News that the US-based biopharmaceutical company AbbVie agreed to acquire its European rival, Shire, and plans to relocate to Jersey, in the English Channel, has brought more media attention to the controversial trend of corporate inversion.
In general, a corporate inversion is a transaction in which a US multinational group restructures, by way of a purchase or merger with a foreign company, so that the US parent is replaced by the foreign corporation. As a result, the domicile of the US corporation changes to a foreign jurisdiction with more favorable corporate income tax rates. The law, as currently written, permits inversion transactions by US companies if the foreign ownership is at least 20 percent of the stock of the combined company. In this case, the financial strategy allows AbbVie to reduce its tax burden by moving to a country with a lower tax rate.
Expect to see a continued uptick in inversions until either new legislation makes it more difficult to invert or comprehensive tax reform includes lowering the corporate tax. While other countries have lowered their tax rates, the US statutory corporate income rate remains at 35 percent and jumps to 40 percent or more when you factor in state income taxes.
Jim Alajbegu, Baker Tilly’s International Tax Firm Leader, was interviewed on the subject of corporate tax inversion by Chitra Nawbatt, anchor and correspondent for CTV News. Jim discussed the financial impact of the AbbVie-Shire merger, reasons for the increase in inversions, types of industries benefiting from using this strategy, and likelihood that Congress would make law changes to stop tax inversion.