How Corporate Inversions Give Foreign Acquirors a Comparative Advantage

The current US corporate tax regime has created an unintended incentive for corporations founded in the US to redomicile overseas—a so-called corporate inversion.    To make matters worse from a US perspective, the current corporate inversion rules effectively give foreign acquirers a pricing advantage over US corporations who are potential acquirers.

As we have previously explained, a corporate inversion allows a US corporation to redomicile into a more favorable tax jurisdiction (e.g., a jurisdiction with lower tax rates and no worldwide taxation regime).  To be legally effective, the corporate inversion rules require that former shareholders of the US corporation own less than 80% of the resulting entity following the merger.

Consider an example where a US corporation (“Target”) is planning to be sold.  A US buyer acquiring Target will continue to pay the same high US taxes on Target’s worldwide income. However, a foreign bidder from a lower tax jurisdiction or one that does not tax worldwide income might pay substantially less tax on Target’s worldwide income post closing.  As a result, the foreign bidder might actually offer Target’s shareholders a premium for the per share purchase price and still expect higher after tax profits as a result of the acquisition when compared to the US bidder.

The US tax regime’s high corporate rates and worldwide taxation has created a perverse incentive for corporations founded in the US to redomicile overseas and an unintended advantage for foreign buyers to acquire US based corporations. Until the rules are changed, non-US based multinationals will continue to take advantage of this opportunity.

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Doug McCullough and Sydney Warren | McCullough Sudan PLLCсварочные полуавтоматы

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