The Pros And Cons Of Tax Inversion

Tax inversion is the business practice in which a company moves its main interests to a new parent company in another country. Often this is done by purchasing a competitor or smaller business in that country with which to merge and reincorporating. By relocating a corporate headquarters to a lower taxed country, the corporation is in effect, evading the United States tax laws. Fruit of the Loom did it in 1998; Chiquita Brands is in the process of doing it; both companies inverted to Ireland and recently Burger King Worldwide, Inc. has come under fire for reports that the corporation is moving its headquarters to Canada. This is not a new practice but it is a growing trend among companies that seek to pay less United States income taxes.

Ireland and Canada are 12.5 and 15 percent respectively. Ontario, Canada, to which Burger King is expected to move, also has a provincial tax rate of 11.5 percent but even combined, a 26 percent corporate tax rate will potentially save the company millions of dollars. This savings alone is very enticing to a company that pays millions and sometimes billions in U.S. corporate taxes each year. Although to some corporations, inversions seem to be a benefit, there are still negatives. Despite moving to countries with lower rates, inverting companies are required to pay not only to the country in which they have reincorporated, but also pay the U.S. tax rate on profits earned within the United States. They also have to have sold at least 20 percent of their shares to buyers in the new country almost instantly after the completion of the merger. Another negative is for shareholders who could and do incur more capital gains taxes based on their shares, due to the inversions. Currently, legislation is attempting to make changes that will potentially discourage companies from leaving the U.S. this legislation. Instead of 20 percent of shares, the new legislation would require 50 percent to be sold within the country of