Sam Lichtman in the Economist: All My Bags Are Packed


When President Barack Obama said last September that he would get tough on companies that avoid tax through “inversions”—merging with or buying foreign firms so as to shift their domicile abroad—some wondered if this would end a wave of corporate emigration. Some high-profile deals were called off, but other companies have continued to tiptoe out of America to places where the taxman is kinder and has shorter arms...

Inversions can cause a domino effect within industries, as the first companies to emigrate to a low-tax country gain an advantage that prompts rivals to follow suit. The logical way to stem the tide would be to bring America’s tax laws in line with international norms. Britain, Germany and Japan all have lower corporate rates and are among the majority of countries that tax firms only on profits earned on their territory. But the likelihood of a substantial tax reform in America is low—vanishingly so before 2017.

So, rather than making it nicer for companies to stay, the US Treasury has been trying to make it harder for them to leave. There has long been a rule whereby any inversion resulting in the American firm’s shareholders owning 80% of the merged group would be taxed as if it were still American...

Despite such speed bumps, inversions still make enormous sense for companies with large overseas operations. If anything, the rule changes have led to more companies looking to get out before it is too late, says a New York lawyer. In the current mergers boom, companies that are combining for commercial reasons are also taking the opportunity to choose the cheapest tax jurisdiction for the merged group’s new base. The Coke bottlers’ deal is one example, as is Terex’s merger. “The Coke deal should bring its effective tax rate down significantly and should allow the company to move cash freely amongst subsidiaries, which it couldn’t when incorporated in the US,” says Sam Lichtman, a partner at Haynes and Boone, a law firm.

Excerpted from the Economist. To read the full article, click here.

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