Corporate Expatriation, Inversions, and Mergers: Tax Issues
This report discusses relevant portions of the U.S. corporate income tax system and how inversions have commonly been structured. It also looks at how Congress and Department of the Treasury have reduced the benefits of inversions, including The American Jobs Creation Act, as well as post-2004 inversions and treasury regulations, and policy options.
CORPORATE TAX AVOIDANCE AND PROFITABILITY FOLLOWED BY MERGERS AND ACQUISITIONS
This study aims to examine whether the level of corporate tax avoidance increases following mergers and acquisitions (M&A) for firms on the buy side in European deals. Firms are increasingly inclined to search for more favourable tax treatments and are relocating operations and headquarters in order to achieve tax savings. One example is the success of Ireland in attracting businesses, with its 12.5% statutory corporate income tax rate, leading to a flow of “inversions”, whereby firms with their headquarters in foreign countries move overseas to lower-tax jurisdictions. Several jurisdictions have responded by steadily decreasing statutory tax rates over the past two decades. However, the proliferation of tax avoidance strategies, especially from multinational firms, mainly arises from the tax rate-gap between countries (Schwarz, 2009; Huizinga and Laeven, 2008; Clausing, 2009). Nevertheless, tax avoidance strategies in M&As are not limited to tax inversion deals. While countries are lowering corporate tax rates in advanced, emerging, and lowincome markets, parent firms from high tax jurisdictions engage in more tax avoidance strategies through income shifting with their affiliates to reduce the tax burden (Klassen and Laplante, 2012; Clausing, 2003). A recent and much-criticised case was the announced $160 billion deal between Pfizer and Allergan in 2015-2016. The question that arises is, what was the rationale for the deal? Logic surmises that the deal was motived by operational synergies. However, in order to reduce its actual corporate tax burden with the deal, Pfizer planned to strategically move its headquarters from the US to Ireland through a “tax inversion” deal. According to Fortune (2015), the M&A would reduce Pfizer’s current ETR
Tax Credits, Source Rules, Trade and Electronic Commerce: Behavioral Margins and the Design of International Tax Systems
The paper provides a framework for designing international tax rules by outlining the various behavioral margins they apply to. It then goes on to analyze three specific policy issues in terms of preserving the neutrality of choices along the relevant margins: (1) Which foreign taxes should be credited against home country tax liabilities? (2) Should the income from intangible assets like patents be taxed by the host country or the country in which it was developed? (3) Should the local sales by a foreign company determine the income tax imposed by the consuming country? Should the rules be changed because of electronic commerce? The analysis shows that the current foreign tax credit rules lack any coherent basis, either in terms of efficiency or fairness. For example, a tax on gross assets should be creditable, as well as a tax on gross income that does not allow deductions for interest. The income from intangible assets like patents should be sourced in the country in which the intangible asset was developed and be subject to its tax rate. That preserves the undistorted choice among alternative locations for exploiting an intangible. The analysis of the relationship between income taxes and trade taxes shows that in extreme cases a tax on imports may be justified to offset the distorting effect of income taxes. But electronic commerce is unlikely to create such a case. It is like any other technical change that lowers transactions costs.