International Expansion Blog

Thinking About a Corporate Inversion? Time Could Be Running Out

By Khalid Sadur, Corporate Tax, Advisory Services

Corporate inversion, the practice of reincorporating an American business in a different country, has been around for more than 30 years. But it’s only been in the last couple that it’s again become a hot topic in international business and drawn renewed government scrutiny. If you’re considering an inversion as part of an international merger or acquisition, keep in mind that the clock is ticking, and it’s likely only a matter of time before regulators get rid of the practice — or at least make it much harder to pull off.

The first notable case of corporate inversion dates back to 1982, when the engineering firm McDermott reincorporated in Panama. The practice gained popularity in the late 1990s, with American companies likes Tyco and Fruit of the Loom renouncing their American “citizenship” and registering in Caribbean tax havens.

The practice sparked criticism in the U.S. because it allowed businesses to pay tens or hundreds of millions of dollars less in federal taxes annually. In response, American regulators have made it progressively more difficult for corporations to shed their American registrations and reincorporate in lower-tax jurisdictions. Now, corporations that re-register have to meet certain requirements for the level of foreign ownership and the level of activity they conduct in the jurisdiction in which they’re registering. As a result, corporations can now pretty much only pull off an inversion when they merge with or acquire overseas entities. 

For a while, corporate inversions became much less common. But as post-recession M&A activity has picked up, so have inversions. This time around, American firms have been more likely to reincorporate in lower-tax jurisdictions in Europe: Ireland and the Netherlands have been especially popular.

Most recently, American drug maker Pfizer offered to buy British pharmaceutical company AstraZeneca for more than a $100 billion, a move that would allow the company to re-register in the UK and save $1 billion or more annually in tax.

The massive proposed merger is bringing inversion more attention from both executives and lawmakers. Already, the budget submitted in March by the Obama administration included a provision that would have ended the practice. After news of Pfizer’s plans broke, Michigan Sen. Carl Levin vowed to introduce legislation of his own to end inversion.

Because the wheels of Congress turn slowly these days, it’s likely that businesses moving forward with plans to reincorporate abroad will be able to pull it off by the time the rules change. Anyone considering an inversion, though, should keep in mind that the federal government has taken notice, and the window will eventually close.

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