portion of income from foreign sources since the income is taxed abroad and in the country of incorporation.

Headquarters-the place or building serving as the managerial and administrative center of an organization

OECD (Organization for Economic Cooperation and Development)- forum where the governments of 34 democracies with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.

Repatriation- measures taken by a country to reduce foreign capital investment.

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

2

4

6

8

10

12

Inversions By The Year

Year

inve

rsio

ns

“These corporate expatriations aren’t illegal,

but they sure are immoral.”

-Senator Charles Grassley (R-IA)

Where are they going?

Where are they going?3%

31%

3%

14%3%8%

19%

3%3%

8%

3%3%

New Headquarters Location

netherlands bermuda panama

cayman islands antigua england

ireland austrialia UK

canada luxemburg denmark

How has legislation changed as a result of inversions?

History 1983- McDermott Inc.

First inversion to trigger major policy response

The result? In 1984, Congress added a new rule to the tax code which was intended to tax all

unrepatriated earnings of a foreign subsidiary, of which a US parent owned more than 10%,

involved in a share inversion.

This insured that temporary tax deferral via inversion would not be made permanent.

McDermott Inc. saves over $220 million in revenue over 5 year span.

History 1994- Helen of Troy

Began using US stock to “reorganize” foreign stock in a subsidiary company which was a tax free action.

Another form of inversion that was allowed via US tax codes.

Two months later, the IRS issued new guidelines for share inversion to be tax free.

New “strict” guidelines

The result? These guidelines were not a strong deterrence to the perceived benefits of inversions.

An unprecedented amount of inversions followed in the late 1990’s and into the early 2000’s

American Jobs Creation Act of 2004

If a foreign corporation meets the test for a surrogate foreign corporation

(substantially all property held by US company, 60% owned by shareholders or corporation with the U.S., or after incorporation company has little business in US)

the tax benefits from engaging in a corporate inversion will be eliminated. Thus, § 7874 deters

corporate inversions. It was expected in 2008 to increase tax revenue by approximately $937

million over ten years.

This was revised in 2009 and created a bit more confusion over definition of “substantial business activity” and increased shareholder ownership to 80%.

Who is Inverting?

Why corporate inversions?

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Reason #1 Tax incentiveThe United States has the world’s highest corporate tax rates among OECD countries.

• Countries like Luxembourg, Ireland, and London, have used favorable tax incentives as a centerpiece in highly successful business attraction programs.

The United States ranked 69th among 185 countries in its tax burden, according to the World Bank’s June 2013 ease of doing business index.

According to a study done at University of Calgary found that the U.S. federal and state tax rate on new capital investment, considering credits and deductions, was 35% relative to a 19.5% OECD average and an 18% global average.

Reason #2 Competition Subpart F of the US tax code is seen as particularly burdensome by taxing US companies passive investment income (royalties, rents, interest, dividends)

Company moves as a result of other companies moving in a domino effect of inversion.

Political LandscapeLIBERAL

Corporate inversions are unpatriotic and corporations should pay taxes to their country of origin.

CONSERVATIVE

Forbidding corporate inversions would cost 42,000 U.S. Jobs and incentivize more corporations to move overseas.

Stop Corporate Inversions Act of 2014

Introduced May 2014 by Sander Levin

Problem: There has been a rapid increase in the number of U.S. based companies moving overseas to avoid paying U.S. tax rates

Cost: $20 Billion over ten years

Changes: Foreign company threshold from 20% to 50%

Prohibits: Inversions by U.S. companies if the foreign entity is managed and controlled in the United States by conducting significant domestic business activities in the United States

Stop Corporate Inversions Act of 2014NOTABLE AYES

Building Trades Unions

Transportation/Automotive Unions

Teachers Unions

Nancy Pelosi (Ca 12th)

NOTABLE NAYS

Banks and Bank Holding Companies

Defense Aerospace Contractors

John Boehner (Oh 8th)

Eric Cantor (Va 7th)

Paul Ryan (Wi 1st)

What do I think? Corporate inversions aren’t bad but they can be.

◦ In fact they’re quite natural, but need to be addressed.

Incentives◦ Drive growth and prosperity◦ Keep our U.S. Companies and◦ The United States Should Incentivize Foreign Companies to Come Here

◦ Our High Taxes Rates Vs. Their Low Rates◦ Or Through Other Business Opportunities (networking, growing business)

A Corporations Responsibility◦ Maximize the Dividends They Distribute to their Shareholders◦ Not to be patriotic

◦ Being patriotic may cost them money

Works Cited http://www.law.nyu.edu/sites/default/files/upload_documents/NYU-Annual-Survey-68-3-Simpson.pdf

http://dealbook.nytimes.com/2013/10/08/to-cut-corporate-taxes-a-merger-abroad-and-a-new-home/?_r=4

http://ctj.org/pdf/pre0414.pdf

http://themorningconsult.com/2014/08/pol-tax-inversions/

http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/CRS%20report%20on%20inversions.pdf

http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/113-0927%20JCT%20Revenue%20Estimate.pdf

Works cited http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/images/A_Spike_in_Corporate_Inversions_2.pdf

http://www.bloombergview.com/quicktake/tax-inversion

http://www.cnbc.com/id/101864543

http://democrats.waysandmeans.house.gov/press-release/new-crs-data-47-corporate- inversions-last-decade-2

http://fas.org/sgp/crs/misc/R42726.pdf

http://www.bloomberg.com/infographics/2013-10-28/u-s-profits-in-ireland-pile-up.html

http://taxfoundation.org/blog/us-corporate-tax-rate-fails-move-competition