Corporate Inversion

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Definition of Corporate Inversion:

Negotiating a corporate inversion is a tax strategy used by companies to reduce their income tax by moving their operations to another country with lower tax rates.

Detailed Explanation:

Companies earning a large portion of their income overseas may benefit from relocating to a country with a lower tax rate. A corporate inversion occurs when a company has a foreign company acquire them, or when two companies merge and create a new company. Headquarters is reestablished in the foreign country – but operations in the old country remain unchanged. The United States is one of the few countries where taxes are paid on income earned overseas. By moving to another country that income would no longer be taxed in the US. It would be taxed in the foreign country, but at a lower rate. Additional savings would accrue because most countries do not tax income a company earns outside its borders. US taxes would continue to be paid for earnings earned in the United States. 

For example, in 2014 Burger King and Tim Hortons, a Canadian donut chain, merged to become Restaurant Brands International. The headquarters was moved to Canada, where there is a lower tax rate. Furthermore, Canada only taxes income earned in Canada. Burger King operations in the United States should be unaffected by the move. The company (Restaurant Brands International), will continue to pay US taxes, but only for operations in the United States, thereby eliminating its tax liability to the US government for operations outside the US. 

Ireland is a popular destination for corporate inversions because it has the lowest statutory rate of any of the Organisation for Economic Co-operation and Development (OECD) countries and a welcoming government. Visit this article in Bloomberg for a list of inversions and welcoming countries.

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