The subject of U.S. corporate inversions continues to be a source of concern (or panic – depending on which side of the fence you are on) and has even had the President using words like ‘unpatriotic’ and ‘tax loophole.’
Congressmen are rallying for new laws to stop or penalize corporations moving their legal headquarters overseas and companies are backing out of what would otherwise be advantageous mergers.
A corporate inversion is the relocation of a corporation’s legal headquarters to a country with lower corporate tax rates.
July 2014 was a big month for corporate inversion, particularly the backlash surrounding Walgreens’ potential merger with Alliance Boots, the largest drugstore chain in Europe. You can read our previous blog on Corporate Inversions here. Walgreens eventually backed down from the merger and lists public opinion as a major factor in the decision not to invert. However, pressure from the government and the threat of being banned from government contracts, a law being proposed to curb corporate inversion, may have been an influencer as well.
Companies invert for many reasons but the heart of the matter is, companies invert to minimize cost and maximize profit for shareholders – also the job description of any good CEO and CFO.
The most recent company to stir up the corporate inversion pot is one of the largest fast food companies in the world, Burger King. Burger King Worldwide and Tim Horton, Canada’s coffee and donuts king, and largest fast food service in Canada, merged on August 26, 2014. The newly formed company now has 18,000 restaurants in over 100 countries and is headquartered in Ontario, Canada. They also cut their tax bill from the U.S.’ 35% corporate tax rate to Canada’s 26% corporate tax rate.
Analysts speculate that the punitive measures proposed by the government is just that – punitive and ultimately ineffective. Companies are simply reacting to a fundamental problem in our tax system. Experts believe that a tax reform where multinational companies headquartered in the U.S. are not at a tax disadvantage will be the solution to the problem of inversion.
Klueger & Stein, LLP continues to monitor and advise our clients on any changes regarding U.S. Corporate tax.