Sometimes, American businesses buy other businesses overseas, moving their headquarters abroad as well. There may be several reasons for this, but in this article, we will focus on inversion deals as one of the most common.
To make it easier to understand this process, imagine that you live in one city and work in another. The authorities of both cities tax you. Surely you would like to move to a place where regular government payments are lower. So, let’s discuss what inversion deals are and how they work.
What are inversion deals?
An inversion deal is the restructuring of a corporation to reduce its tax burden. As a result of such restructuring, a company that was originally a parent becomes a subsidiary of an overseas company. Tax residency, in turn, moves to a foreign enterprise.
Critics regard this scheme as a legal loophole in the taxation system. They find it unfair to the United States since American companies receive income in this country. For example, a team of former President Obama staff members considered this action unpatriotic and unethical.
It is worth noting though, that the tax rate in the United States is significantly higher than in other developed countries. For comparison, take a look at the percentages below:
- the USA — 35%
- the United Kingdom — 21%
- Ireland — 12.5%
- Switzerland — 18%
Why do companies do corporate inversions?
We saw that one of the reasons for inversion deals is the high corporate tax in America. This system is also distinguished by the taxation of foreign subsidiaries. The result is a double tax payment to the US government. By acquiring or forming a parent company, an organization reduces its overall global income tax bill.
Here’s what the managing director of a large American investment company Stifel Financial Corp. Cole Bader had to say:
“The difference between US corporate and foreign tax rates has widened, and the US is the only country that taxes its corporations on their worldwide profits. As difficult as it is to invert, the benefits from a tax-saving standpoint are just too great for many corporations to ignore. This is particularly true for companies that have profits driven by intellectual property (IP) and have corporate structures set up in a way that, by having IP held and profits generated abroad, the cash resulting from those profits is unable to be repatriated. It’s very complex to set up these structures and an inversion simplifies the process.”
Questions to ask before a corporate inversion
Referring to Bader’s opinion, Harvard Business School professor Bill George considers one motivation to be appropriate for this transaction. In his opinion, the justified purpose of the conclusion is to strengthen the position of the organization. He even compiled a small questionnaire for those planning to start the inversion process.
1. Do your company’s principles remain the same after inversion?
“Your mission should provide purpose beyond financial returns that creates value for customers, employees, shareholders and other stakeholders. Most importantly, it should motivate employees to create innovations and deliver great service far more than financial incentives.”
2. Does inversion have a positive impact on the global strategy?
“If companies want to expand into higher growth markets, acquisitions can accelerate their growth.”
3. Do employees become more motivated?
“The key is to engage employees of the newly acquired company to commit to their new owner.”
4. Will the acquisition help you achieve sustainable profit growth?
“It should be accretive to earnings within two years, including realistic cost-saving synergies, without cutting back investments in future growth.”
5. Is it possible to finance an inversion without damaging the organization’s budget?
“Successful acquisitions must generate future cash flow to repay the investment. These days, borrowing money is cheap due to low interest rates, but companies shouldn’t get over-leveraged in case of economic downturns, as they did in 2008-09.”
Main features of corporate inversion
The traits below deepen the insight into the inversion business.
- Reduced taxes. The transformation of an American organization into a subsidiary means its transfers ownership to a foreign company. In this way, the corporation reduces its overall tax burden. At the same time, for the portion of income earned in the United States, the normal corporate tax rates still apply.
- Ambiguous outcome. Despite expectations of an increase in value, they do not always translate into reality. Reuters research confirms that inversion is not a guarantee of higher returns for investors.
- Not by tax alone. The company must organize its work in such a way as to fit in with foreign norms and laws. What’s more, it should have a valid reason for inversion besides reducing its corporate taxes.
It is believed that tax inversion is contrary to the way that mankind has been creating for centuries. However, Benjamin Franklin himself argued:
“In this world, nothing can be said to be certain, except death and taxes.”
Virtual data rooms to pay inversion rigors off
This platform is popular among those looking for a tool for transparent collaboration. For a modest fee, customers receive secure storage and other benefits for quality transactions. Namely, the following:
- Data encryption. The exchange of information is in a threat-free environment, regardless of location. A special algorithm for converting file contents is used so that they are unreadable for unauthorized users.
- Compliance with international standards. VDR providers are committed to operating under data protection laws.
- Options to ensure uninterrupted communication. During this transaction, parties must keep in touch. The program offers both messengers and a video-conferencing application. It is important to note that the contents of the correspondence are also well protected.
- Activity tracking. This allows the organization to track usage. Directors have access to information about the processes in real-time.