With the recent decision by Walgreens to keep its corporate domicile in the U.S. and not move it to Switzerland as part of its merger with Alliance Boots, is it possible that we have reached peak “inversion?” From the pages of the Wall Street Journal to the floor of Congress to Main Street, talk of corporate inversion, and it’s tax, business, and political implications, is no longer the province of tax lawyers and CFO’s but has become a well-known and controversial strategy. In fact, when Walgreens announced its decision not to utilize inversion, it admitted that it was greatly concerned about “the ongoing public reaction to a potential inversion” and the significant risk of “consumer backlash and political ramifications, including the risk to our government book of business.”
In an inversion, a U.S. business merges with or is acquired by a foreign company in a country with a lower tax rate, allowing the company to lower its tax bill. Future taxation is then limited to U.S. earnings only. Frequently, the companies maintain their U.S. headquarters and operations, and the U.S. entity often maintains control of the company. While most inversion transactions are taxable to U.S. shareholders, and post-inversion restructuring also results in significant additional tax costs, the overall tax savings are still largely worth the cost for most companies considering inversion.
Walgreens’ move notwithstanding, inversion remains a widely utilized strategy for minimizing U.S. corporate tax liabilities – at least for the moment. Congressional Democrats have introduced legislation to put the brakes on inversions, and given Congressional gridlock, some are pressing President Obama to take executive action on the subject. The president has spoken out loudly and harshly against inversion, recently saying that U.S. companies that use the tactic are “basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share.”
There are a number of different directions potential legislation or executive action could go. Many assert that reducing the 35% corporate tax rate – the highest in the industrialized world – would quell the desire of companies to leave the U.S., as would reducing or eliminating taxes on income that is earned overseas but brought back to the U.S. However, as noted, Congress is unlikely to agree on such sweeping changes to the tax code, so the focus has been on more targeted measures that would penalize inversion transactions or at least make them more costly.
With Congress in recess, more likely and more imminent inversion measures would be in the form of executive action. On August 5th, the Treasury Department released a statement that it was “reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, as well as approaches that could meaningfully reduce the tax benefits after inversions take place.”
It remains to be seen what is next for inversions, but what was once a sleepy backwater of the tax code has now become a political flashpoint and as such those considering inversion transactions need to be mindful and vigilant about legislative and administrative changes that could quickly, and perhaps retroactively, change the calculus involved in these deals.
If you have questions or concerns about inversions, contact the Dallas business and tax lawyers at the Finley Law Group (972) 581-2880.
This website has been prepared by The Finley Law Group for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.