24 May 2014

A transaction used by a company whereby it becomes a subsidiary of a new parent company in another country for the purpose of falling under beneficial tax laws. Typically they are used by US companies to move to lower tax domiciles, in Europe in particular.

Tax inversions can take different forms. For example, take the case of a cosmetics company called Helen of Troy in 1993. Incorporated in the US, it created a shell company in the tax haven of Bermuda, and made it the parent company of the US business.

However, following the deal, the US Internal Revenue Service (IRS) clamped down on such transactions where they could be shown to have been carried out purely to avoid US taxes. It issued the first rules against inversion in 1996.

In 1960, the US was home to 17 of the world’s 20 largest companies. Fifty years later, only six were headquartered there.

Such inversions have come at a time when politicians in Washington have been increasing their calls for corporate tax reform.

Tax rules in the US have been tightened. Until 2003, a US company could simply create a new foreign headquarters to which the US group became a subsidiary. A rush of such deals in the early 2000s drew the attention of Congress.

tax inversion in the news

US advertising company Omnicom has said its $35bn merger with Publicis will result in the combined group’s headquarters being located in the Netherlands, saving about $80m in US tax a year.

Meanwhile, Liberty Global’s $23bn acquisition of Virgin Media will allow the US cable group to relocate to the UK, and pay its lower 21 per cent tax rate of corporation tax.

Many US acquirers of European companies have not disclosed their exact tax savings.

In April 2014 the revelation that US pharmaceutical company, Pfizer, wanted to take over the UK’s AstraZeneca in at £60bn deal that would move its tax domicile to the UK was seen as the latest example of a planned tax inversion.

tax inversion graphic

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