Corporate Inversion

        Corporate inversion is a process that has been used by numerous corporations headquartered in the United States to avoid certain excessive income taxes that would be levied against their income earned at home and in foreign countries. The United States Government then loses the taxes that would have been earned on the income the corporation earns at home and abroad. Generally, a company that earns a significant share of their total income from foreign transactions is more likely to utilize a corporate inversion. By utilizing corporate inversion, the existing company is essentially changing its country of residence, making it so they won’t have to pay the foreign income taxes the United States would apply. After the inversion has taken place, the original corporation located in the United States becomes a subsidiary of the new foreign corporation.

        Companies generally utilize this strategy by incorporating with another corporation located in a country with a lower tax rate, benefiting their bottom line. There are three main paths that corporations can choose to use to invert. Corporations can have a substantial business presence in another country and form a subsidiary there, merge with a larger foreign corporation, or merge with a smaller foreign corporation. No matter which path is taken, the bottom line is that the corporation will benefit by facing lower home and foreign income taxes. Corporate inversion is not considered tax evasion as long as nothing is misrepresented in the financial statements and no profits have been hidden.

        The first method of corporate inversion begins by a corporation creating a foreign subsidiary. This is most likely to occur when a corporation has a substantial business presence in that foreign country. Once the subsidiary is set up, the U.S. corporation and the foreign subsidiary exchange stock, and from this both entities own stock in the other. After this exchange has occurred, the new entity is labeled as a foreign corporation, and the old corporation is now it’s U.S. subsidiary. Since the exchange of stock is usually proportionate to the company’s valuation, there is no change in effective control, and the income earned along with now foreign income will be taxed at the new country’s rates.

        The second method of corporate inversion takes place when a U.S. corporation decides to merge with a larger foreign corporation. In this relationship, the U.S. shareholders will now own a minority share of the new merged company. Since the majority share is outside the United States, the effective control of the company is now in the new country. This is advantageous for the original U.S. corporation because of the lower tax rates in the foreign country. The foreign corporation will hopefully also be able to bolster their business because of the addition of new assets and management included in the merger.