What is Tax Inversion? Can Our Company Use It to Reduce Taxes Like Burger King?

What is Tax Inversion?

Companies with a headquarters in the United States must pay taxes on all income, including income from business operations outside of the United States. However, if that company moves its headquarters to another country, ceasing to be a United States company, it would no longer have to pay taxes on revenue derived outside of the United States because it would become a foreign company. This concept is called tax inversion.

Does Tax Inversion Eliminate Taxes on U.S. Profits?

No. Tax inversion does not eliminate federal or state taxes on profits derived from operations in the United States. Even foreign companies are taxed by the United States on profits derived from operations within the United States.

Does Tax Inversion Eliminate Taxes on Funds Entering the U.S.?

No. Companies using a tax inversion strategy still must pay taxes if they bring those profits into the United States. However, companies who (1) create a foreign subsidiary company and (2) borrow from that company, may bring the funds from that loan into the United States without paying income taxes because loans are not taxable income (income tax applies to profits, not loans, because loans must be repaid).

Does a Tax Inversion Cause Consequences for U.S. Shareholders?

Often, shareholders in the United States will owe capital gains tax when the tax inversion occurs. To pay this tax bill, shareholders will need to come up with money even though they generally receive no money from the deal. Forbes explains:

Shareholders often owe capital gains tax. However, unlike in many mergers where there’s a swap of old shares for new on a non-taxable basis, shareholders pay tax. And unlike many taxable stock swap deal, inversions usually don’t hand out cash. (Source)

Can Our Company Use Tax Inversion to Reduce Taxes?

If your company has significant revenue derived from outside of the United States, you may be able to benefit from tax inversion or similar tax strategies. You should consult with an accounting firm experienced in international tax strategies.

Is Tax Inversion Legal?

Yes. At the time of this writing (2014), tax inversion is a legal strategy to reduce corporate income taxes in the United States. Courts have uniformly held that taxpayers may use lawful methods to minimize taxes.

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. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

– Judge Learned Hand

See Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).

Should Tax Inversion Be Legal?

This is a hot political topic. People have different views:

1. Tax inversion should be illegal: Those who support this view generally want corporations in the United States to pay more taxes. They call tax inversion a “corporate tax loophole.”

2. Tax inversion should remain legal: Those who support this view often raise three points:

  • Morally, the United States has no right to tax business operations and revenue wholly outside of the United States. The United States should only tax money brought into the United States or owned by U.S. taxpayers.
  • Legally, the United States could have difficulty justifying a tax on foreign companies with revenue wholly outside of the United States.
  • Practically, making tax inversion illegal would have no significant effect because international companies would adapt, reorganizing on paper to avoid U.S. taxes on profits from operations outside the United States.

Disclaimer: Do Not Rely on This Article for Your Taxes

This is general information intended to educate the public. To simplify learning, many exceptions have been excluded and ignored. Do not rely on this as tax advice for your situation. Consult with an independent tax advisor.