tax inversion

 

  • [94] Countermeasures United States[edit] See also: Double Irish arrangement § Effect of the Tax Cuts and Jobs Act (TCJA) There have been three phases of initiatives that the
    US Government have taken to counter US corporate tax inversions: • 2004 American Jobs Creation Act (ACJA): In 2002, the US Treasury reported to Congress that there had been a “marked increase in the frequency, size, and visibility” of “naked
    inversions”.

  • The second major wave of US tax inversions use mergers to meet the “substantial business activities” of IRS 7874; Ireland and the UK are main destinations and the size of
    these inversions are much larger than the first wave (see graphic), and included: Medtronic, Liberty Global, Eaton Corporation, Johnson Controls, and Perrigo.

  • US Congress passes the American Jobs Creation Act of 2004 (AJCA) with IRS Section 7874 that requires existing shareholders to own less than 80% of the new entity, and introduces
    a “substantial business activities” test in the new foreign location; AJCA ends “naked inversions” to Caribbean-type tax havens.

  • In response, Congress passed the AJCA, which added Section 7876 to the US tax-code that effectively ended “naked inversions” to Caribbean-type tax havens where the US corporation
    had no previous business presence in the location.

  • [1] The majority of the less than 100 material tax inversions recorded since 1993 have been of US corporations (85 inversions), seeking to pay less to the US corporate tax
    system.

  • [29] Evidence of tax savings[edit] In September 2017, the US Congressional Budget Office analyzed the post-tax outcomes of US corporate tax inversions from 1994 to 2014, and
    found the following:[52] • After year one, the aggregate effective rate of worldwide taxation of the inverted company fell from a 29% rate to an 18% rate;[53] and • By year three, the aggregate worldwide tax expense was 34% lower, while the
    US tax expense was 64% lower.

  • Irish International Financial Services Centre tax-law firms sometimes list Pentair in their brochures as a Swiss tax inversion to Ireland; however Pentair was really a 2012
    US tax inversion to Switzerland, who then used Ireland as a base for two years, before moving to the UK in 2016.

  • The existing US shareholders still own a majority merged group this thus maintain “effective control”, however, it is now a foreign company under the US tax code.

  • [41] Inversions are undertaken to reduce taxes — Federal Reserve Bank of St. Louis (2017)[5] One such strategy is a corporate inversion, which is executed to result in a significant
    reduction in worldwide tax payments for a company.

  • However, long-term domestic shareholders did not benefit from inversions, since the US tax code requires taxable shareholders to recognize their capital gains at the time
    of the inversion.

  • [11][16] • Where the existing US shareholders owned between 60% but less than 80% of the EAG, the inversion would be recognized as a foreign company but with restricted tax
    benefits.

  • As of June 2019, there have been no material US inversions post-2017, and notably, two large Irish-based tax inversion targets were acquired in non-tax inversion transactions,
    where the acquirer remained in their higher-tax jurisdiction: Shire plc by Japanese pharma Takeda for US$63 billion (announced in 2018, closed in 2019), and Allergan plc by U.S. pharma AbbVie for US$64 billion (announced in 2019, expected
    to close in 2020); in addition, Broadcom Inc. redomesticated to the United States.

  • Concept While the legal steps taken to execute a tax inversion can be complex as the corporations need to avoid both regulatory and Internal Revenue Service (IRS) hurdles
    in re-locating their tax residence to a lower-tax jurisdiction, simplified examples are available; such as provided in August 2014, by Bloomberg journalist Matt Levine when reporting on the Burger King tax inversion to Canada.

  • [5][47] The US was one of only eight jurisdictions using a “worldwide tax system”.

  • [1] In 1994, US tax academic James R. Hines Jr. published the important Hines–Rice paper, which showed that many US corporations had chosen to shift profits to tax havens,
    instead of outright moving to the tax haven by executing a tax inversion.

  • They also used debt-based earnings stripping tools to shift US profits to the new destination.

  • By changing its headquarters to another country with a territorial tax regime, the corporation typically pays taxes on its earnings in each of those countries at the specific
    rates of each country.

  • [49] US tax academics noted this was the reason why non-US corporations made limited use of tax havens;[49] in contrast, US corporations have been shown to be the largest
    global users of tax havens.

  • [55] Shareholder impact[edit] A number of studies have shown that the after-tax returns to original company shareholders post-inversion are more mixed, and often poor: • A
    2014 report by Reuters on 52 completed US tax inversions since 1983 showed that 19 outperformed the S&P500, another 19 underperformed the S&P500, another 10 were bought by rivals, another 3 went bankrupt and the final one returned to the US.

  • [10] Hines, and later again with US tax academic Dhammika Dharmapala, would show that base erosion and profit shifting (BEPS), was an even greater loss of corporate tax revenue
    to the US exchequer, than full tax inversions.

  • However, Apple’s 2015 BEPS transaction to Ireland was the first time a US corporation moved a substantial amount of IP to a full OECD jurisdiction where it already had a “substantive
    business operations”.

  • [69][70][71] While Apple’s tax residence remained in the US,[72][73] Apple moved the legal tax residence of a large part of its business to Ireland in a US$300 billion quasi-tax
    inversion of its intellectual property (IP).

  • The Treasury cited three concerns: the erosion of the US tax base, a cost advantage for foreign-controlled firms, and a reduction in perceived fairness of the tax system.

  • Before the 2017 TCJA, the US corporate tax rate was one of the highest rates in the developed world at 35%.

  • [25] Costs There have been several estimates of the aggregate cost of US tax inversions to the US exchequer (also called the erosion of the US tax base).

  • [65] Since the 2004 ACJA, and the 2012–16 Treasury rules, only US corporations with an existing “substantial business presence” in the foreign location that constitutes more
    than 25% of the post-inversion corporation (called the “expanded affiliate group” (EAG) in the legalisation) can execute a “self-inversion”.

  • [88] However, just three years later, the scale of US tax inversions had increased dramatically, leading the CBO to re-forecast in 2017 that by 2027, annual US taxes would
    be circa 2.5% (or US$12 billion) lower due to tax inversions.

  • In 2016, tax academic Kimberly Clausing estimated that the loss to the US exchequer from all classes of inversions, using the broadest types of hybrid inversions (and all
    base erosion and profit shifting earnings stripping activity), by US corporations was between US$77 to US$111 billion in 2012 (having been zero 20 years ago).

  • In July 2015, The Wall Street Journal reported that the circa 4% “effective tax rate” being paid by US pharmaceuticals who inverted to Ireland made them highly acquisitive
    of other US firms (i.e.

  • [43][44] The “first wave” of US inversions from 1996 to 2004 focused on debt-based tools, however, the significantly larger “second wave” of US inversions from 2012 to 2016
    also made use of IP-based BEPS tools.

  • Reuters concluded that: “But the analysis makes one thing clear: inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee
    of superior returns for investors”.

  • In addition, the corporation executing the tax inversion may find additional tax avoidance strategies, called § Earnings Stripping tools, that can shift untaxed profits from
    the higher-tax locations (e.g.

  • A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the
    original parent company becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country.

  • [26] AbbVie announced that post the 2017 TCJA, its effective tax rate was already lower than that of Irish-based Allergan plc at 9%, and that post the acquisition, it would
    rise to 13%.

  • This pre-TCJA U.S. tax system, was referred to as a “worldwide tax system”, as opposed to the “territorial tax system” used by almost all other developed countries.

  • [22] Medtronic and Allergan, therefore, could only avail of Ireland’s lower effective tax rates if they could shift US-sourced profits to Ireland without incurring full US
    corporate taxes.

  • Existing shareholders of the US company maintain at least 50% of the equity, or “effective control”, of the new post-inversion company; and ii.

  • — Congressional Budget Office (2017)[18] Types of tax saving[edit] US research on US tax inversions breaks down the tax savings into three areas: OECD “worldwide tax” countries.

  • [81] The US Life Sciences industry (Pharmaceutical and Medical Devices) became a significant part of the second wave of US tax inversions from 2012 to 2016.

  • [d] This is where the IP of the newly inverted group is moved to the lower-tax jurisdiction of the parent, who charges it out to the higher-tax jurisdictions in which the
    group operates (including its original US jurisdiction).

  • Given that the U.S. tax rate of 35% was one of the highest in the world, the corporate’s maximum global tax liability should, therefore, have been 35%.

  • [84][44] § Countermeasures created in the 2017 TCJA, directly targeted debt-based tools via the new BEAT tax, and introduce a competing US IP-based BEPS tool called the FDII
    tax.

  • [61] Since 2004 ACJA and 2012–16 Treasury rules, only mergers where the existing US shareholders own less than 80% of the EAG are recognized as foreign by the IRS (and mergers
    where the foreign-headquartered EAG is still over 80% owned by the original US corporate shareholders, is considered by the IRS to be a US corporation for taxation purposes).

  • Hybrid inversions[edit] See also: Leprechaun economics The material fall in the US aggregate “effective” corporate tax rate (1990 to 2016).

  • [5] The development of § Tools that could shift or earnings strip US-sourced profits to other jurisdictions without incurring US taxes, created an incentive for US corporates
    to execute tax inversions to lower tax jurisdictions.

  • The United Kingdom reforms its corporate tax code introducing a lower 19% corporate tax rate and moves to a full “territorial tax system”.

  • [54] A 2014 report by the Financial Times on US pharmaceutical tax inversions during 2012–2014, showed their aggregate worldwide tax rates dropped from 26 to 28% to 16–21%.

  • The main provisions were:[11] • US inversions where the existing US shareholders owned more than 80% of the post-inversion group, or Expanded Affiliate Group (EAG), would
    not be recognized.

  • The driver was shown to be partly agency costs, and a distinction was drawn between the material gains of the CEO from the inversion and the losses of long-term shareholders.

  • It also involved some of the largest and most public executed US tax inversions (e.g.

  • [84][85][42] For example, when Medtronic inverted to Ireland in 2015, over 60% of the merged group’s revenue still came from the US healthcare system.

  • Liberty Global completes the second largest US tax inversion in history in a US$24 billion merger with Virgin Media in the UK.

  • [64][22] Major classes[edit] In 2019, in the “anatomy of an inversion” the US Congressional Research Service (CRS) classified US tax inversion into three broad types:[65]
    • Substantial business presence.

  • [81] The US Oil & Gas Well Drilling and Servicing and US Casualty Insurance inversions are mostly associated with the first wave of US tax inversions before 2004;[9] the very
    first US tax inversion, McDermott International in 1983, was from the Oil & Gas Well Drilling and Servicing industry.

  • James R. Hines Jr. publishes the important Hines–Rice paper, which shows that many US corporations had chosen to shift profits to tax havens, instead of using tax inversions.

  • [51] A similar 2014 study by Forbes Magazine using the projected post-inversion tax rates from the inverting corporates also confirmed the same movement in tax rates.

  • The US definition requires that the original shareholders remain a majority control of the post-inverted company.

  • AbbVie announced an agreement to acquire Allergan plc for $US63 billion; however the acquisition would not be structured as a tax inversion, and that the group would be domiciled
    in the U.S. for tax purposes.

  • [21][63] Sometimes, the 2015 US$70 billion merger of Allergan plc and Activis plc, both previous US tax inversions to Ireland, are listed as a tax inversion (and the largest
    executed inversion in history).

  • Without these tools, a tax inversion might not deliver the expected tax savings, as the profits might arrive at the new destination having incurred full taxes in the jurisdictions
    in which they were sourced.

  • These inversions involved mergers with real companies that met the “substantial business activities” test of IRS Section 7874.

  • [21] Similarly, over 80% of Allergan’s revenues comes from the US healthcare system post its Irish inversion.

  • [80] Industries In 2017, the Congressional Budgetary Office reported that of the 60 US tax inversions from 1983 to 2015 which the CBO officially recognize, over 40% came from
    three industries: Pharmaceutical preparations (9), Fire, marine, and casualty insurance (7), and Oil & Gas Well Drilling and Servicing (7).

  • The largest completed corporate tax inversion in history was the US$48 billion merger of Medtronic with Covidien plc in Ireland in 2015 (the vast majority of their merged
    revenues are still from the US).

  • [48][43] All other jurisdictions used a “territorial tax system” where very low rates of taxation are applied to foreign-sourced profits (e.g.

  • Tax academics have shown that the dominance of US corporations in using tax havens was driven by strategies to shield non-US income from US taxation.

  • The US Tax Cuts and Jobs Act reforms US tax code and introduces a lower 21% headline tax rate and moves to a hybrid–”territorial tax system”.

  • [3] These US companies that inverted in these two industries shared the common attributes of having mostly international client bases, and of having assets that were easily
    “portable” outside of the US.

 

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Determined to save even more, Pentair relocated again on June 3 from its Swiss headquarters to Ireland, which has a tax rate of roughly 12.5 percent.
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Drawbaugh (18 August 2014). “REUTERS INSIGHT: When companies flee US tax system, investors often don’t reap big returns”. Reuters. Archived from the original on 15 April 2019. Retrieved 15 April 2019.
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“What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature”. University of Chicago. p. 1. Archived from the original on 2018-07-20. Retrieved 2019-04-22. It focuses particularly on the dominant approach within the
economics literature on income shifting, which dates back to Hines and Rice (1994) and which we refer to as the “Hines-Rice” approach.
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Retrieved 15 October 2019. Apple has changed its own corporate structure, restructured a new Irish Beps tool called Capital Allowances for Intangible Assets (CAIA), also nicknamed the “Green Jersey”. The bookkeeping change was so significant that
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30 January 2020. Apple restructured its tax operations in 2015 using the State’s capital allowance for intangible assets (CAIA), helping trigger the so-called Leprechaun Economics effect that year when the Irish economy suddenly surged by 26pc
o ^
Jump up to:a b Erik Sherman (8 January 2020). “New Laws Meant to Close Down Tax Havens and Shut Loopholes Could Have the Opposite Effect”. Fortune. Retrieved 7 February 2020. By April 2018, economists estimated Apple had onshored [to Ireland] $300
billlion of intellectual property from Jersey in Q1 2015, appartently the largest recorded BEPS action in history. This was equivalent to over 20% of Irish GDP”
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of Payments”. Council on Foreign Relations. Archived from the original on 28 April 2018. Retrieved 15 April 2019.
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doi:10.17310/ntj.2016.4.09. S2CID 232212474.
o ^ Maples & Gravelle, pp. 13–21
o ^ Lynnley Browning; David Kocieniewski (1 September 2016). “Pinning Down Apple’s Alleged 0.005% Tax Rate In Ireland Is Nearly Impossible”. Bloomberg News. Archived
from the original on 1 September 2016. Retrieved 15 April 2015.
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Retrieved 16 April 2019.
o ^ Eoin Burke-Kennedy (12 September 2017). “Seamus Coffey: Strong Irish corporate tax receipts ‘sustainable’ until 2020”. Irish Times. Archived from the original on 17 April 2019. Retrieved 16 April 2019.
o ^ Seamus
Coffey, Irish Fiscal Advisory Council (18 July 2018). “When can we expect the next wave of IP onshoring?”. Economics Incentives, University College Cork. Archived from the original on 4 August 2018. Retrieved 16 April 2019. IP onshoring is something
we should be expecting to see much more of as we move towards the end of the decade. Buckle up!
o ^ Brad Setser, Council on Foreign Relations (6 February 2019). “The Global Con Hidden in Trump’s Tax Reform Law, Revealed”. New York Times. Archived
from the original on 24 February 2019. Retrieved 24 February 2019.
o ^ Jump up to:a b Hall 2017, pp. 8–9, Clustering of Inversions by Industry
o ^ Liz Hoffman (7 July 2015). “The Tax Inversion Wave Keeps Rolling”. The Wall Street Journal. Archived
from the original on 17 April 2019. Retrieved 16 April 2019. Horizon and other inverted companies are using their new, lower tax rates to turbocharge corporate takeovers. Applying those rates, often in the midteens, to profits of companies in the
US, with a federal corporate rate of 35%, can yield extra savings on top of those traditionally wrung from mergers. Moreover, unlike the US, Ireland and most other countries, only tax profits earned in-country, giving companies the freedom and incentive
to shift income to still-lower-tax jurisdictions.
o ^ Max Nisen (6 August 2016). “Big Pharma Murdered Tax Inversions”. Bloomberg News. Archived from the original on 17 April 2018. Retrieved 15 April 2019.
o ^ Jump up to:a b c Hall 2017, pp. 2–3
o ^
Jump up to:a b “Inverse logic”. The Economist. Washington, D.C. 20 September 2014. Archived from the original on 4 December 2016. Retrieved 14 April 2019. Often, the group can shift debt to the American unit, or have it borrow from the foreign parent.
It can then pay interest to the parent while deducting the sums involved from its American taxes. Several studies have found such “earnings stripping” common when companies invert.
o ^ Jump up to:a b Jim A. Seida; William F. Wempe (December 2004).
“Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion” (PDF). National Tax Journal. LVII (4). Archived (PDF) from the original on 15 August 2018. Retrieved 15 April 2019. [..] we infer that inversion–related ETR reductions
are due to U.S. earnings stripping.
o ^ Clausing 2014, pp. 6–7
o ^ Kyle Pomerleau (14 August 2014). “How Much Will Corporate Tax Inversions Cost the U.S. Treasury?”. Tax Foundation. Archived from the original on 13 March 2017. Retrieved 21 April
2014.
o ^ Jump up to:a b Howard Gleckman (26 January 2016). “How Much Revenue The U.S. Is Losing Through Tax Inversions, And How Much Worse It May Get”. Forbes Magazine. Archived from the original on 21 October 2016. Retrieved 21 April 2019.
o ^
Marples & Gravelle 2019, pp. 7–8
o ^ William McBride (14 October 2014). “Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions”. Tax Foundation. Archived from the original on 17 April 2019. Retrieved 16 April 2018.
o ^ Editorial (14
November 2012). “The United Kingdom’s Move to Territorial Taxation”. Tax Foundation. Archived from the original on 14 April 2019. Retrieved 15 April 2019. From 2007 to 2010, a total of 22 companies inverted out of the UK. See Martin A. Sullivan,
Eaton Migrates to Ireland: Will the U.S. Now Go Territorial?, 135 Tax Notes 1303 (June 11, 2012).
o ^ McBride 2014, p. 3
o ^ Zachary Mider (2 March 2017). “Tax Inversions”. Bloomberg News. Retrieved 7 April 2020.
o ^ Jump up to:a b c d e Marples
& Gravelle, pp. 7–16
o ^ Jump up to:a b c d e f Marples & Gravelle, pp. 16–23
o ^ “How to stop the inversion perversion”. The Economist. 26 July 2014. Archived from the original on 20 April 2018. Retrieved 15 April 2019.
o ^ Kyle Pomerleau (3
May 2018). “A Hybrid Approach: The Treatment of Foreign Profits under the Tax Cuts and Jobs Act”. Tax Foundation. Archived from the original on 1 April 2019. Retrieved 15 April 2019. While lawmakers generally refer to the new system as a “territorial”
tax system, it is more appropriately described as a hybrid system.
o ^ Amanda Athanasiou (19 March 2018). “U.S. Tax Cuts and Jobs Act: Corporate tax reform – Winners and Losers”. Taxnotes International. p. 1235. Archived from the original on 15
April 2019. Retrieved 17 May 2018.
o ^ Athanasiou, Amanda (19 March 2018). “U.S. Tax Cuts and Jobs Act: Corporate tax reform – Winners and Losers”. Taxnotes International. pp. 1235–1237. Archived from the original on 15 April 2019. Retrieved 17
May 2018. The new tax code addresses the historical competitive disadvantage of U.S.–based multinationals in terms of tax rates and international access to capital, and helps level the playing field for U.S. companies, Pfizer CEO Ian Read.
o ^ Marples
& Gravelle 2019, pp. 16–23
o ^ Zachary Mider (8 July 2014). “Ingersoll Finds Escaping U.S. Tax No Penalty as Contracts Flow” (PDF). Bloomberg. Archived (PDF) from the original on 22 April 2019. Retrieved 22 April 2019.
o ^ Levine, Matt (25 August
2014). “Burger King May Move to Canada for the Donuts”. Bloomberg News. Archived from the original on 17 April 2016. Retrieved 15 April 2019.
o ^ Kevin Drawbaugh; Olivia Oran (6 August 2014). “Walgreen retreats from plan to move tax domicile abroad”.
Reuters. Archived from the original on 22 April 2019. Retrieved 22 April 2019.
o ^ Alexandra Frean (30 December 2014). “Walgreens completes $16 billion takeover of Alliance Boots”. The Times. Archived from the original on 22 April 2019. Retrieved
22 April 2019.
o ^ Ben Hirschler; Bill Berkrot (26 May 2014). “Pfizer walks away from $118 billion AstraZeneca takeover fight”. Reuters. Archived from the original on 22 April 2019. Retrieved 22 April 2019.
o ^ Katie Allen (15 April 2008). “Drugs
company moves to cut tax bill”. The Guardian. Archived from the original on 5 April 2018. Retrieved 15 April 2019.
• Marples, Donald J.; Gravelle, Jane G. (2019). Corporate Expatriation, Inversions, and Mergers: Tax Issues (PDF) (Report). Congressional
Research Service.
• Marples, Donald J.; Gravelle, Jane G. (2018). Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97) (PDF) (Report). Congressional Research Service.
• Mider, Zachary (2017). Tracking the Tax Runaways (Report).
Bloomberg News.
• Hall, Keith (2017). An Analysis of Corporate Tax Inversions (PDF) (Report). Congressional Budget Office.
• Neely, Michelle C.; Sherrer, Larry D. (2017). “A look at Corporate Tax Inversions: Inside and Out” (PDF). The Regional
Economist. Federal Reserve Bank of St. Louis.
• Lunder, Erika K. (2016). Corporate Inversions: Frequently Asked Legal Questions (PDF) (Report). Congressional Research Service.
• Talley, Eric (2015). “Corporate Inversions and the Unbundling of
Regulatory Competition” (PDF). Virginia Law Review. 101: 1650–1721.
• Marples, Donald J.; Gravelle, Jane G. (2014). Corporate Expatriation, Inversions, and Mergers: Tax Issues (PDF) (Report). Congressional Research Service.
• McBride, Will (2014).
Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions (PDF) (Report). Tax Foundation.
• Clausing, Kimberly (2014). Corporate Inversions (PDF) (Report). Urban Institute and Brookings Institution.
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