Corporate Inversions: The Battle of Evermore?

JasonChen
JasonChen

发布于2020-07-06 17:01来源:原创 0 评论 2 点赞


Abstract: Corporate inversion as an effective tax-avoidance strategy has been adopted by many American companies for more than three decades. There are many factors contributing to this practice, among which are: (i)avoidance of the jurisdiction of the highest corporate income tax among the developed countries and an uncompetitive worldwide taxation system; (ii) earning stripping; (iii) hopscotch loans. Corporate inversions have been criticized by American politicians, tax experts or scholars and the public, because they believe that this practice will erode the tax base of the U.S. and put other American companies in a competitively disadvantageous position. However, corporate inversion is just a symptom of an American tax system with serious defects instead of the problem itself. With a business’s natural mandate of maximizing net incomes, corporate inversions can save significant costs and improve the market performance of the companies involved in the long term. Furthermore, this practice is related to the new development of corporate governance rules in the U.S, let alone the fact that the losses of corporate taxes in the U.S. can be made up by the shareholders’ capital gains and dividend taxes resulting from mergers in inversions. However, the U.S. government has nevertheless taken anti-inversion measures with the simple intention to make inversions more difficult instead of overhauling its tax code. This strategy only increases the transaction costs, since American companies still have strong incentives to save their costs and improve performance by all legal means available. Demonizing corporate inversions also has negative impacts on cross-border mergers having economic purposes beyond the saving of taxes. There have been many proposals to address the inversion issue, such as corporate income tax cuts and the total elimination of corporate income tax, adoption of a territorial taxation system, and an overhaul of the tax code, all with both advantages and disadvantages. Above all these three proposals are American-centric, without full cooperation with other members of the Organization for Economic Cooperation and Development (OECD), which have already taken active roles in the implementation of the Base Erosion and Profit Shifting (BEPS) Action Plan. The U.S. government’s reluctance to adopt such a plan will further weaken America’s competitiveness. The newly-elected Trump administration has proposed a tax cut and a reform of the repatriation system, which will improve American tax competitiveness. But the Trump administration’s advocacy of protectionism and isolationism will intensify the tax and international charter competition between countries. Therefore, corporate inversion will last for a long time, and the measures against it will prove futile.

 

 

 

 

 

 

 

 

Entities must not be multiplied beyond necessities---William of Ockham     

Every solution is an admission ticket to another problem--- Henry Kissinger

Reliable maxims do not abound in the tax field, but there are a few. One relates to Moses’ rod. It reminds us that every stick crafted to beat on the head of a taxpayer will metamorphose sooner or later into a large green snake and bite the commissioner on the hind part---Martin D. Ginsburg

                         Introduction

A corporate inversion (or “expatriation”) is a transaction in which a U.S. based multinational[1] carries out restructuring by way of mergers, so that the U.S. parent is replaced or succeeded by a foreign one, so as to avoid U.S. taxes. Current law is designed to subject those inversions that are judged to be based primarily on tax considerations to certain potentially adverse tax treatments. However, these transactions often take place one after another, indicating that to the corporations involved these adverse consequences are acceptable in light of the potential tax benefits.

The first inversion happened in 1982. McDermott Inc., an American engineering and construction company, moved its place of incorporation from the U.S. to Panama. During the following three decades, we have witnessed several waves of corporate inversions. No one can deny the fact that among many factors contributing to this practice, the main one is serious defects in the American tax system, which make it very uncompetitive when compared with other developed countries. This is because, firstly, the U.S. corporate income tax is the highest among OECD countries. Secondly, in contrast to most developed countries that have adopted a more competitive territorial tax system, the U.S. is one of the very few countries maintaining a worldwide tax system, which taxes the overseas profits of American companies at uncompetitive tax rates even after those profits have been taxed by the host nations where they were earned. Thirdly, the unique repatriation (or “deferral”) rules[2] allow U.S. multinational companies to postpone paying U.S. taxes indefinitely by reinvesting rather than repatriating those earnings.[3] Corporate inversions can facilitate their adoption of strategies such as “earning stripping” and “hopscotch loans”, then skillfully apply foreign incomes so as to cut tax payments further.

American politicians, tax experts or scholars, and the public criticize corporate inversions heavily, and blame this practice for eroding the tax bases, reducing government revenue and costing American jobs by moving enterprises to foreign countries. They even regard it as unpatriotic action, since it seems akin to the renouncement of citizenship. The U.S. government has taken many measures to constrain inversion in the past three decades. But as these measures have only been undertaken with the intent to make the implementation of corporate inversion more difficult instead of to overhaul the tax code, American companies still have strong incentives to move overseas, since other countries remain more competitive in this international tax and charter race.[4] Ingenious and creative advisors still can design schemes to circumvent the walls set up by the U.S. government, making these measures ineffective to a great extent and increasing the unnecessary transaction costs[5]of every stakeholder in effect.

In fact, corporate inversion is just a symptom of a defective tax system instead of a fundamental problem. It has been greatly demonized by critics who have either intentionally or unintentionally exaggerated its negative impacts, and neglected its positive aspects. Maximizing net income and making profits are natural missions of businesses, and their managements have the fiduciary duty to improve company performance. In addition to significant cost savings, statistics prove that corporate inversions can improve the stock performance of the companies in the long term, too. The improvement of competitiveness can ensure job increase in the U.S in return, as the companies concerned have more capabilities to invest there. Furthermore, this practice is related to new developments in corporate governance in the U.S. The ever- increasing compliance costs have driven American multinationals to relocate to other countries with strong corporate governance with lower compliance costs available. Finally, any losses of corporate taxes in the U.S. can be made up by the shareholders’ capital gains taxes resulting from company mergers in inversions. It can be argued that the trend to the globalization of markets and information makes the traditional theory of corporate jurisdiction obsolete, so that U.S. companies moving their place of incorporation to foreign countries can be seen as akin to moving them to company -friendly states, such as Delaware and Nevada. Punishing this rational choice in such as emergent situation will weaken the competitiveness of American companies by constraining their cross-border restructuring, hurting in particular, those mergers with economic purposes greater than the saving of taxes.

There have been various proposals to address the inversion issue, including (i) corporate income tax cut or total elimination of corporate income tax; (ii) adoption of a territorial taxation system; (iii) an overhaul of the tax code including a combination of the above measures, in addition to other measures such as the reform or abolition of repatriation practices. All suggestions have both pros and cons, which makes it impossible to supply a “magic bullet” in a short time. In particular, these proposals still originated from the philosophy that the rest of the world should regard the U.S. as the center and that other countries orbit around it, which is unfortunately consistent with the U.S. government’s reluctance to cooperate with other OECD members in the implementation of the BEPS Action Plan.

The newly-elected Donald Trump administration has proposed a tax cut and reform of the repatriation system, which will improve American tax competitiveness. But Trump’s general idea of “America First” in effect advocates protectionism and isolationism. All these new developments will intensify the tax and international charter competition between countries. Therefore, current measures against corporate inversions will prove fruitless unless there is a genuine overall cooperation and coordination between countries.

Following this above introduction, Section I below will give the history of corporate inversion and the causes of this phenomenon. Section II will next focus on criticisms of this practice, and will present an overview of anti-inversion measures taken by the U.S government. Also, it will show the fruitlessness of anti-inversion measures, which only increase the transaction costs of each stakeholder instead of solving the problem. Section III will explain the rationality and legitimacy of corporate inversion, in addition to detailing the fallacy of anti-inversion. The final section will analyze the pros and cons of various proposals addressing the issue, in combination with an update of world political and economic developments, concluding that there will be no magic bullet developing in a short time. In particular, with the recent developments in global politics, a less integrated world is unlikely to ensure the cooperation and coordination necessary to curb the international tax and charter competition.

I.One Flew Over the Cuckoo’s Nest

A corporate inversion is a prevalent business arrangement adopted by U.S. corporations to reorganize as foreign entities. Since many believe its main purpose is to avoid the taxes, corporate inversion is very controversial. The U.S. Treasury Department defined inversion in 2002 thus: “an inversion is a transaction through which the corporate structure of a U.S.-based multinational group is altered so that a new foreign corporation, typically located in a low-tax or no-tax country, replaces the existing U.S. parent corporation.”[6]When an American multinational performs an inversion, it acquires a foreign corporation and then reincorporates in the host country of that foreign corporation via a series of complicated arrangements. This process is called an inversion because the acquiring company adopts the target company’s corporate identity in reverse of the usual process.[7] Also, since inversions seldom need physical relocation of the inverted companies, their offices, assets, and employees in the U.S. remain where they were under most circumstances.

It is generally accepted that the first recorded inversion occurred in 1982. McDermott Inc., a Louisiana-based engineering and construction company moved its place of incorporation to Panama. McDermott then stated in a prospectus that “The principal purpose of the reorganization is to…retain earnings from operations outside the United States without subjecting such earnings to United States income tax. This will enable the McDermott Group to compete more effectively with foreign companies…”[8]

There was no other company taking the same action after McDermott’s successful reincorporation, until the international supply chain solutions company Flextronics relocated its headquarters to Singapore in 1990, which started a wave of  inversions.

Till today, there have been over 70 U.S. public companies performing inversions, which is estimated to be involved deals valued around $2 trillion. Although the deal structures here might be different, all of these companies succeeded in relocating to countries with lower tax rates.[9]

                    Figure 1 U.S. Inversions by Year

                                             

Source: Data Compiled by Bloomberg, “Tracking Tax Runaways” 13 Apr 2015

The “first wave” of inversions ran through the 1990s, with about twenty US corporations inverting. They were typically regarded as “naked” inversions, since in these restructurings, the American companies just reincorporated their new foreign parents as pure corporate shells in a tax haven like Barbados, for example (but resident there so as to enjoy treaty benefits). A typical naked inversion is the one performed by American security systems company Tyco International, because it established a new foreign parent with no change to its business activities.[10]

In later years, inversions have become more and more popular. It should be partly attributed to the increased anti-transfer pricing and tax avoidance regulations and legislation, in addition to the great tax savings to be realized abroad. The drama around these practices reached a climax in 2014 when Burger King, an American household national fast food chain, decided to merge with the Canadian company, Tim Hortons, and move its headquarters to Canada,[11]and in 2015 when U.S drug giant Pfizer planned to merge with the Irish pharmaceutical company Allergan, and relocate its headquarters to Ireland, after this financially record high deal had closed.[12]

It is generally recognized that there have been three kinds of inversion:

(1) Stock-for-stock. In this first kind of transaction, an American multinational’s shareholders exchange their stock for those in a foreign corporation. Since the former American shareholders receive stock of the foreign corporation, they will own the newly-formed foreign parent corporation, which now becomes the parent of the American multinational. The new foreign parent corporation is usually located in a low tax country. In essence, this kind of transaction is not a merger between two corporations; but the creation of a parent-subsidiary relationship with the U.S. corporation reincorporating in the place of the foreign parent company.

(2) Asset transfers. This kind of transaction is usually adopted in cases of smaller inversions. It is a merger transaction where the American corporation merges with the foreign parent and the foreign parent survives. To complete the transaction, the American corporation moves all of its assets into the new foreign parent corporation. The similarity between this kind of transaction and the stock inversion transaction is American shareholders’ receipt of stocks of the foreign corporation.

(3) “Drop down”. This is a combination of the elements of the above two kinds of transaction. In this kind of transaction, the U.S. multinational transfers all assets to a foreign corporation, which reciprocates by contributing some of those assets to a new U.S. subsidiary. Actually, the foreign corporation will transfer part of the assets of the U.S. multinational to the new American subsidiary, and the U.S. multinational will “survive” as a subsidiary of the foreign corporation.[13]

It is generally accepted that the most important motivation behind corporate inversion is tax benefits. The primary tax benefit of an inversion is that the foreign parent is no longer subject to the worldwide tax system and the high corporate income tax rate of the U.S. The U.S. ranks 32nd out of 34 OECD countries in tax code competitiveness.[14] It not only has the highest corporate income tax rate of 39.1 % among the OECD members, but also is one of the very few countries in the OECD that does not have a territorial tax system. A pure territorial taxation only imposes taxes on the active business income of foreign companies earned in such source (“host”) country, without incurring home country tax liability and taxation on dividends repatriated by foreign subsidiaries at the same time. In contrast, a worldwide taxation system allows the home country to tax resident corporations on their worldwide income, only with deductions or credit for taxes paid to source countries on the same income. The U.S. also has a deferral of tax until income repatriation, which repatriation is completed in the form of dividends from foreign subsidiaries to the home country resident parent.[15]

 

 

Figure 2 Worldwide Taxation System vs. Territorial Taxation System

Sources: Senate Republican Policy Committee, Senator John Barrasso, “Territorial vs. Worldwide Taxation”

19 Sep 2012

Figure 2 provides a simulated case of a U.S. company paying taxes under both the worldwide and territorial taxation systems. We can see that under the same circumstances, the worldwide taxation system puts an American business in a disadvantageous position with less after-tax income than the territorial system.

Performing a corporate inversion, the new parent of the merged companies will incorporate in a country that either (1) employs the territorial tax system or (2) has a lower effective tax rate than the U.S. In the first instance, the U.S. multinational will no longer pay the excess taxes on foreign income it previously paid, because the parent is incorporated in a foreign country. In the second instance, there will be a smaller difference between the tax rate of the new home country and that of foreign host countries, resulting in excess tax bill smaller than it would be in the U.S. Therefore a corporate inversion succeeds in tax savings in either case. Also, this theory has been supported by Jim A. Sieda and William F. Wempe’s research, which proves that inversion generally results in large effective tax rate reductions.[16]

Additionally, corporate inversion can achieve a second kind of tax benefit with a strategy called “Earning Stripping”. This is a more “creative” way to extract savings after a corporate inversion has been completed. Usually, in this process the new foreign parent company lends money, which is provided in the form of loans, to its U.S. subsidiary. The subsidiary will pay interest to the parent on such loans, with interest payments being tax deductible for the subsidiary. In this way, the U.S. subsidiary can move its earnings to its foreign parent as interest.

A so-called “Hopscotch” loan is another strategy to achieve a kind of tax benefit after completion of a corporate inversion. When a company inverts, it usually has money left in various host countries yet to repatriate.[17] With the completion of a corporate inversion, the newly created foreign parent company now has the option of receiving “hopscotch” loans.[18] These loans are provided by a foreign subsidiary to the new parent company from this subsidiary’s previously offshore earnings, completely bypassing the former U.S. parent. Then the new foreign parent can give the money back to the U.S. subsidiary by way of another loan or a capital contribution. Such back and forth transfer can avoid many of the taxes imposed on the original repatriation of income. Despite the similar form of loans, there is a notable different flow of the earnings between earning stripping and a “hopscotch” loan. The latter comes from foreign earnings with the intention to move the money back to the U.S. subsidiary with fewer taxes. On the contrary, earning stripping is a money flow in both directions. One way is using an initial loan to get foreign earnings back into the U.S; the other way is to get the U.S. earnings out of the U.S. by means of interest payments to the foreign parent.[19]

II. The Taxman Always Rings Twice

The practice of corporate inversion has been heavily criticized by American politicians, scholars and ordinary citizens. One public policy poll found that around fifty-nine percent of registered voters nationwide believe that Congress should act to “penalize and discourage companies” from engaging in inversions.[20]

Firstly, these critics believe that inversion will erode the American tax base. Researchers at the non-partisan Joint Commission on Taxation estimated that the U.S. Treasury will lose up to $20 billion in tax revenues over the next decade if Congress does not act soon to prevent inversions.[21] Secondly, corporate inversion is alleged to harm American workers by transferring jobs to those countries in which inverting companies reincorporate.[22] Thirdly, large companies have the necessary funds and other resources to employ tax-planning firms and other advisors to design and implement various tax saving plans, which will leave smaller companies without access to these resources at a disadvantage due to their lack of expertise.[23]

The former Secretary of the Treasury Jacob J. Lew published an article in the Washington Post in 2014, in which he claimed “Many of these companies are for all intents and purposes still based in the United States, and they remain here to take advantage of everything that makes the United States the best place in the world to do business… By moving their tax homes overseas, these companies are making the decision to reduce their taxes, forcing a greater share of the responsibility of maintaining core public functions on small businesses and hardworking Americans.”[24] President Obama even called this practice an “unpatriotic tax loophole”.[25]Many companies planning inversions have faced strong critiques.[26]Some of these companies had to scuttle the deals due to strong public disapproval and to the measures taken by the government.[27] Although Burger King completed its merger with Tim Hortons, its collateral damage cost Anthony Weiss the chance to be appointed to a top post in the Department of the Treasury due to his incumbent employer Lazard’s advisory role in this Burger King deal.[28]

The U.S. government has kept using its targeted legislation and regulations to curb corporate inversion for decades, and the companies have responded with more creative schemes to both meet the government’s requirements and complete the inversion with the help from their advisors, unless they have believed that the costs have outweighed the benefits. In response, the government has passed more laws and has taken more drastic measures to fight against the new wave of inversion. This so-called “whack-a-mole” game has now been played for more than 30 years.[29] A brief background summary is necessary for a better understanding of this scenario.

The first wave of inversions in the 1990’s was dominated by “naked” inversions, in which the new foreign parent was a pure shell company incorporated in a tax haven like Barbados, without any material business activities transferred.[30]After the tax-free inversion of the American company Helen of Troy Limited, the Internal Revenue Service (IRS) released a notice, which stated that“on a prospective basis, U.S. shareholders of a U.S. corporation [will] be subject to taxation in certain inversion transactions.”[31]

Following this notice, new anti-inversion regulations were released in 1996 under section 367(a) of the Internal Revenue Code (Code)[32]. They stipulated that when an American transfers stock or securities of a domestic corporation to a foreign corporation, it should be taxed in the U.S as long as all U.S. transferors owned 50% or more of the total voting power or the total value of the stock of the transferee corporation immediately after the exchange.[33] While these new regulations would have made inversions like Helen of Troy’s taxable for their U.S. shareholders, they were not so effective in curbing future inversions as planned. This is because of the fact that under many circumstances, taxable Americans only constitute a minority of the shareholders of a U.S. multinational, and they may have little financial gain from such shares.[34]

In 2004, the Congress added Section 7874 to the Code in the newly passed American Jobs Creation Act (AJCA), which will impose negative tax consequences

once certain criteria are met.[35] The AJCA deprived or constrained the tax benefits of an inversion, as long as the owners of the new company were not substantially different from those of the original company. The AJCA also prohibited an inversion unless the inverting company had substantial business operations in the new place of incorporation.

Although the AJCA largely ended naked inversions, there were still two alternatives open, which allowed American multinationals to relocate and still maintain business control. They were the naked inversion via the business activity exemption, and a merger with a smaller company. The first route would require significant economic operations in the target country. The second would require a rather large company (the so-called “smaller company”) that would be at least 25% of the size of the U.S. firm[36].

Since the criteria of “substantial business activities” were not clarified in the AJCA, companies promptly applied new techniques to circumvent the new regulations. These techniques included inflating the size of the foreign company, shrinking the U.S. company, and inverting only part of the U.S company.[37] The new techniques no longer involved countries such as Barbados and the Cayman Islands, but larger countries with substantial business activity such as the U.K., Canada, and Ireland instead. Especially the U.K has become a much more attractive home for inverted companies due to freedom of movement rules in the European Union. Subject to these E.U. rules, the U.K refrains from passing anti-inversion laws. It is likely that to some extent, this factor contributes to the U.K.’s movements of transition to a territorial tax and a corporate tax rate cut.[38]

In response to the new wave of inversions, the U.S. Treasury Department attached great importance to three measures to address this issue. The first was making it more difficult for corporations to meet the ownership thresholds prescribed by section 7874.The second was to make it harder for inverted corporations to engage in hopscotch loans, or otherwise to access foreign untaxed earnings held by CFCs[39] of an inverted corporation. The third is to make as many corporations unqualified for the substantial business activities exemption as possible.[40] For example, in 2014 the U.S. Treasury issued a notice of regulatory actions (Notice 2014-52). These actions were designed to restrict the aforementioned techniques qualifying companies for the less than 80% ownership criterion, and preventing access to the hopscotching loan as well.[41]

After the issuance of the 2014 Treasury regulations, some companies had to spend time on revising their plans and slow the pace of inversions as a result. Some designed deals with an ownership share of less than 60% so as to avoid the anti-inversion rules and Treasury regulations.[42] Others even created mergers not qualifying as inversions under the tax code. The most significant one was the proposed Pfizer merger deal due to its record high value, which would create the largest pharmaceutical company in the world. The deal was not subject to the anti-inversion rules since Pfizer would own only 56% of the value of the new firm.[43]

In 2015 the Treasury issued new regulations (Notice 2015-79), making three significant regulatory changes, with more likely negative consequences for inversions than the 2014 regulations had had.[44] At the same time, the IRS also finalized regulations that primarily address the threshold for “substantial business activities” in a company’s home country with a comparison between this and its total business activities.[45] These new regulations defined “substantial business activities” in such a way that the entire company has to meet all three criteria.[46]

In April 2016 the Treasury issued temporary and proposed regulations to further formalize rules contained in Notices 2014-52 and 2015-79, as well as to add new rules to address inversions and earnings stripping.[47] In response to these new regulations, Pfizer had to scrap the proposed merger with Allergan.[48]

It seemed that the collapse of the Pfizer deal signaled the end of this new wave of inversions, which started from 2009. However, it is noticeable that there have always been alternatives or options available. Corporations can avoid being subject to new U.S regulations by following the “never-here” route, as it has been dubbed by the Washington Post columnist Allan Sloan.[49] Among major multinationals who applied this strategy are formerly privately-held companies such as Seagate and Accenture.[50]Since these transactions do not qualify as inversions from the outset, never-here deals could become more popular if more anti-inversion laws are passed.

After this review of the history of inversions, we can draw the conclusion that the U.S. government’s solution to the inversion issue is to build higher fences thereby making it harder for American companies to invert. But without an overhaul of the American uncompetitive taxation system and defective tax code, the corporations are justified and strongly motivated to invert by all legal means (on which point I will elaborate in the following section).

Since inversion is just a symptom of a much bigger problem, the historical “whack-a-mole” game actually only increases the transaction costs of every stakeholder and fails to fundamentally address the issue. In addition to the government’s policing and enforcement costs, the huge unnecessary sunk costs (those cost incurred and unrecoverable) incurred in such a game should not be underestimated.

In the first place, American tax codes are notorious for being tedious and confused. The constantly changing anti-inversion rules make them worse. Companies have to spend extra resources assuring compliance with such rules, including the greater employment of accountants, tax advisors and lawyers. Larger firms are liable to pay for more professionals in the pursuit of lowering their tax bills. General Electric, for example, employs an army of nearly one thousand people in its tax department.[51]

Moreover, all inversions are expensive business transactions with high upfront costs. For example, Actavis had to pay $20.5 million to its two financial advisors, Merrill Lynch and Greenhill, for its acquisition of Warner Chilcott.[52]In 2014, when Forest Labs inverted (through a merger with Actavis), it paid its financial advisor, J.P. Morgan, $5 million for consulting, and this was only a small part of the $50.9 million remuneration Forest Labs paid to its advisors after the deal was completed.[53]Also, companies often have to pay generous attorneys’ fees in exchange for their service in negotiation, document drafting, due diligence, and public disclosure filing, which can also easily cost millions of dollars.[54]Worst of all, in addition to those sunk costs, when the deals collapse, companies like Pfizer have to pay a breakup fee which might cost them a fortune.[55]

Finally, as we will mention later, corporate inversions subject company shareholders to unexpected capital gains taxes. Among the shareholder are company executives with stocks and options as part of their remuneration packages. As a result of Congressional legislation in 2004 attempting to stop inversions, executives holding stocks were subject to the same capital gains tax as other shareholders. [56] A survey of the 47 inversions occurring after the promulgation of this legislation, indicated that this attempt was almost a total failure, since most of the inverted companies had adopted reimbursement strategies to cover the losses of executives and the legislation, in effect, only increased the amount of executive compensation (which, in return, adds to costs to be borne by the companies and shareholders).[57] 

III. The Witches of Salem

Both James Mann and Wayne Winegarden in their articles[58] regard corporate inversions only as a symptom of a larger problem, although they had disagreements over the scope of the problem. The more deep the research, the more relatively innocent or justified inversions we can find.

First of all, to evaluate an American business’s performance, one important indicator is the company’s net income.[59] As a result, the managements of American companies are obligated to maximize net income, so as to fulfill their fiduciary duties. In reality, an uncompetitive taxation system like that of the U.S. will impose heavy liabilities upon companies and create high related expenses, eroding revenues and therefore yielding a lower net income. Legally reducing the company’s tax bill will be a management’s rational option, just as in the famous remark made by Judge Learned Hand in the case of Helvering v. Gregory “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. … Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”[60] According to the U.S. Chamber of Commerce, irrespective of any ethical issues, inversion is completely legal under current U.S. law. [61]Even Secretary Lew in his article had to admit that “there is nothing wrong with cross-border merger activity”.[62] American politicians and the public just don’t realize that their outrage is based on faulty analysis, since many of them have no idea of the difference between legal tax avoidance and illegal tax evasion.[63] They should know tax inversions are not unpatriotic, as corporations are not charities. Acting “in the name of morals” is against their nature of being competitive and making profits.[64] In fact, management owes a fiduciary duty to shareholders to maximize net income and remain competitive. As such, tax saving is only a subpart of a business plan to achieve the goals of a corporation.[65] Therefore, in contrast to common belief, corporate inversion should be understood to be patriotic as “it embodies the American spirit of capitalism and profit by reducing costs, such as taxes, thereby maximizing profits.”[66] Inversions allow American multinationals to stay competitive in the global market when the U.S. has higher tax rates when compared with the rest of the world. Restructuring to cut tax bills is not more unpatriotic than U.S. corporations incorporating in Delaware with the intent to take advantage of its convenient incorporation process.[67] We are now in an age of globalization and integration, with free flow of capital. Multinationals can invest in different countries so as to maximize their returns. Countries with lower tax rates will have a natural advantage in this race of investment solicitation. On the other hand, a high tax rate country will drive out investment, and experience slower economic growth. This practice, in essence, is no different from moving the place of incorporation of American companies from their home states to business-friendly states like Delaware and Nevada.[68] The latter approach has never been regarded as unpatriotic although there is also charter competition between states (If the same logic behind the “unpatriotic” criticism of inversions would apply here, the state politicians and citizens should have called those companies moving out their states unpatriotic too). On the other hand, its adoption of the worldwide taxation system and application of a high corporate income tax, make the U.S. tax code fail to meet the two chief principles of a good code: competitiveness and neutrality.[69] From this perspective, it is the U.S government which is really unpatriotic, since it has acted arbitrarily and negligently by passing oppressive legislation which forces companies to reincorporate in foreign countries.

Secondly, even though corporate inversions may reduce the corporate income tax revenue of the U.S. government, the negative impact can be greatly offset by the unexpected capital gains taxes.[70] According to the research done by Rita Nevada Gunn and Thomas Z. Lys,[71] even without an inversion, U.S. multinationals will keep avoiding repatriation of their overseas incomes and the related tax, as long as they can retain the foreign-sourced income oversea indefinitely and reinvest it abroad permanently. Based on the assumption that repatriation would not occur at current tax rates or in the short-term, Gunn and Lys estimate that in the period from 2004-2015, U.S. shareholders in a sample of 108 inversions, will report $81,415.92 million in capital gains and an annual increase in dividend income of $9,959.37 million to the U.S. Treasury.

Thirdly, those who oppose corporate inversions claim that the practice hurts U.S. workers by sending jobs to the countries of reincorporation. According to a recent study by the U.S. Treasury, although inversions do involve considerable restructuring under corporate law, the impact on the actual management and operation of the inverted corporation can be neglected. In other words, “While the jurisdiction of incorporation is changed in an inversion transaction, there need not be any change in the location of the corporation's headquarters or its other business operations.”[72] Moreover, rather than reduce employment in the U.S., inversions may actually increase American job opportunities. If an inversion which can retain the multinational’s facilities, employees and executives in the U.S. is not allowed, the multinationals have to acquire foreign corporations in order to improve their competitiveness. In such cases, it is very likely that the multinationals have to transfer all of the facilities, employees, and officers to foreign countries so as to enjoy the local lower tax bills.[73] After the implementation of inversions, the increased net income can directly provide benefits to the inverted multinationals, since the tax savings can be translated into higher wages and more jobs in the U.S.[74]

Fourthly, recent studies indicate that the management of multinationals would not implement corporate inversions unless they were sure that the benefits to the shareholders outweigh the costs.[75]Based on their findings, experts conclude that managements attach more importance to shareholder wealth than stock prices. They would not take the measure of inversion unless future tax savings outweigh compensation for current capital gains (and corresponding tax liabilities) incurred by shareholders.[76] The inverting multinationals’ share prices also reflect the positive impacts and benefits of inversion, since they result in improvement of overall performance of the multinationals. Studies disclose that stock prices of certain inverting corporations experience significant gains shortly after the public announcement of an inversion plan.[77] Elizabeth Chorvat in her study summarized the excess returns of publically traded companies associated with “Phase I” or “pre-Section 7874 (of the AJCA)” inversions. Taking the most conservative measure possible, and including all negative returns associated with those companies whose inversion plan failed, returns for companies which inverted in Phase I were 266% since the date of the announcement, as compared to 42% for the Standard & Poor’s 500. In other words, corporate inversions have been associated with excess profits on the order of 225% to corporate shareholders, or approximately 6.3 times the market return.[78] This fact might be attributed to the circumstances that these companies were underpriced, and there was information unavailable to the market at the time of the inversion. However, we should not neglect the fact that the managers of the American companies might have been insufficiently innovative. The larger inversions may eventuate in a partial change of control, with ineffective corporate management removed, and this might have contributed to the need for the sale of the American company in the first place.[79]Generally, the U.S. tax system does not operate to replace ineffective managers. At least inversions have sometimes made it possible to replace these ineffective managers, create innovation and therefore reinvest in the new business or product lines,[80] which will definitely improve the companies’ net income and market performance in return.

Fifthly, one criticism of corporate inversion is that it will bring negative impacts to the corporate governance of inverted American companies.[81]However, no one can deny the fact that the management must first obtain shareholder approval of inversions before executing them. To get such approval, the management has to abide by the disclosure laws of the Securities and Exchange Commission ("the SEC") and reveal the inversion details to shareholders. The SEC disclosure rules, along with corporate voting restrictions, therefore can act as a shelter to prevent the management from abusing power and taking irresponsible actions. For example, disregarding overwhelming negative media coverage of inversions at the time, in June 2012, more than 93% of the shareholders of Weatherford International, an oil-field services company, approved a resolution on corporate inversion from Houston to Bermuda, so as to cut corporate tax bills by one third.[82]Moreover, the research done by Gregory R. Day discloses that individual shareholders likely do not need protection—at least from potentially harmful inversions.[83] Also, we should not neglect the fact that the companies most likely to invert are large multinationals, which have a predominant shareholder base of institutional investors who have much more expertise and prudence in making decisions about such a major business activity. Institutional investors play such a predominant leadership role in large corporate transactions that management must make inversion arrangements consistent with shareholder rights and preferences, so as to reach consensus and get approval. On the other hand, due to recent developments, American multinationals’ tradition of valuing the strength of U.S corporate law and governance, especially within Delaware, has been changed to some extent. After the dot-com bubble burst, federal securities law increasingly and progressively eroded the regime of corporate governance formerly belonging to state corporate law, preempting and displacing the latter’s mandates step by step.[84] This trend, on the one hand, makes the costs of compliance with corporate governance law ever greater.[85] On the other hand, although federal law has taken over large portions of corporate governance jurisprudence from Delaware and other states, the multinationals can simply keep being listed in U.S. securities markets (subject to federal securities laws), so as to retain most benefits from incorporation in the U.S. This is exactly what most of the inverting companies have intended to do. American securities laws provide an alternative to enjoy the U.S.-style corporate governance structures. These laws are independent of corporate law and almost make the American incorporation-centered approach for determining tax residency meaningless. In other words, tax status is now separated from a company’s corporate governance regime. A public company now has the options of choosing its tax jurisdiction, which can be largely independent of corporate governance concerns.[86] Also, it is noticeable that in contrast to the first wave of naked inversion (most of which involved relocating to tax havens, such as Barbados, notorious for weak corporate governance), during the later wave of inversions, many corporations inverted in jurisdictions with strong corporate governance such as Ireland and the U.K.[87] Gregory R. Day’s research not only suggests the surprising result that investors care deeply about the corporate governance law,[88] but also draws the conclusion that inverted companies are likely to migrate to countries with strong rules of law, which effectively casts doubt on the claim that inverting companies would likely try to engage in regulatory-stripping transactions.[89]

Finally, just as Secretary Lew noted that “our economy is stronger for our investment overseas and for foreign investment in the United States”, and also that, “these activities should be based on economic efficiency, not tax savings”[90], many alleged corporate inversions are actually normal mergers made on the basis of economic factors instead of pure tax savings. Omri Marian has proved that non-tax considerations play an important role in multinationals’ decisions on whether to “dislocate meaningful attributes”, even where tax incentives to invert exist. This implies that it is easier for multinationals to engage in tax-induced inversions if they are able to change their tax-residence without incurring the high cost of shifting real economic structures.[91] The Burger King---Tim Hortons cross-border merger has been greatly over-criticized, since it is actually a perfect example of Secretary Lew’s theory of merger based on economic efficiency.[92] But in the acquisition of beer-maker Anheuser-Busch by the Belgian corporation InBev, which was also initiated by Burger King’s majority shareholder 3G applying the same business logic, it was not blamed as an inversion that American lawmakers try to prevent because “the company is Belgian, not just as a tax matter but in terms of the physical location of its corporate headquarters in Leuven.”[93]Actually, Anheuser-Busch is no longer based in the U.S. either, and the economic factors similar to the Burger King deal applied too. What a great irony and an example of an obvious double standard!

                   IV. The Good, The Bad and The Ugly

Although corporate inversions have been demonized and treated unfairly, it is also true that they are symptoms of a larger problem, i.e. an uncompetitive and defective U.S. tax code. Therefore, it is still worth discussing proposals for addressing this bigger issue, since the government’s anti-inversion efforts have proved to be both fruitless and harmful.

One proposal is U.S. transition to a territorial taxation system like most OECD members.[94] Senator John Barrasso in his report claimed that “ Moving to a territorial system would make American firms more competitive, allow them to bring overseas income back to the U.S. without being taxed, remove the tax disincentive for domestic investment with foreign income, decrease the influence that tax considerations have on business decisions, lower compliance costs, make it more likely that global businesses are located in the U.S., and result in a tax system more in line with basic economics.”[95] A similar conclusion can be drawn from Elizabeth Chorvat’s research,[96] in which she claims that under a territorial system, if a member of the corporate group earns active business profits in a low-tax country, the only tax to which the income will be subject is the low source country rate. On the other hand, if the group is subject to a worldwide system, income eventually repatriated to the parent corporation will be subject to another layer of tax. Therefore, a corporation operating under a territorial system will generally have a lower tax cost associated with operations even in countries with low local tax rates. The experience in the U.K also proved that cutting the corporate tax rate and the transition to a territorial tax system can halt the exodus of companies in pursuit of better tax treatments, and these measures can also make the country more attractive to businesses through revenue increase.[97] However, a territorial tax system should not be overestimated as a “magic bullet” that can solve all problems.[98] A move to a territorial tax system does have one major flaw. Since the U.S. tax rate is one of the highest in the world, American companies will face a lower tax rate in foreign countries. Therefore, a territorial tax system strongly motivates American companies to invest in foreign countries rather than in the U.S.[99]Additionally, the adoption of a territorial system might have further implications for the U.S, such as, by encouraging capital outflow, it would face the risk of wages reduction at home, higher budget deficits due to revenues drained from the corporate income tax, and higher taxes on smaller businesses and domestic businesses.[100]

The second proposal is to cut the corporate income tax or even eliminate it. First, with the statutory tax rate cut, the American tax rate would keep pace with those of its major trading partners; therefore, there will be less room for tax arbitrage. Second, it would reduce American exporters’ domestic costs, which are often translated into prices. Thus, American exported goods would be more attractive to foreign buyers. Third, the multinationals will feel more comfortable at repatriating their foreign-source income to the U.S. Finally, a lower tax rate will encourage more foreign corporations to invest in the U.S.[101] In addition to the corporations, other stakeholders may greatly benefit from a lower corporate income tax rate too. According to the Heritage Foundation, cutting the federal corporate income tax rate to 25% would result in (1) an annual rise in GDP of nearly $132 billion per year, (2) an increase of nearly 581,000 available jobs annually, and (3) a $2,484 annual increase in after-tax income for a typical family of four.[102] James Mann in his article proposes a more aggressive strategy: Elimination of corporate income tax.[103] Although it sounds rather contrived, there are certain merits the policymakers might take into consideration here. For example, corporate income taxes fall ultimately on people and elimination of corporate income taxes would simplify the American tax system and limit its abuse. The elimination of corporate income tax will lower the prices of products and increase an individual’s purchasing power. Also, the elimination will increase investment in the U.S. from both foreign and domestic companies.[104] The elimination proposal might not be so drastic, when you take into consideration the facts that the corporate income tax only generates a rather small portion of total U.S. tax revenues[105] and corporations waste millions to reduce their tax bills. There are certain factors challenging these proposals. First, there may not be enough tax bases with extra revenues to offset the losses of a deep tax cut. Even if there are such offsets, they might have side effects which should not be neglected. Therefore, cutting the corporate tax without corresponding base broadening would result in losses of tax revenue, followed by chronic budget deficits. At the same time, some of those who oppose a tax cut believe the effective tax rates American companies pay are far less than the statutory rate and similar to what many foreign companies pay in their countries.[106] Professor Kleinbard even suggests that American companies have become so clever with “aggressive tax planning technologies” that many of them are able to take advantage of the current tax system so well that they are more competitive than their foreign rivals. [107] As for the elimination of corporate income tax, people are already angry at Thomas Picketty’s finding that the distribution of resources has grown more and more distorted in favor of the so-called “one percent” in recent decades,[108]and they regard American multinationals as the culprits for the inequality evident in economic globalization. Such a drastic measure will definitely be blamed for helping big businesses, and it would be total “political incorrectness”.

The third proposal is an overhaul of the U.S. tax code,[109] including employing a combination of transition to territorial tax, tax rate cut, reform or abolition of repatriation rules, and other measures such as changing the current place of incorporation criteria to a real seat or management and control test[110] to define corporate residence. Senate Finance Chairman Ron Wyden expressed the urgency of an overhaul by asserting: “The last overhaul of the U.S. tax code was in 1986. Meanwhile, other countries have modernized their tax policies to encourage investment.”[111] However, a complete overhaul of the Code, has its own problems too. A complete overhaul requires substantial political cooperation between all parties, which is almost “mission impossible” with today’s fractured Congress and divided American society.[112] In the past, both the Democratic and Republican Parties have bundled the subject with other issues.[113] Thus, it has been no surprise to witness that nothing happens. Moreover, legislators are prone to changing the tax code or creating new regulations and then projecting success based on certain assumptions. But they often overlook human behavior. In other words, legislators take static response for granted under most circumstances, but in reality, the stakeholders affected by the laws and regulations often alter their behavior, which deviates from the legislators’ assumptions and makes their efforts fruitless.[114] Above all, it is too optimistic to forecast that an effective overhaul of the tax code is forthcoming.

All these proposals have their own pros and cons. But they are all based on the common ground like the current tax code and other legislations, which are all American-centric. They begin with the faulty notion that the U.S. has always been the world center of capital movement, and therefore judge all capital movement from a purely American perspective.[115] They refuse to accept the fact that in the age of globalization, the U.S. is now only a single player on a competitive international stage. It is true that once the U.S. was able to decide its tax rates and taxation system without regard to the rest of the world, due to its status of world financial, political, and economic center.[116] But this paradigm no longer applies, when economic powers such as the European Union, Brazil, Russia, India, and China keep benefiting from the process of globalization and increasing their global influence accordingly.[117] It is much easier for capital to move from the U.S to other more friendly jurisdictions which are beyond U.S. taxation authority. It is more important to understand in the age of globalization, that cooperation and integration, open and free trade have been established as new norms, under which countries do not have the only option of economic competition with each other, which implies a winner-takes-all style zero-sum game. Enhancing a foreign country’s economic well-being does not naturally risk that of the U.S. The development of global trade leads to more product variety, lower consumer prices, higher income and greater welfare. Thus, it is no surprise that economists would cast doubt on whether it is sensible for a country to make “competitiveness” one of its tax policy objectives.[118]

The best example of the American government’s mistakes is its reluctance to play an active role in the BEPS Action Plan.[119] In September 2013, the G-20 countries officially endorsed the BEPS Action Plan initiated by the OECD. Some of the actions recommended actually relate to the inversions discussed in this paper. For instance, neutralizing the effect of hybrid mismatch arrangements, which are arrangements arbitraging tax laws in two or more tax jurisdictions so as to lower the corporation’s aggregate tax liabilities (Action 2), strengthening CFC rules (Action 3), limiting base erosion via interest deduction and other financial payments (Action 4), countering harmful tax practices more effectively (Action5), and so on. If these actions can be successfully carried out on an international level, then many of the incentives that make corporate inversions so attractive to companies – such as the practices of hopscotching and earnings stripping, will be significantly reduced.[120]

On several occasions, the U.S. has been criticized for its failure to play an active role in the OECD’s BEPS action plans. Some commentators even further accused the U.S of actively challenging the BEPS project, with attempts being made to minimize its impact on the U.S and its multinationals.[121]

While American policymakers are still obsessed with the debate on inversion, the OECD spares no effort in the implementation of the BEPS Action Plan, whose efforts include: deliverables on the digital economy, hybrid entities and instruments, treaty abuse prevention, and so on. In the earlier debate over these items, the US government played the role as an unlikely ally of multinationals, scrapping suggestions on lowering the Permanent Establishment (PE) threshold for the digital economy.[122] On the one hand, American policymakers were trying to moderate other countries’ proposals of coming out of the BEPS Action Plan; on the other hand, they focused most of their efforts on American-centric issues like inversions, despite the fact that this practice is not an issue to other countries. This is a typical indicator of how the U.S.’s system and plan is out of step with the thinking of the rest of the world.[123] The OECD’s concerted effort is to create new tax rules, which will further put American companies in a more disadvantageous position as long as there is no overhaul of the U.S. tax code. Among other things, many OECD members are now imposing higher tax rates on multinationals given that their research and development facilities remain in the U.S., which means American multinationals are more motivated to invert and to be more localized so as to enjoy the local lower taxes. Otherwise, they are left with no other choice but competing with a substantially harmful tax code. Unless the defective system will be fixed, there will be more company restructuring that leads to overseas reincorporation. With the OECD’s BEPS project, it’s now more likely that American companies are motivated to shift actual jobs and investment out of America, quitting their old habits of keeping their factories, headquarters and R&D facilities in the U.S.[124]

To make things worse, the newly-elected President Trump’s “America First” policy promotes protectionism and isolationism openly.[125] Tax reform has been one of Trump’s priorities,[126] and the newest-released tax plan does consist of corporate income tax cuts, a partial territorial system and a border tax adjustment (which is similar to a kind of value added tax).[127] Furthermore, Mr. Trump’s deregulation efforts will reduce the compliance costs too.[128]These measures are likely to bring positive impacts on business investment, raising productivity and overall economic growth in the U.S. But all these efforts are based on the fallacy of global trade being a zero-sum game and history has proved that the “beggar-thy-neighbor” policy can’t ensure a sustainable development.

According to the newest article published by The Economist,[129] the multinationals are already in retreat. The retreat cannot bring back all the jobs promised by Mr. Trump. Also, it will mean rising prices, diminishing competition and slowing innovation in the U.S. Mr. Trump is obsessing about protectionism, which seems appealing to angry American voters, but it only ends up raising prices for consumers,[130] since the end of free trade will increase companies’ tax and wage bills, squeezing their profits further.[131] When the American consumers who are accustomed to low prices and high-quality products secured by globalization find out these items are beyond their affordability, they will use votes to urge changes again.

The multinationals have to either localize or become intangible so as to accelerate the process of restructuring and tackle the new challenges.[132] The retreat of multinationals will give politicians a feeling of greater control as some companies have to appeal more to domestic demands. However, it is not automatic that every country will be entitled to a bigger share of the same multinationals’ production, jobs and taxes. As more and more politicians are prone to regard global trade as a zero-sum game like Mr. Trump, the competition around international tax policy and charter will become unavoidable. As long as there are different tax rates and regimes, the tax arbitrage strategies such as inversion will never stop, as lawmakers and regulators will always be a step behind the innovative businessmen, financial advisors, and lawyers, who always seem to be able to create new approaches to close deals even in our age of turbulence.[133]

V. Conclusion

My article provides an introduction to the practice of corporate inversion as a legal tax avoidance technique. It outlines the history of corporate inversion, its demonization and unfair treatment, describes its justification and merits, and agrees that it is just a symptom of a larger problem--an uncompetitive and defective U.S tax code. Then, the article explains the U.S. government’s mistake in taking measures to make it difficult for American companies to invert, instead of overhauling the tax code to make the U.S. a more desirable location to headquarter businesses. We discover that this cat-and-mouse game only increases the transaction costs of stakeholders without addressing the issue. Finally, we believe that an American-centric philosophy prevents the U.S. government from co-operating with other developed countries to find practical solutions. The newly-elected Trump’s administration makes things worse by advocating protectionism and isolationism. With global trade and multinationals in retreat, new rounds of competition between countries on international tax policies will provide enough room for tax arbitrage techniques like inversion to continue.

 

 

 

 

 

 

 

 

 

 

 

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[1] In this article “Multinational”, “Multinational Companies (MNC)” and “Multinational Enterprises (MNE)” will be used interchangeably for convenience.

[2] The repatriation rules work by allowing multinationals to delay the tax payment on foreign income earned by their separate foreign subsidiary corporations until the funds are repatriated, or remitted to the United States as dividends or other income. In other words, if an American multinational never transfers foreign earnings back to the U.S. parent company, it will never pay U.S. taxes on those earnings in reality. This policy encourages multinationals’ cash being “trapped” overseas. General Electric is estimated to have $110 billion in cash assets “trapped” in foreign jurisdictions. See Joshua Simpson, “Analyzing Corporate Inversions and Proposed Changes to the Repatriation Rule”, 68 NYU Ann Surv AM. L. 673, 676 (2013) at 680; and according to Kimberly Clausing’ s article “Corporate Inversions” (Tax Policy 20 Aug 2014), the stockpile of unrepatriated foreign cash of American multinationals is growing to towering levels, nearing $ 1 trillion. See, e.g., Daniel N. Shaviro, Fixing U.S. International Taxation (Oxford University Press 2014) at 169-170(defining and discussing "deferral").

[3] See Richard Rubin, “Cash Abroad Rises $206 Billion As Apple to IBM Avoid Tax” (13 Mar 2014) Bloomberg, online:<https://www.bloomberg.com/news/articles/2014-03-12/cash-abroad-rises-206-billion-as-apple-to-ibm-avoid-tax>.

Also see Dan Feed, “How U.S Corporations Use Oversea Cash in U.S without Paying Taxes” (23 Feb 2015 )Street, online:<https://www.thestreet.com/story/13053211/1/how-us-corporations-use-overseas-cash-in-us-without-paying-taxes.html> and Andrew Wong, “Americans Are Paying Apple Millions to Shelter Oversea Profits”( 7 Dec 2016) Bloomberg, online:< https://www.bloomberg.com/graphics/2016-apple-profits/?cmpid=BBD120716_BIZ.>.

[4] See Victor Fleischer, “Regulatory Arbitrage”, 89 Tex. L. Rev. 227, 230 (2010) .Fleischer claims that countries use their legal regimes as a commodity to attract foreign companies, He also uses statistics to analyze the international competition for corporate charters between countries. In the international market of corporate charters, he claims that countries promote their national business and corporate laws to attract opportunity-seeking firms.

[5] Please refer to the definition of transaction costs under https://en.wikipedia.org/wiki/Transaction_cost . In my article transaction costs mainly refer to policing and enforcement costs for the government of anti-inversion measures, and the costs spent by the companies on creation of new techniques of inversion so as to circumvent the government’s policing and enforcement.

[6] U.S. Department of the Treasury, Corporate Inversion Transactions: Tax Policy Implications (2002), available at https://web.law.columbia.edu/sites/default/files/microsites/millstein-center/panel_1_001_office_to_tax_policy.pdf

 Also see Lindsay Holst, “What Are ‘Inversions,’ and Why Should You Care?”(24 July 2014),White House(blog) online:< https://obamawhitehouse.archives.gov/blog/2014/07/24/what-are-inversions-and-why-should-you-care>.

 This article defines an inversion occurs when “a U.S.-based multinational with operations in other countries restructures itself so that the U.S. ‘parent’ is replaced by a foreign corporation—and usually one that’s in a country with a lower tax rate than the United States”.

[7] See Hale E. Sheppard, “Fight or Flight of U.S.-Based Multinational Businesses: Analyzing the Causes for, Effects of, and Solutions to the Corporate Inversion Trend”, 23 NW. J. INT’L L. & BUS. 551, 555 (2003) (it explains that in an inversion “the corporate structure is basically turned upside down, with the newly-created foreign corporation becoming the parent. . . and the former domestic parent becoming a U.S. subsidiary of a foreign corporation.”)

[8] Bhada v. Commissioner Internal Revenue Service. 892 F. 2d 39 [1989] at para 5, available at http://openjurist.org/892/f2d/39/bhada-v-commissioner-internal-revenue-service.

[9] See Lynelle Fung “Corporate Inversions: The New Business Strategy”, Fung.L.(2016) Undergraduate Honors Thesis, University of Redlands. Page 6, available at http://inspire.redlands.edu/cgi/viewcontent.cgi?article=1149&context=cas_honors.

[10] See Reuven S. Avi-Yonah “A World Turned Upside Down: Reflections on the ‘New Wave’ Inversions and Notice 2014-52”, University of Michigan Public Law Research Paper No 421, page 3, available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2502513.

[11] Richard Rubin “Burger King Deal Advances Amid U.S. Inversion Crackdown” (24 Sept 2014) Bloomberg, online:<https://www.bloomberg.com/news/articles/2014-09-23/lew-tries-to-limit-tax-cut-deals-with-inversion-crackdown>.

[12] Rob Davies& Dominic Rushe, “What Is Tax Inversion and Why Are They So Controversial” (23 Nov 2015 ) The Guardian, online:< https://www.theguardian.com/business/2015/nov/23/pfizer-takeover-tax-inversion-questions>.

 

[13] Melisa Lucar, “Corporate Inversions: The Fleeing Notion of An American Corporation”, 15 U.C. Davis Bus.L.J. 265 2014-2015, Page 279-280.

[14] Kyle Pemerlea &Andrew Lundeen “The U.S Ranks 32nd Out of 34 OECD Countries in Tax Code Competitiveness” ( 22 Sept 2014 ) Forbes, online:

<http://www.forbes.com/sites/realspin/2014/09/22/the-u-s-ranks-32nd-out-of-34-oecd-countries-in-tax-code-competitiveness/#405c39d6d271>.

[15] Thornton Matheson, Victoria Perry& Chandara Veung “Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries” (2013) IMF Working Paper No WP/13/205.

[16] Jim A. Deida &William F. Wempe, “Effective Tax Rate Change and Earning Stripping Following Corporate Inversion”, National Tax Journal, Vol. 57, No. 4 (December, 2004), page 805-828.

[17] See Michael Hiltzik, “Solving the Inversion Crisis: How the U.S. Can Keep Companies at Home”(4 Dec 2015) L.A. TIMES ,online:< http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20151204-column.html>.

[18] Mike Patton, “Will U.S. Government Succeed in Closing this Corporate Tax Loophole?”(25 Sep 2014) Forbes, online:<http://www.forbes.com/sites/mikepatton/2014/09/25/congress-attempts-to-close-corporate-tax-loophole/#2a90dcbb32f3>. Also see Stuart Weichesl, “Corporate Inversions and Hopscotch Loans: The Remaining Loopholes Outnumber the Restrictions”, Bloomberg BNA Nov 2014, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2528788.

[19] Chris Capurso, “Burgers, Doughnuts, and Expatriations: An Analysis of the Tax Inversion Epidemic and A Solution Presented through the Lens of the Burger King-Tim Hortons Merger”, 580 William& Mary Business Law Review [Vol.7:579 2016] Page 588.

[20] John D. McKinnon, “Strong Support for Congressional Action on Inversions-- WSJ/NBC Poll”(9 Sep 2014), Washington Wire(blog),

online:<http://blogs.wsj.com/washwire/2014/09/09/strong-support-for-congressional-action-on-inversions-wsjnbc-poll/>.

[21] Joseph Walker, “U.S Stands to Lose Billions from Corporate Tax Inversions” (14 July 2014) the WSJ, online:< https://www.wsj.com/articles/u-s-stands-to-lose-billions-from-corporate-tax-inversions-1405373537>.It should be noted this is not an accurate cost estimate, since consideration of the multitude of variables is not a full-scale one.

[22] Hale E. Sheppard, Supra Note 7 Page 559.This article even mentions that one lawmaker introduced an anti-inversion bill entitled the “Save America's Jobs Act of 2002”, since he believed (albeit incorrectly) that inversions would occasion significant domestic job loss.

[23] See Lynelle Fung Supra Note 9, Page 8.

[24] Jacob J. Lew, “Close the Tax Loophole on Tax Inversion”(27 Jul 2014) the Washington Post, online:< https://www.washingtonpost.com/opinions/jacob-lew-close-the-tax-loophole-on-inversions/2014/07/27/2ea50966-141d-11e4-98ee-daea85133bc9_story.html?utm_term=.f77f42b39640>.

[25] Zachary R. Mider, “Burger King Saying Move Won’t Save Taxes Draws Skepticism” (3 Sept 2014 ) Bloomberg, online:<https://www.bloomberg.com/news/articles/2014-09-03/burger-king-saying-move-won-t-save-taxes-draws-skepticism>.

[26] Ramsey Cox, “Levin: Public Disapproval Could Cost Burger King” (26 Aug 2014) the Hill, online:< http://thehill.com/blogs/floor-action/senate/215960-levin-public-disapproval-could-cost-burger-king>.Senator Carl Levin (D-Mich.) lambasted Burger King’s plan to merge with Tim Hortons by claiming “If this merger goes through, there could well be a strong public reaction against Burger King that could more than offset any tax benefit it receives from a tax avoidance move.”

[27] Kevin Drawbaugh, “Factbox: Another U.S Tax ‘Inversion’ Implodes, Pending Deals Dwindle”(24 Oct 2014) Reuters, online:< http://www.reuters.com/article/us-usa-tax-pending-inversions-idUSKCN0ID1VR20141024>.

[28] Michelle Yee Hee Lee, “Explainer: Elizabeth Warren vs. Weiss and the Use of Corporate Inversions”(12 Dec 2014) the Washington Post, online: <https://www.washingtonpost.com/news/fact-checker/wp/2014/12/12/explainer-elizabeth-warrens-war-on-wall-street/?utm_term=.05318e6b21df>.  Also see Ken Wells, Jonathan Allen &Richard Rubin, “How Inversions Leap from Shadows to Doom Anthony Weiss” (14 Jan 2015)Bloomberg, online:<https://www.bloomberg.com/politics/articles/2015-01-14/how-inversions-leaped-from-the-shadows-to-doom-treasury-nominee>.

[29] Bret Wells, “Corporate Inversions and Whack-a-Mole Tax Policy”, Tax Notes June 23 2014, page 1429.

[30] Reuven S. Avi-Yonah Supra Note 10, page 3.

[31] Brandon Hayes. “US anti-inversion provisions.” (27 Mar 2013) International Tax Review, online:< http://www.internationaltaxreview.com/Article/3181949/US-anti-inversion-provisions.html>.

[32] In my article, the “Internal Revenue Code” , “Code” and “tax code” are used interchangeably as for convenience.

[33] Mindy Herzfeld. “News Analysis: What’s Next in Inversion Land?” (16 2014 June) Tax Analysts, online: < http://www.taxanalysts.org/content/news-analysis-whats-next-inversion-land>.

[34] Novak Scott, “Curbing Corporate Inversions: A Study of National and International Efforts to Establish Corporate Tax Equity” (2014). Independent Study Project(ISP) Collection Paper 1986, Page 25.

[35] Ericka K.Lunder, “Corporate Inversions: Frequently Asked Legal Questions” Congressional Research Service (7 Sept 2016) page 4, available at https://fas.org/sgp/crs/misc/R44617.pdf. The criteria are: a foreign corporation completes after March 4, 2003, the direct or indirect acquisition of “substantially all” of the properties held by a U.S. corporation; after the acquisition, the new foreign parent and its expanded affiliated group do not have “substantial business activities” in its home country when compared to its total business activities; and after the acquisition, at least 60% or 80% of the foreign parent's stock is held by former shareholders of the U.S. company.

[36] Donald J.Marples& Jane G. Gravelle, “Corporate Expatriation, Inversions, and Mergers: Tax Issues”, Congressional Research Service(27 Apr 2016) page 6, available at https://fas.org/sgp/crs/misc/R43568.pdf.

[37] Ibid, American firms can reach the less than 80% goal by inflating the size of the foreign merger partner (which must have more than 20% ownership subsequent to the merger) by use of passive assets (e.g., an interest bearing bank deposit); shrinking the size of the U.S firm by paying extraordinary dividends before the merger; completing an inversion of part of a U.S. company (a “spinversion”) by spinning it off to a newly formed foreign corporation.

[38] Ibid, Page 6.

[39] A foreign subsidiary of a former U.S. company – known as a controlled foreign corporation (CFC)

[40] Reuven S. Avi-Yonah &Omri Marian, “Inversions and Competitiveness: Reflections in the Wake of Pfizer/Allergan”, (2015) Public Law Research Paper No. 488 Page 8-9, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2703576.

[41] Ibid, page 10.

[42] Ibid, page 11. The examples are the merger of telecom firm Arris and Pace (a UK firm), CF Industries (fertilizer) and OCI NB (a Netherlands firm), Terex with Konecranes (a Finnish firm), and a consolidation of European Coca-Cola bottling firms (one such firm, Coca-Cola Enterprises was a U.S. headquartered firm).

[43] Ibid, page 11. On November 23, 2015, Pfizer announced a proposed merger with an Irish company Allergan and relocation of its headquarters to Ireland. Allergan itself is the product of a merger with Actavis in 2015, involving both stock and cash acquisition by the latter, with former Allergan shareholders owning a minority of the new company. Thus, this merger as well was not an inversion under the tax law. Actavis, in turn, was a former U.S. firm that inverted by merger with Warner Chillcott, an Irish firm, in 2013 (where the former shareholders of the U.S firm acquired 77% of the stock).

[44] Ibid, page 12. First, if the foreign parent is a tax resident of a third company, stock issued by that parent to the existing foreign firm will be disregarded for purposes of the ownership requirement. That change will prevent a U.S. firm from merging with a partner and then choosing a tax friendly third country to headquarter in. The second provision would clarify the so called “anti-stuffing” rules, where the foreign firm’s size is inflated by adding assets to that firm. Third, the current business activity exception requires 25% of business activity to be in the foreign country where the new parent is created or organized, but does not require it to be a foreign parent. This rule requires the business activity to be in the foreign parent. It prevents inversion based on the business activity test when the foreign parent has a tax residence in another country without substantial business activities.

[45] Substantial Business Activities, 80 Fed. Reg. 31,837 (June 4, 2015) (codified at Treas. Reg. § 1.7874-3).

[46] Ericka K.Lunder, Supra Note 35 Page 4.The criteria are: the number of employees (and compensation) in the foreign country must be at least 25% of the total world-wide number of employees (and compensation) on the applicable date; the value of assets in the foreign country must be at least 25% of the total value of all world-wide assets on the applicable date; and the income derived in the foreign country must be at least 25% of the total worldwide income during the testing period.

[47] Donald J.Marples& Jane G. Gravelle, Supra Note 36 Page 12.The new temporary regulations target inversion transactions involving a new foreign parent that previously acquired one or more U.S. entities in inversions or acquisitions in which the new foreign parent issued stock. These prior acquisitions would generally increase the value of the foreign entity, enabling it to subsequently engage in an inversion transaction with a larger U.S. company while remaining below the 60% or 80% ownership thresholds. The temporary regulations disregard stock of the new foreign parent to the extent the value of such stock is attributable to its prior U.S. entity acquisitions during the prior three years. According to analysis by Americans for Tax Fairness, the implementation of this rule would have increased Pfizer’s share of the merged company to roughly 70% from 56% prior to the rule.

[48] Caroline Humer& Ankur Banerjee, “Pfizer, Allergan Scrape $160 Billion Deal After U.S. Tax Rule Change”(6 Apr 2016)Reuters, online:< http://www.reuters.com/article/us-allergan-m-a-pfizer-idUSKCN0X3188>.

[49] Allan Sloan, “Positively Un-American Tax Dodges” (7 Jul 2014)Fortune, online:< http://fortune.com/2014/07/07/taxes-offshore-dodge/>. It argues that inverting corporations are “un-American” and that tax holidays provide the wrong incentives to corporations)

[50] John C. Hamlett, “The Declining Allure of Being ‘American’ and the Proliferation of Corporate Inversions: A Critical Analysis of Regulatory Efforts to Curtail the Inversion Trend”, 93 Wash. U. L.Rev 767(2016) Page798. Seagate started as a US company and underwent a “going private” (This procedure leaves only that group of insiders who direct the corporate reacquisition programs, (usually the very ones who took the companies public originally) as the surviving shareholders in a now privately held enterprise. Such a program of share reacquisition is known as a ‘going private.’ transaction in a buyout. Seagate’s owners then moved it as a private company to the Cayman Islands, where they subsequently implemented a “going public” transaction (“Going public” happens when a company “makes the transition from being privately owned to having shares traded and owned by public investors.” Christine Hurt, “Moral Hazard and the Initial Public Offering”, 26 Cardozo L. Rev. 711, 712 (2005))Seagate then moved as a public company from the Cayman Islands to Ireland a few years later. According to Sloan, “firms like these can duck lots of U.S. taxes without being accused of having deserted our country because technically they were never here.”

[51] Nile Nwogu &Barry Plunkett, “Corporate Inversions: A Policy Primer” (24 Oct 2016) Public Policy Initiative, Penn Wharton, online:< https://publicpolicy.wharton.upenn.edu/live/news/1492-corporate-inversions-a-policy-primer>.

[52] Actavis Ltd., Amendment No. 1 to Registration Statement (Form S-4) 70 (Jul. 31, 2013), at 85, 96 (disclosing that Actavis agreed to pay $10.5 million and $10 million to Merrill Lynch and Greenhill, respectively), available at https://www.sec.gov/Archives/edgar/data/1578845/000119312513385946/d604022dposam.htm.

[53] Actavis plc, Amendment No. 1 to Registration Statement (Form S-4) at 97 (May 2, 2014), available at https://www.sec.gov/Archives/edgar/data/1578845/000119312514178606/d686059ds4a.htm.

[54] Cathy Hwang, “The New Corporate Migration: Tax Diversion through Inversion”, 80 Brook.L.Rev.807 2014-2015. Page 848.

[55]Jonathan D. Rockoff, Liz Hoffman &Richard Rubin, “Pfizer Walks Away From Allergan Deal”( 6 Apr 2016) the WSJ, online:< http://www.wsj.com/articles/pfizer-walks-away-from-allergan-deal-1459939739>. According to the report, Pfizer will pay a breakup fee of $ 150 million to Allergan.

[56] Steven Solomon. “In Deal to Cut Corporate Taxes, Shareholders Pay the Price.” (8 Jul 2014) the New York Times, online:<https://dealbook.nytimes.com/2014/07/08/in-deal-to-cut-corporate-taxes-shareholders-pay-the-price/?_r=0>.

[57] Lynelle Fung Supra Note 9 Page 32.The pharmaceutical and medical device company, Medtronic, will spend around $63 million to pay the executives’ individual taxes. Other companies offer to pay taxes plus a bonus for the executives’ “trouble” as to keep them in the company. Please also see Zachary R. Mider, “Companies Fleeing Faxes Pay CEOs Extra as Law Backfires”( 27 Jan 2014)Bloomberg, online:<https://www.bloomberg.com/news/articles/2014-01-27/companies-fleeing-taxes-pay-ceos-extra-as-law-backfires>.

[58] James Mann, “Corporate Inversions: A Symptom of A Larger Problem. The Corporate Income Tax”, Southern California Law Review Vol 78:521; Wayne Winegarden, “Corporate Inversions Are the Symptoms, Bad Tax Policy Is the Disease”( 8 Mar 2016) Forbes, online:< http://www.forbes.com/sites/econostats/2016/03/08/corporate-inversions-are-the-symptoms-bad-tax-policy-is-the-disease/#3527772914ce>.

[59] Lynelle Fung Supra Note 9 Page 2. Net income has been used as a means of comparison amongst competitors and a symbol of financial health for creditors, it also serves a purpose to potential investors, since it can influence stock prices, and determine the amount of potential dividends and other such distributions available for current shareholders.

[60] Available at http://www.businesslawbasics.com/legal-quote-week-learned-hand-taxes

[61] Hale E. Sheppard, Supra Note 7, page 561.

[62] Jacob J. Lew, Supra Note 24.

[63] Joseph Thorndike, “Tax Avoidance or Tax Evasion? There Is A Difference”(12 Mar 2015) Forbes, online:< https://www.washingtonpost.com/opinions/jacob-lew-close-the-tax-loophole-on-inversions/2014/07/27/2ea50966-141d-11e4-98ee-daea85133bc9_story.html>.

[64] Comm'r v. Newman, 159 F2d at 851 (2d Cir. 1947) (Hand, J, dissenting)                                                            

[65] Kathy Wong, “Inverse Logic: the Shortcoming of Preventing Corporate Tax Inversion through Amending Section 7874”,14 Cardozo Pub.L.Pol’y&Ethics J.451 2015-2016, page 474.

[66] Eric Tak Han, Is Capitalism Un-American? An Analysis of Corporate Inventions and Expatriation Proposals in Response 27 Hastings Int' L& Comp. L. Rev. 511 (2004) at 512.

[67] Yevgeniy Feyman, “No Inversion Is Unpatriotic. Yes We Need Corporate Tax Reform”(25 Aug 2014) Forbes, online:<http://www.forbes.com/sites/theapothecary/2014/08/25/no-inversion-is-not-unpatriotic-yes-we-need-corporate-tax-reform/#1f34eb4a6482>.

[68] Hale E. Sheppard, Supra Note 7, page 562. Notwithstanding the fact that their assets and management are located elsewhere, thousands of U.S. businesses opt to incorporate in Delaware in order to take advantage of this state’s well-established corporate laws, court system familiar with resolving corporate issues, and the certainty provided by an abundance of legal precedent involving corporations. It is argued by Sheppard that the decision to incorporate in Delaware is theoretically similar to inverting to Bermuda.

[69] Kyle Pemerlea &Andrew Lundeen, Supra Note 14.

[70] Lynelle Fung Supra Note 9 Page 29-31. “Shareholders are faced with the brunt of the tax liability when the company first reincorporates overseas. In an inversion, the shareholders, in effect, “sell” their shares of the acquired company and “buy” stock in the newly formed corporation.  Throughout this process, no money is exchanged, but the shares of the new company are distributed amongst the existing stockholders.  Even though a “normal” sale of old and purchase of new shares does not take place, the IRS sees this exchange as a taxable transaction. The tax liability that occurs for individual shareholders with respect to this transaction is that concerning capital gains.  A capital gain is realized when “a capital asset is sold or exchanged at a price higher than its basis”. The controversy arises with a liability being passed onto the stockholder without their active participation in the changes occurring.” Please also see Robert Williams, “One Downside of Inversions: Higher Tax Bills for Shareholders”(20 Aug 2014) Forbes, online:< http://www.forbes.com/sites/beltway/2014/08/20/one-downside-of-inversions-higher-tax-bills-for-stockholders/#480eef362876 >, Lauran Saunders &Jonathan D.Rockoff, “Pfizer Holders Could Face Tax Hit in A Deal for AstraZeneca” (8 May 2014) the WSJ, online:< https://www.wsj.com/articles/SB10001424052702304655304579550033161299264>. It is an example of capital gain tax in Pfizer’s planned merger with AstraZeneca.

[71] Rita Nevada Gunn &Thomas Z. Lys, “The Paradoxical Impact of Corporate Inversions on U.S. Tax Revenue”, 21 Aug 2016, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2596706

[72] Ibid. See also U.S. Department of the Treasury, Supra Note 6.

[73] Hale E. Sheppard, Supra Note 7 page 559.

[74] John. S. Barry, “Corporate Inversions: An Introduction to the Issue and FAQ” (30 May 2002) Tax Foundation, oniline:< https://taxfoundation.org/corporate-inversions-introduction-issue-and-faq>.

[75] Jim A. Seida & William F. Wempe, “Market Reaction to Corporate Inversion Transactions”, 24 Ins. Tax Rev. 73(2003).

[76] See Mihir A. Desai & James R. Hines Jr., “Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions”, 55 Nat'L Tax J. 409 (2000).

[77] Jim A. Seida & William F. Wempe, Supra Note 75.

[78] Elizabeth Chorvat, “Expatriations and Expatriations: A Long Run Event Study”(2016) University of Chicago Public Law Working Paper No 445, Page 12,available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2309915.

[79] Vauhini Vara,‘‘Is the Burger King-Tim Hortons Deal About More Than Taxes?’’ (26 Aug 2014) The New Yorker, online:< http://www.newyorker.com/business/currency/burger-king-wants-deal-tim-hortons>.

[80] Bret Bogenschneider, “Why Corporate Inversions Are Irrelevant to U.S. Tax Policy” (9 Mar 2015) 146 Tax Notes 1267, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2709000.

[81] Hale E. Sheppard, Supra Note 7 page 566. A concern is relocating the parent corporation to a low-tax, and perhaps lesser-developed, country will inevitably weaken shareholder rights. Also see Felipe Cortes, Armando & Radhakrishnan Goplan, “The Effect of Inversions on Corporate Governance”(25 Oct 2016), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2481345. They believe firms that invert have weaker governance than comparable U.S. firms. Consistent with weaker market-based governance, the stock price of firms that invert is less liquid and the firms have lower institutional ownership.

[82] Hale E. Sheppard, Supra Note 7 page 560.

[83] Gregory R.Day, “Irrational Investors and the Corporate Inversion Puzzle”,69 SMU L.Rev. 405(2016), Page 491.

[84] The well-known vanguards have been two landmark pieces of legislation (and their implementing regulations): the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Act of 2010 (“Dodd-Frank”).

[85] Joshua Simpson, Supra Note 2 Page 688. One survey discovers that the high regulatory cost of being a public company incorporated in the U.S caused 23% of companies to consider going private, 16% to consider a sale, and 14% to consider a merger in 2007. The hidden annual cost of compliance with regulations in the U.S is now $1.75 trillion, whereas corporate income taxes only raised $181 billion in 2011.Significant sources of U.S. regulatory costs that may be avoided through inversions include SOX, Dodd-Frank and the Foreign Corrupt Practices Act (“FCPA”).

[86] Eric L. Talley, “Corporate Inversions and the Unbundling of Regulatory Competition”, Virginia Law Review 101:1649, Page 1699.

[87] Gregory R.Day, Supra Note 83 Page 481.

[88] Ibid, page 486.

[89] Ibid, page 488.

[90] Jacob J. Lew, Supra Note 24.

[91] Omri Marian, “Home-Country Effects of Corporate Inversions”, 90 Wash.L.Rev.1 2015, Page 73.

[92] Please see Trefis Team, “ Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion”(29 Aug 2014)Forbes, online: <http://www.forbes.com/sites/greatspeculations/2014/08/29/burger-king-tim-hortons-cross-border-merger-much-more-than-tax-inversion/#33b7283cdfac>,  also see Devin Leonard &Vanessa Wong, “ Why Burger King Is Really Buying Tim Hortons(It Is Not About the Taxes)”( 27 Aug 2014) Bloomberg, online: <https://www.bloomberg.com/news/articles/2014-08-26/the-burger-king-tim-hortons-deal-isnt-about-taxes>.It is believed that both companies are facing heavy competition. Their combination can effectively complement each other’s product lines and improve their performance by cost cutting. For example, Burger King doesn’t have much of a breakfast business. Tim Hortons is a coffee-and-doughnuts shop. There are undoubtedly cost-cutting opportunities at Tim Hortons. Bloomberg News reports that Tim Hortons’ profit margin was 25 percent last year, compared with 50 percent at Dunkin’ Brands. It is also noticeable that 3G, the Brazilian private equity firm that bought Burger King in 2010 and owns 70 percent of its shares, act in a banker style. It acquires companies and grows them through acquisitions. It did this most successfully in 2008 when InBev, controlled by the principals of 3G and a group of Belgian investors, bought Anheuser-Busch for $52 billion. AB InBev’s Brazilian managers cut expenses, quickly repaid the company’s debt, improved its performance greatly.

[93] Matthew Yglesias, “9 Questions About Tax Inversions You Were Embarrassed to Ask ” (22 Sep 2014) the Vox, online:< http://www.vox.com/2014/7/28/5944263/corporate-tax-inversions-deserters-vs-economic-patriotism>.

[94] See Jane G. Gravelle, “Moving to A Territorial Income Tax: Options and Challenges”( 2012), Congressional Research Service, available at https://pdfs.semanticscholar.org/4d09/a9861dd5ad1e513a4dd8bc2d3603c7e47d16.pdf.

 Reuven S. Avi-Yonah, “Territoriality: For and Against”(2013). Law &Economics Working Papers, Public Law and Legal Theory Research Paper Series Paper No 329, available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2256580.

Thornton Matheson, Victoria Perry & Chandara Veung, Supra Note 15. Scott A. Hodge, “The Simple Solution to Pfizer Deal: Cut the Rate and Move to A Territorial Tax System”(24 Nov 2015) Tax Foundation, online:< http://taxfoundation.org/blog/simple-solution-pfizer-deal-cut-rate-and-move-territorial-tax-system>.

[95] John Barrasso, Senate Republican Policy Committee, “Territorial vs. Worldwide Taxation”(19 Sep 2012), available at http://www.rpc.senate.gov/policy-papers/territorial-vs-worldwide-taxation.

[96] Elizabeth Chorvat, “You Can’t Take It With You: Behavioral Finance and Corporate Expatriations”, University of Virginia School of Law 2003 Law and Economics Research Papers, Page 9.

[97] William McBride, “Tax Reform in the U.K Reversed the Tide of Inversion”(14 Oct 2014) Tax Foundation, online:<http://taxfoundation.org/article/tax-reform-uk-reversed-tide-corporate-tax-inversions>.  Also see Tax Foundation, “The United Kingdom’s Move to Territorial Taxation”(14 Nov 2012),online: <http://taxfoundation.org/article/united-kingdoms-move-territorial-taxation>.

[98]Howard Gleckman, “A Look at the Territorial Tax Systems in Four Countries Finds No Magic Bullet” ( 22 Jan 2015) Forbes, online: <http://www.forbes.com/sites/beltway/2015/01/22/a-look-at-the-territorial-tax-systems-in-four-countries-finds-no-magic-bullets/#21ef80297de2>.

[99] James Mann, Supra Note 58 Page 548; Reuven S. Avi-Yonah, Supra Note 94 Page 4.

[100] Chye-Ching Huang, Chuck Marr & Joel Friedman, “The Fiscal and Economic Risks of Territorial Taxation”, Center on Budget and Policy Priorities Jan 31 2013, Page 3.

[101] Chris Capurso, Supra Note 19 Page 597.

[102] Dr. Karen Campbell & John L. Ligon, “The Economic Impact of a 25 Percent Corporate Income Tax Rate” (2 Dec 2010 )Heritage Found, online:  <http://www.heritage.org/taxes/report/the-economic-impact-25-percent-corporate-income-tax-rate>.

[103] James Mann, Supra Note 58.

[104] Ibid, page 553.

[105] Mark P. Keightley and Molly F. Sherlock. “The Corporate Income Tax System: Overview and Options for Reform.” Congressional Research Service (February 14, 2014), available at http://fas.org/sgp/crs/misc/R42726.pdf.  At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2%, and the payroll tax accounted for 9.7% of revenue. In 2012, the corporate tax only accounted for 9.9% of federal tax revenue, whereas the individual and payroll taxes generated 46.2% and 34.5%, respectively, of federal revenue. The report also noted that whereas corporate tax was equal to 6.1% of gross domestic product (GDP) at its peak in 1952, the tax was equal to approximately 2.3% of GDP in 2011. This significant drop in percentage occurred despite the fact that corporations have been capturing a growing share of the national income from 1946 to 2012.

[106] See Government Accountability Office, Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate. (GAO Report no. 13-520 July 2013), available at http://www.gao.gov/products/GAO-13-520.The first appendix of this report also refers to several other studies on effective tax rates. According to the report, most American multinationals don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent instead, by deliberately stashing piles of cash abroad.

[107] Andrew Ross Sorkin, “Tax Burden in U.S Not As Heavy As It Looks, Report Says”(19 Aug 2014) the New York Times, online: <https://dealbook.nytimes.com/2014/08/18/tax-burden-in-u-s-not-as-heavy-as-it-looks-study-finds/?_r=1&mtrref=getpocket.com&gwh=7637EA0A0D68F437918732A525A8C8C9&gwt=pay&assetType=nyt_now>.

[108] See Thomas Picketty, Capital in the Twenty-First Century(Cambridge: Harvard University Press, 2014).

[109] Donald J.Marples &Jane G. Gravelle, Supra Note 36 page 20. Also see Mortimer B. Zuckerman, “Reform the Tax Code So We Can Have It Our Way”( 19 Sep 2014) the U.S News, online: <http://www.usnews.com/opinion/articles/2014/09/19/burger-kings-inversion-should-spur-congress-to-reform-the-tax-code>. Aaron Forbes& Julia Lawless, U.S. Senate Committee of Finance “ Amid Inversion Talk, Hash Calls for Internationally Competitive Tax Code to Keep Job Creators in the U.S” U.S. Senate Committee of Finance( 8 May 2014), available at https://www.finance.senate.gov/ranking-members-news/amid-inversion-talk-hatch-calls-for-internationally-competitive-tax-code-to-keep-job-creators-in-us. Ian Katz, Richard Rubin& Peter Cook, “Treasury Can Act on Tax Inversions If Congress Won’t: Lew” ( 10 Sep 2014)Bloomberg, online: <https://www.bloomberg.com/news/articles/2014-09-10/treasury-can-act-on-tax-inversions-if-congress-won-t-lew>. Edward D. Klienbard, “Tax Inversions Must Be Stopped Now) (21 Jul 2014) the WSJ, online:<http://www.wsj.com/articles/edward-d-kleinbard-tax-inversions-must-be-stopped-now-1405984126>.

[110] Lee A. Sheppard, “Preventing Corporate Inversions”, 26 Tat Notes Int'L 8 (2002); see also “Corporate Inversions: Hearing Before the S. Subcomm. on Treasury and Gen. Gov 't of the Comm. of Appropriations, 107th Cong.” (2002) (statement of William Gale).Under this new standard, the legal residency of the corporation would be based on where the decision-makers (i.e., managers, officers, and directors) of the corporate group are located, as opposed to where the parent corporation is legally organized.

[111] Ron Wyden, “We Must Stop Driving Business Out of the Country”(8 May 2014) the WSJ, online :<http://www.wsj.com/articles/SB10001424052702303701304579548433123065724>.

[112] Cathy Hwang, Supra Note 54 Page 853.

[113] The Economist, “How to Stop the Inversion Perversion” (24 Jul 2014), online: <http://www.economist.com/news/leaders/21608751-restricting-companies-moving-abroad-no-substitute-corporate-tax-reform-how-stop>. President Obama insists that corporate-tax reform must also raise more money to spend on things like public infrastructure, which the Republicans oppose. They in turn want to package it with cuts in personal tax rates, which President Obama is reluctant to accept.

[114] Mike Patton, Supra Note 18.

[115] Bret Wells, “What Corporate Inversions Teach About International Tax Reform”, (21 June 2010) Tax Notes Page 1346.

[116] John C. Hamlett, Supra Note 50 Page798.

[117] See Mark C. Anderson, A Tougher Row to Hoe: The European Union’s Ascension as a Global Superpower Analyzed Through the American Federal Experience, 29 Syracuse J. Int’L L. & Com. 83 (2001).

[118] Mark P.Keightley & Jeffrey M. Stupak, “Corporate Tax Base Erosion and Profit Shifting: As Examination of the Data”, Apr 30 2015 Congressional Research Service, available at https://fas.org/sgp/crs/misc/R44013.pdf.

[119]  Please see OECD. “BEPS – Frequently Asked Questions.” OECD,2014,available at http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.

[120] Novak Scott, Supra Note 34 Page 42.

[121] See Lee Sheppard, “International Changes the United States Shouldn’t Have Made” (2014) 76:7 Tax Notes Intl 739 at 739 (“The United States is not serious about taxing U.S. multinationals on their foreign income and does not need the revenue. This fundamental understanding is amply demonstrated by the U.S. attitude toward the base erosion and profit-shifting project, which is a polite pretense of participation with quiet undermining.”); Antony Ting, “The Politics of BEPS – Apple’s International Tax Structure and the US Attitude Towards BEPS” (2015) 69 Bull Intl Tax [forthcoming in 2015] (“It appears that the primary objective of U.S. involvement in the BEPS project is not to avoid double non-taxation, but to minimize the impact of the project on the country and its MNEs.”)

[122] Joel Williamson,Charles Triplett& Jason Osborn, “US: the Dust from BEPS Still Swirls, Fuelled in the U.S even More by the Wind of Inversion” (3 Sep 2014) International Tax Review, online: <http://www.internationaltaxreview.com/Article/3377036/US-The-dust-from-BEPS-still-swirls-fuelled-in-the-US-even-more-by-the-winds-of-inversion.html>,which is “ ‘special measures’ that would make it easier to recharacterise related party transactions, a subjective anti-avoidance rule on top of a limitation on benefits provision in tax treaties, and an overly burdensome version of the country-by-country reporting template.”

[123] Ibid.

[124] Daniel J. Mitchell, “Who Americans Should Really Blame for Corporation Inversions” (31 Jan 2016)Fortune, online: <http://fortune.com/2016/01/29/tax-inversions-johnson-controls/Je>.

[125] Jeff Jacoby, “Protectionism Won’t Make America Great Again. If Anyone Should Know That, Trump Should” (24 Jan 2017) the Boston Globe, online: <https://www.bostonglobe.com/opinion/2017/01/24/protectionism-won-make-american-great-again-anyone-should-know-that-trump-should/srwK5QHcC6VHU1KVEUpuIN/story.html>. Also see Charles Krauthammer, “Trump’s Foreign Policy Revolution”( 26 Jan 2017) National Review, online: <https://www.bostonglobe.com/opinion/2017/01/24/protectionism-won-make-american-great-again-anyone-should-know-that-trump-should/srwK5QHcC6VHU1KVEUpuIN/story.html>.

[126] Donald Trump’s Election Campaign document, Trump: “Tax Reform Will Make America Again”, available at  https://assets.donaldjtrump.com/trump-tax-reform.pdf.

[127] Martin Feldstein, “Corporate Tax Reform Wouldn’t Fix Trade Deficit, But It’s A Great Idea Anyway”(30 Jan 2017) Market Watch, online: <http://www.marketwatch.com/story/corporate-tax-reform-wouldnt-fix-trade-deficit-but-its-a-great-idea-anyway-2017-01-30>.

[128] Halah Touryalai, “With Trump Deregulation Order, Is Dodd-Frank A Goner?” (30 Jan 2017)Forbes, online: <http://www.forbes.com/sites/halahtouryalai/2017/01/30/with-trump-deregulation-order-is-dodd-frank-a-goner/#371c3d965ea4>.

[129] The Economist, “The Multinational Company Is In Trouble”( 28 Jan 2017) The Economist, online: <http://www.economist.com/news/leaders/21715660-global-firms-are-surprisingly-vulnerable-attack-multinational-company-trouble?cid1=cust/ednew/n/bl/n/20170126n/owned/n/n/nwl/n/n/AP/8705207/n>.

[130] Mark Broad, “Will Donald Trump Mean the End of Global Trade”( 25 Jan 2017)BBC News , online: <http://www.bbc.com/news/business-38731812>.

[131] The Economist, “The Retreat of the Global Company”(28 Jan 2017) the Economist, online: <http://www.economist.com/news/briefing/21715653-biggest-business-idea-past-three-decades-deep-trouble-retreat-global>.

[132] The Economist, Supra Note 129. General Electric and Siemens are “localising” supply chains, production, jobs and tax into regional or national units. With the strategy of being “intangible”, Silicon Valley’s star companies such as Uber and Google, are still expanding abroad. Fast-food firms and hotel chains are shifting from flipping burgers and making beds to selling branding rights. Also see Matt Levine, “Burger King May Move to Canada for the Donuts”(25 Aug 2014) Bloomberg, online:

< https://www.bloomberg.com/view/articles/2014-08-25/burger-king-may-move-to-canada-for-the-donuts>. Levine claims that tax arbitrage really works for high-margin, IP-driven businesses. It doesn't work for low-margin, labor-and-raw-materials-driven businesses. Being “intangible” is likely to improve the companies’ chances of tax arbitrage.

[133] John Kelly, “Haven or Hell: Securities Exchange Listing Standards and Other Proposed Reforms as a Disincentive for Corporate Inversion Transactions”, 14 Minn. J. Global Trade 199, 199 (2004)-27.


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