Reduced taxes ) While corporates who execute inversions downplay taxation in their rationale for the transaction, and instead emphasise strategic rationale, research is unanimous that tax was the driver for most US tax inversions from 1983 to 2016.
Types of tax saving US research on US tax inversions breaks down the tax savings into three areas: •
Tax on US income. Before the 2017 TCJA, the US corporate tax rate was one of the highest rates in the developed world at 35%. The US was one of only eight jurisdictions using a "worldwide tax system". All other jurisdictions used a "territorial tax system" where very low rates of taxation are applied to foreign-sourced profits (e.g. in Germany was at 5%). US tax academics noted this was the reason why non-US corporations made limited use of tax havens;
BEPS tools such as the "
Double Irish", Ensuring that such reserves would be protected from any initiatives by Congress to subject them to US taxes required an inversion to another jurisdiction. Medtronic's US$20 billion in untaxed offshore reserves was noted as a driver for their 2015 inversion. • After year one, the aggregate effective rate of worldwide taxation of the inverted company fell from a 29% rate to an 18% rate; and • By year three, the aggregate worldwide tax expense was 34% lower, while the US tax expense was 64% lower. A 2014 report by the
Financial Times on US pharmaceutical tax inversions during 2012–2014, showed their aggregate worldwide tax rates dropped from 26 to 28% to 16–21%.
Shareholder impact A number of studies have shown that the after-tax returns to original company shareholders post-inversion are more mixed, and often poor: • A 2014 report by
Reuters on 52 completed US tax inversions since 1983 showed that 19 outperformed the S&P500, another 19 underperformed the S&P500, another 10 were bought by rivals, another 3 went bankrupt and the final one returned to the US. Reuters concluded that: "But the analysis makes one thing clear: inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee of superior returns for investors". • A 2017 study published in the
Journal of Financial Economics, found that while inversions lowered the corporate tax and increased the economic value of the corporate, the after-tax benefits to shareholders were distributed disproportionately. CEOs and short-term shareholders, foreign shareholders, and tax-exempt shareholders benefitted disproportionately from inversions. However, long-term domestic shareholders did not benefit from inversions, since the US tax code requires taxable shareholders to recognize their capital gains at the time of the inversion. • A 2019 study published in the
International Review of Financial Analysis, found in the short-term, shares of inverting corporates increased in value. In the medium to longer-term, however, they found that the share price tended to decline. The driver was shown to be partly agency costs, and a distinction was drawn between the material gains of the CEO from the inversion and the losses of long-term shareholders. There were concerns on the acquisition premiums paid in inversion mergers, and that inversions tended to be favoured by corporates with poor growth outlooks. ==Types==