Monday, November 23, 2015 3:10:50 AM
Corporate inversion is one of the many strategies companies employ to reduce their tax burden. One way that a company can re-incorporate abroad is by having a foreign company buy its current operations. Assets are then owned by the foreign company, and the old incorporation is dissolved.
For example, take a manufacturing company that incorporated itself in the United States in the 1950s. For years the majority of its revenue came from U.S. sales, but recently the percentage of sales coming from abroad has grown. Income from abroad is taxed in the United States, and U.S. tax credits do not cover all taxes that the company has to pay abroad. As the percentage of sales coming from foreign operations grows relative to domestic operations, the company will find itself paying more U.S. taxes because of where it incorporated. If it incorporates abroad, it can bypass having to pay higher U.S. taxes on income that is not generated in the United States. This is a corporate inversion.
The first inversion in the U.S. took place in 1982, but the practice became common only in the late 1990s, with US corporations seeking to relocate to tax havens such as Bermuda; More recently, because of changes in US law, a second wave of corporate inversions took place by way of merger with companies in lower-tax foreign countries such as Ireland. The issue drew public attention in 2014 when Pfizer proposed to invert to the U.K. through a takeover of AstraZeneca.
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