International Law

Tax Inversions and the Middle Market

 By now, most of us have heard that Burger King has bought Tim Hortons. However, most of us do not know the reason. Corporate synergies, perhaps?  Well, what if I told you that Burger King has the opportunity to substantially decrease its tax liability if it was able to change its corporate headquarters?  That is exactly why Burger King purchased the Canadian café chain. This practice has increased in popularity over the past few years with a large number of corporations employing a tax avoidance technique called an “inversion.”  By changing its domicile, a corporation with foreign operations can shield its foreign-earned income from tax liability.

            The end effect becomes a lower income tax rate for the corporation because the foreign earned income is no long subject to U.S. tax. Since the U.S. has one of the highest corporate income tax rates among the developed world,[1] multi-national corporations have an incentive to lower the tax bill. The inversion can take place through a merger, acquisition, or some other transaction. In its most simple terms an inversion usually involves a U.S. company transferring assets or equity to a foreign corporation so that the corporate domicile can be changed. The tax rules that apply to corporate inversions are extremely complex and may result in adverse tax consequences if not followed properly.

            Inversions make sense for large multinational corporations, such as Burger King. However, since the inversion laws apply to all businesses, including partnerships, taxpayers in the middle market and private equity sectors may be affected by these rules. Thus, it is possible for privately owned companies to take advantage of this tactic.

            Recently, the debate over this highly controversial corporate structuring practice has escalated. The debate has centered on Congress curbing this practice to keep U.S. corporations with large overseas operations on U.S. soil. Congress is also worried about the lost revenue resulting from inversion. Additionally, some large, multinational corporations have been accused of being unpatriotic for re-domiciling in a foreign nation. However, it appears that the benefits of a tax inversion outweigh the negative public relations and media coverage.   

            Senator Carl Levin has proposed that anti-inversion measures be taken to expand the scope of companies subject to the complexities of inversion law. In late September, the Corporate Inversion Act of 2014 was introduced. Under current tax laws, shareholders are required to own at least 20% of their stock to move overseas. However, the new bill would raise this to 50%.

            On October 15, 2014, the Treasury and the IRS published Notice 201-52, which expressed the intent to issue new regulations targeted at curtailing the tax benefits of corporate inversions. Given Senator Levin’s proposal and the potential new regulations, the future of tax inversions remain uncertain, especially for middle market companies.    

[1] Currently, the income tax rate for corporations is approximately 40%. The average rate among developed countries is 24%.

Jon H. Ruiss, Jr. is an associate at Ruskin Moscou Faltischek, P.C., where he is a member of the firm’s Financial Services, Banking and Bankruptcy Department, and the International Practice Group.

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