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 that generate a significant portion of their income overseas may benefit from relocating to a country with a lower tax rate. A corporate inversion occurs when a foreign entity acquires a company or when two companies merge to create a new company. The headquarters is relocated to the foreign country, while operations in the original country remain essentially unchanged. The United States is one of the few countries that taxes income earned abroad. By moving to another country, overseas income would no longer be subject to U.S. taxation but would instead be taxed in the foreign country, typically at a lower rate. Additional savings arise because most countries do not tax income earned outside their borders. However, U.S. taxes would still apply to income generated within the United States.
For example, in 2014, Burger King merged with Tim Hortons, a Canadian donut chain, to form Restaurant Brands International. The headquarters was relocated to Canada, which has a lower tax rate. Additionally, Canada only taxes income earned within its borders. The move did not impact Burger King’s U.S. operations. Restaurant Brands International will continue to pay U.S. taxes on its operations within the United States, but the inversion has eliminated its tax liability to the U.S. government for income earned outside the U.S.
Ireland is a popular destination for corporate inversions because it is a welcoming country and it has the lowest statutory rate of any of the Organisation for Economic Co-operation and Development (OECD) countries. Visit this article in Bloomberg for a list of inversions and welcoming countries.
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