The U.K.'s Inversion Experiences are a Good Lesson for the U.S.

August 06, 2014

If there is one thing that Americans are not good at it is learning lessons from the experiences of other countries. We tend to look upon issues and events as unique to the American experience and struggle to find our own solutions, often failing to realize that other countries have suffered similar problems and have already discovered viable remedies.

So it is with the latest “wave” of corporate inversions. To read this morning’s latest article on the trend in the Washington Post, “U.S. officials gird for rash of corporate expatriations,” you would think this is a uniquely American problem with its own set of political dynamics. Hardly.

The United Kingdom went through a similar experience less than a decade ago and, after some brief handwringing, acted decisively to reform their tax system in a manner that not only solved the problem, but has made the U.K. a destination for U.S. corporate inversions.

Here is how we summarized their experience in a 2011 study, “10 Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings”:

Britain’s worldwide tax system produced a different set of consequences than Japan’s. Because the European Union allows capital to move as freely between the member states as it moves among the 50 U.S. states, more than a dozen British multinational firms chose to move their headquarters to countries with more favorable tax climates to protect their foreign earnings from the U.K. tax code.

The common fact pattern for each of these companies was that they derived roughly 75 percent of their profits from outside the U.K., yet the British worldwide tax system subjected their foreign earnings to U.K. taxes. Even though the U.K. corporate tax rate was 28 percent at the time, it was still higher than the European Union average. Thus, the companies felt that the only way to protect the majority of their earnings from U.K. tax was to move to a low-tax country, such as Ireland, or a country with both lower taxes and a worldwide tax system such as the Netherlands or Switzerland.

Shocked by these trends, the British government began implementing changes to their international tax rules to make the system more friendly to global businesses. The recently released U.K. budget includes changes in the Controlled Foreign Company (CFC) rules for 2012 "towards a more territorial corporate tax system that reflects the global reality of modern business. The interim improvements are designed to make the current CFC rules easier to operate and, where possible, to increase competitiveness."[1]

On the day after the government released its budget, two of those expatriate firms announced that they would consider moving back to England.[2]

Ironically, the pharmaceutical firm Shire was one of those U.K. firms that fled to Ireland. [We blogged on the exodus of U.K. firms here and here.] Shire is now the merger partner of the Illinois-based company AbbVie, which announced its inversion plans this year. You have to wonder if the U.S. had cut its corporate tax rate and moved to a territorial tax system years ago whether companies like Shire would be looking to merge with U.S. firms and move their headquarters here.

At this point, we probably won’t know until after the 2016 presidential election.

 

 



[1] HM Revenue & Customs, "Overview of Tax Legislation and Rates," March 23, 2011, p. A71. http://www.hmrc.gov.uk/budget2011/index.htm

[2] Steve McGrath, "WPP, publisher may end tax exile," The Wall Street Journal, March 25-27, 2011.

 

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