Inversion

• DOI: http://doi.org/10.1002/jcaf.22067
• Date: 01 July 2015
• Published date: 01 July 2015
• Author: Louis P. Le Guyader

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22067

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Inversion

Louis P. Le Guyader

The season for

corporate inver-

sions is open, at

least for now.

In a corporate

inversion, a corpora-

tion “located in” one

jurisdiction moves

its legal center, head

office, or “tax domi-

cile” to another juris-

diction, principally

for the purpose of

avoiding corporate

taxes in the former

jurisdiction. Achiev-

ing tax savings often

motivates inversions,

say corporate manag-

ers, and tax regulators

seem to acquiesce that these

strategies constitute “legal tax

avoidance.” Put simply, an

American corporation dons

another “nationality” where the

corporate tax rates on the con-

solidated group are lower than

in the United States. The tax

savings can be invested by the

corporation’s managers, or even-

tually paid out to stakeholders,

even in the form of dividends or

stock buybacks to equity hold-

ers. The inversion can remove the

artificial tax restrictions on the

movement of earnings between

the legal entities that constitute

the consolidated group.

The complex corporate

strategy is gaining increased

interest from American corpo-

rations seeking to escape the

United States’ corporate tax

rate. At 35%, it is reputedly one

of the highest in the world. As

business becomes international

and as commerce “globalizes,”

it should be no surprise that

the tax line item in earnings has

fallen victim to the astute cost-

cutting skills of the American

manager. This article provides

a layman’s review and some

suggestions as to how an inver-

sion might be organized. It also

points out some of the costs

that such a strategy

imposes on the newly

inverted corporation.

Interested readers

should consult their

tax and other experts

before attempting

their own inversion.

WHAT IS ACTUALLY

TAXED AND

HOW DO TAXES

IMPACT FINANCIAL

STATEMENTS?

Taxes are paid at

the legal entity level

within the “consoli-

dated group” referred

to in published

financial statements. The “con-

solidated group” is a defined

economic entity that represents

a business consisting of sev-

eral legal entities, subject to

the vagaries of the accounting

model being used.

Here are some general

rules for what is known as the

“global American approach”

to taxation that are relevant to

inversion plans. In the United

States under generally accepted

accounting principles (GAAP),

an American corporation

reports a tax expense on its

global pretax earnings. The

tax expense in earnings is split

American corporations are inverting, or moving

their tax domicile, to escape having their con-

solidated group earnings ensnared in the globally

oriented IRS tax system. Inversions require tricky

legal steps that may necessitate changing the

headquarters location, concentrating certain oper-

ations outside of the United States, and complying

with any number of foreign rules, including tax

rules. The decision to invert requires planning and

effort. Two things are evident: from the inversion

steps to the secondary effects, the devil is in the

details; and brilliant moves at inversion today may

appear shortsighted and expensive if the United

States changes the IRS tax regimes that provoke

so many American corporations to consider the

strategy. © 2015 Wiley Periodicals, Inc.