The Corporate Inversion Ticking Clock
Klueger & Stein, LLP
04 September, 2014
Last week President Obama announced that Washington will be proposing new laws to discourage the growing practice of US companies re-domiciling to countries with lower corporate taxes. The President has called Corporate or Tax Inversion the practice of relocating a corporations headquarters to a lower tax domicile while keeping material operations in the country of origin an "unpatriotic tax loophole."
US corporations redomicile to other countries to minimize taxation by the US government on their companys foreign profits. The United States has a worldwide taxation system where all US persons and corporations pay taxes on income earned in and outside of the US. Read our previous blog on the topic, 'UK - the New Tax Haven?' One of the laws proposed to curb this practice is the "No Federal Contracts for Corporate Deserters Act." If passed, this law will prevent US corporations suspected of inversion from bidding for highly lucrative government contracts.
Another law that has been suggested is a 1969 legislation (26 US Code §385) which gives the government authority to determine whether an interest in a corporation is to be treated as stock or indebtedness. This law will effectively cut to the heart of corporate inversions, making it impossible for companies to use inter-company loans and interest deductions to cut their U.S. tax bills.
However, as Washington tries to decide which laws to pass, business attorneys are working to ensure their clients businesses are structured in the most tax advantageous manner. The most recent example of a corporate inversion is Walgreens, the largest drugstore in the US (with over 8500 stores in the nations).
Walgreens is currently in talks to acquire a controlling stake in one of Europes largest drugstore chain, Alliance Boots. This move will save the company US$4 billion in taxes over the next five years.
Whichever decision Walgreens and other businesses considering a corporate inversion make, it is a race against time, because the White House and Congress will start implementing anti-inversion legislation very soon.
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