Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- The Tax Policy Blog
- The United Kingdom’s Experience with Inversions
The United Kingdom’s Experience with Inversions
Today, the Obama Administration announced a new set of anti-inversion rules. An Inversion is a transaction in which a U.S. firm merges with a foreign firm as a means to moves its legal headquarters overseas. Usually, a company inverts in order to reduce their tax burden. The rules would both make it hard to invert and would make it less attractive to do so.
Treasury’s new rules follow a string of announced inversions by U.S. multinationals. For the past few years, several companies have moved their headquarters overseas. For example, Burger King moved its headquarters to Canada in 2014. The concern is that the string of inversions out of the U.S. could erode the corporate income tax base.
These rules will certainly make it more difficult for companies to invert. In fact, after the announcement of the new Treasury rule, Allergan’s shares, the company that Pfizer planned to acquire in an inversion transaction, dropped 22 percent. While the rules may be somewhat effective in reducing the incentive to invert, Treasury’s approach is not ideal. Treasury seems to be reacting to specific situations as they arise with targeted rules. A better approach would be to address the fundamental problems with the system by enacting broader reforms.
There is actually good international experience that the United States could learn from.
Back in 2008, the United Kingdom found itself in a similar situation. Companies were inverting from the UK to lower tax jurisdictions such as Luxembourg and Ireland. The New York Times wrote about the “exodus of British companies fleeing the tax system.”
At that time, the United Kingdom had a 28 percent corporate income tax rate and a worldwide tax system that was very similar to our own. This system allowed British multinational corporations to earn profits overseas without paying an additional tax to the United Kingdom. However, when those profits were repatriated to the UK, companies were required to pay an additional tax to the British treasury.
Companies were inverting in order to avoid the additional tax that the UK placed on their overseas earnings.
The solution that they came up with was to move to a territorial tax system. The system now exempts the foreign profits earned by UK multinationals from British taxation. As such, British companies no longer had the incentive to invert at all because their foreign profits were treated the same whether they were domiciled in the UK or in the Netherlands.
While there is still substantial disagreement among lawmakers over what a territorial tax system should look like here in the U.S., many lawmakers in the United States have realized that this is where the U.S. should be headed.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.