Home-country Effects of Corporate Inversions

• Publication year: 2021

HOME-COUNTRY EFFECTS OF CORPORATE INVERSIONS

Omri Marian(fn*)

Abstract: This Article develops a framework for the study of the unique effects of corporate inversions (meaning, a change in corporate residence for tax purposes) in the jurisdictions from which corporations invert ("home jurisdictions"). Currently, empirical literature on corporate inversions overstates its policy implications. It is frequently argued that in response to an uncompetitive tax environment, corporations may relocate their headquarters for tax purposes, which, in turn, may result in the loss of positive economic attributes in the home jurisdiction (such as capital expenditures, research and development activity, and high-quality jobs). The association of tax-residence relocation with the dislocation of meaningful economic attributes, however, is not empirically supported and is theoretically tenuous. The Article uses case studies to fill this gap. Based on observed factors, the Article develops grounded propositions that may describe the meaningful effects of inversions in home jurisdictions. The case studies suggest that whether tax-relocation is associated with the dislocation of meaningful economic attributes is a highly contextualized question. It seems, however, that inversions are more likely to be associated with dislocation of meaningful attributes when non-tax factors support the decision to invert. This suggests that policymakers should be able to draft tax-residence rules that exert non-tax costs on corporate locational decisions in order to prevent tax-motivated inversions.

INTRODUCTION .................................................................................... 2

I. BACKGROUND: CORPORATE INVERSIONS AND THE TAX RESIDENCE DEBATE ............................................................ 6

A. The Two Waves of Corporate Inversions ................................ 7

B. Current Policy Discussion on Corporate Inversions ................ 9

II. TAXATION AND THE LOCATION OF CORPORATE HEADQUARTERS ......................................................................... 13

A. Empirical Literature on Corporate Inversions and Its Claimed Policy Implications .................................................. 13

B. How Empirical Studies on Corporate Inversion Overstate Their Policy Implications ....................................................... 15

1. Identifying Meaningful Headquarters Relocations ....... 15

2. Revisiting the Policy Implications of Inversions Literature ...................................................................... 18

3. Inversions Literature Excludes Many Meaningful Relocations ................................................................... 21

4. Inversions and Frictions ............................................... 22

III. A CASE STUDY APPROACH TO HOME COUNTRY EFFECTS OF CORPORATE INVERSIONS ................................. 23

A. Method and Case Selection .................................................... 23

B. Results: Inversion Case Studies ............................................. 27

1. Shire Pharmaceuticals' 2008 move from UK to Ireland ........................................................................... 27

2. Wolseley PLC's 2010 move from the UK to Switzerland ................................................................... 34

3. Nobel Biocare's 2002 Move from Sweden to Switzerland ................................................................... 42

4. The News Corporation Limited's 2004 Move from Australia to the United States ....................................... 47

5. Tim Hortons Inc. 2009 Move from the U.S. to Canada .......................................................................... 54

IV. DISCUSSION: PATTERNS OF INVERSIONS AND HOME COUNTRY DISLOCATIONS ........................................................ 60

A. Summary of Findings ............................................................. 60

B. Grounded Constructs of Home Country Effects of Inversions ............................................................................... 61

1. Chronology of Inversions and Dislocations ................. 63

2. Spectrum and Types of Headquarters Dislocations ...... 64

3. Tax Residence and Meaningful Headquarters Dislocations .................................................................. 65

4. Conflicts of Interests, Reputation and Meaningful Dislocations .................................................................. 68

C. Some Policy Implications ....................................................... 70

CONCLUSION ...................................................................................... 72

INTRODUCTION

Much of the international tax reform discourse in the United States is grounded in two truths:(fn1) First, multinational corporations' (MNCs) locational decisions are sensitive to home-country tax burdens.(fn2) High taxes in an MNC's home jurisdiction may induce the MNC to relocate its tax-residence to a low-tax jurisdiction.(fn3) Second, having an MNC headquartered within a jurisdiction has positive effects on the local economy in the form of increased capital expenditures, research and development (RandD) activities, and high-quality jobs.(fn4)

The combination of these two truths has led to a policy argument that U.S. tax-law should not target corporate headquarters' locations. Taxing an MNC based on the location of its headquarters raises a concern that "management . . . would flee to other countries,"(fn5) resulting in the loss of both the corporate tax base as well as the positive externalities associated with having the headquarters located within the United States.(fn6) This Article suggests, however, that this policy argument is overstated for two reasons.

First, there is no reason to assume that the place of tax-residence is also the place of the economic attributes that policymakers care about. For example, under the Internal Revenue Code (IRC) corporate tax-residence is determined based on the place of incorporation (POI). There is little reason to expect that the place of incorporation and the place of a corporation's meaningful attributes converge around a single location. Unfortunately, much of the empirical research in this area implicitly assumes such convergence. It is well established, however, that the meaningful functions of the modern MNCs are decentralized.(fn7) Different substantive attributes of a corporation may be located in different jurisdictions, which are not necessarily the jurisdiction of the MNC's tax residence. Tax residence can be changed with no need to dislocate any meaningful structures in the jurisdiction from which an MNC inverts. Conversely, economic attributes of an MNC can be shifted across borders with no corresponding change to the tax-residence. A change of an MNC's tax-residence ("inversion") and a dislocation of economic attributes in the jurisdiction from which the MNC inverts are two distinct phenomena.

Second, even if corporate tax-residence is based on the location of meaningful economic attributes (for example, by determining tax-residence based on the place of management or assets), there is no reason to assume that MNCs will dislocate such attributes en masse in order to change their tax-residence. Literature in organizational studies suggests that meaningful corporate functions are likely to be located in jurisdictions that offer substantive non-tax advantages, such as developed financial markets, skilled labor force, infrastructure and other agglomeration benefits.(fn8) The dislocation of real attributes is costly and may result in the loss of agglomeration benefits. This Article suggests that when the dislocation of real economic attributes is necessary in order to "lose" tax-residence, tax savings may not justify the cost of such dislocation. Stated differently, current literature fails to balance the tax benefit expected from an inversion, with the non-tax cost associated with arbitraging one tax regime for another.(fn9)

A possible reason for the lack of coherence in policy implications of inversions literature is that it lacks testable theoretical constructs. Public finance economists have long studied the effects of taxation on locational decisions.(fn10) However, there is no theoretical framework that explains what substantive dislocations may specifically be associated with inversion transactions. This Article aims to fill such gaps through case study research. The aim is to develop theoretical propositions based on observed dislocations in inversion transactions. Several case studies of large-scale inversions are examined in order to articulate-in policy-relevant terms-the possible meaningful economic effects of an inversion in the jurisdiction from which a corporation inverts.

This Article finds that inversions driven exclusively by tax considerations are less likely to be associated with dislocation of real economic attributes, compared with inversions supported by non-tax reasons. These findings are consistent with literature in organizational studies.(fn11) This Article therefore suggests that policymakers should be able to prevent inversions that lack economic substance by imposing stricter locational rules on corporate taxation. This can be achieved, for example, by determining corporate tax-residence based on substantive factors (such as the place of...