The rules of inversion

Tax to many is a dirty word, for business owners and shareholders it’s no different, this would explain the apparent rise in tax inversions in the US. Tax inversion is the process whereby a US domiciled company merges with company in a more ‘tax friendly’ country and thus avoids paying the 35% American corporate tax rate. The latest US company to do so is fast food giant Burger King who has moved its Headquarters to Canada after acquiring the coffee chain Tim Horton’s. It is important to mention that there are laws involved, a successful US company can’t just merge with anyone anywhere to avoid the full force of the American tax man, there are rules. The merger must be a sound business decision and the shareholders of the non-US company must be left with at least 20% of the newly merged company. This is on paper a sound move for Burger King whose new tax domicile Canada demands 15% corporate tax, an undeniable saving. The benefit for any company choosing to relocate, is that they can build up foreign profits free of the US tax charge and enjoy future profits taxed in the same way. President Obama however, identifies this company benefit as the country’s loss, and although the process is thus far legal, he describes it as ‘wrong.’ Obama is currently enjoying a small victory, as US company Wallgreens pharmacy purchase of 55% of Alliance Boots will not affect the location of the company’s headquarters. Wallgreens have decided to remain in the US and not relocate to either Switzerland or the US and pursue the benefits of tax inversion. This could well be seen as a blow to Wallgreens shareholders as a move would see them save an estimated $4bn. It has been reported that Wallgreens decision to keep its headquarters in the US was a long term strategy, as they may have faced dual taxation and higher rates in both countries in the future. They also wanted to avoid controversy with the IRS which may have caused issues and complications with future tax planning, furthermore was the animal that is public opinion. Now despite there being an argument that this victory does not belong to government, as Wallgreens don’t actually meet the conditions required to make relocation legal, it is hard to deny that government opinion has not influenced public opinion. We saw it in the UK with the Starbucks saga, where the coffee conglomerate made a rather large ‘voluntarily’ repayment. The US government are putting measures in place to make inversion difficult, but to stop it all together is a mighty task, so with laws and loopholes it looks like the tax battle will roll on.

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