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Corporate Inversion

United States. Congress. Senate. Committee on Appropriations. Subcommittee on Treasury and General Government

Published: 2003

Total Pages: 72


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Corporate inversion, the process of redomiciling for tax purposes, reduces corporate income taxes, but it imposes a personal tax cost that is shareholder-specific. We develop a model, incorporating the corporate tax benefits and personal tax costs, to quantify the return to inversion for different shareholders. Foreign and tax-exempt investors, along with the chief executive officer, disproportionately benefit. We show that an inversion simultaneously reduces the wealth of many taxable shareholders. The model illustrates an agency conflict in which heterogeneity in personal taxes generates a wealth transfer between shareholders. Furthermore, personal taxes offset the loss in government revenue by 39%.

Corporate Inversion

United States. Congress. Senate. Committee on Appropriations. Subcommittee on Treasury and General Government

Published: 2003

Total Pages: 72


Get eBook

This report examines how U.S. corporate tax inversion announcements impact shareholder value. A corporate tax inversion is where a corporation moves its location of residency to a new jurisdiction with a lower tax rate than that of its original location of incorporation. Corporate operations are usually continued in the location with the higher federal effective tax rate. Since the first U.S. inversion in 1983, there have been more than 75 inversions (Marples & Gravelle, 2016). There has been growing division over the issue of whether or not inversions are acceptable as a result of the U.S. tax base deteriorating. Many politicians have been searching for ways to control the number of inversions through legislation. As a result, inversion trends have been changing due to governmental regulation, international business, and public opinion. For this analysis, data is collected on 49 corporate inversions that occur from 1983 to 2016. Event studies are conducted on individual trends to determine what types of inversions create the most value. Results indicate that pharmaceutical corporations completing merger and acquisition (M&A) inversions in Ireland after 2007 are valued the most by shareholders.
This article investigates the American phenomenon "corporate inversion" and how much income tax the strategy can actually save. It further explains the inversion rules and offers tax planning strategies to reduce a corporation's tax burden.
For decades now, corporate inversions have been the topic of an ongoing debate between legislators, practitioners, and academics. Since the first inversion in 1982, while often arguing on the right methods, policy, and ways, Congress, the U.S. Department of the Treasury (“Treasury”), and countless legislators and political affiliates have advocated against this type of transaction. However, almost thirty-five years later, there seems to have been little to no progress in hindering corporations from partaking in the infamous transaction; the number of inversions has grown nearly 150% since the first transaction. Every piece of legislation enacted concerning this behavior is met with a counter transaction that finds its way around the new law. As of 2015, over sixty companies have changed their places of incorporation to a jurisdiction outside of the United States. It remains to be seen if a way to stop transactions that give way to tax inversions truly exists, as the solution must not interfere with other economic and policy issues. Therefore, the question becomes whether or not attempting to inhibit such transactions should be pursued, and, if continued, what is the next step in regulating them?