Corporate inversion: Impact on United States' economy
What is a corporate inversion?
Corporate inversion is a tax avoiding strategy in which a multinational company in the United States renounces its citizenship and re-incorporate itself in a tax haven country to avoid paying taxes on its foreign income.A multinational company has operations in more than one countries; however, it declares one of them as its home where the parent company resides. An inversion deal changes the parent company with no changes in operational behavior. Corporate inversion has never been the talking point of mainstream common people because of the complex nature of corporate financial accounting and taxation rules. But the recent wave of inversions made
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the media abuzz over it, and more people are becoming conscious of its detrimental effect. From IRS perspective, this means a huge drain in tax revenue. This huge drain combined with rising number of inversions have made the policymakers concerned. History: According to the Congressional Research Service, over the past 10 years, 47 U.S. corporations have changed their legal residence through corporate inversions. There have been 12 corporate inversions since 2011 alone, with at least 10 more waiting in the wings1. The initial wave of inversions halted in 2002, when U.S. congress passed bill to stop them. However, another wave resumed in 2004 when the anti-inversion bill passed in Congress, and corporation discovered a few exceptions to the law. Source: Data Compiled by Bloomberg. Click here for more information on past and pending inversions. Source: http://www.bloomberg.com/infographics/2014-09-18/tax-runaways-tracking-inversions.html The recent acceleration of corporate inversions is troubling. But the number of inversions is not significant in comparison to the total number of C corporations incorporated in the United States. IRS statistics tells that there are 1.6 million C corporations in the United States; approximately 4,000 of them are public2. The number of inverted corporation is approximately ~1%. The following table lists down some of the recent inversions 3. Source: Data Compiled by Bloomberg Where Inverted Companies Have Gone? U.S. companies inclined to corporate inversion tend to choose countries with low or no corporate income taxes. A decade ago, Bermuda was the most popular destination; now it’s Ireland. Driver for corporate inversion: Tax rate: The US income tax rate for corporation is 35%. It is the highest among the 34 countries in the Organization of Economic Cooperation and Development (OECD). As seen in the graph below, other OECD nations have decreased their tax rate whereas United States has been constant at 35% for quite a while. As a result, United States Corporation ends up paying the highest tax in comparison to its peers in other developed nations. Image Although in reality, very few corporation end up in paying that high rate. There are numerous tax break options available. The effective rate generally falls from 13 percent to 17 percent for even those that are profitable.26 corporations paid no U.S. income taxes from 2008 to 2012, including General Electric, Boeing and Verizon. 111 companies paid no income taxes in at least one of those five years 4. But there is a caveat to the special breaks in the tax code. They are only available to certain industries . Therefore, some companies have low effective tax rates, while others pay closer to the maximum rate. Many domestic companies face a disadvantage when competing against multinationals who enjoys those tax breaks. Policymakers on both sides of the political aisle agree that the U.S. tax rate should be reduced. However, the reduction must be accompanied by a reduction or elimination of the special tax exceptions many companies enjoy. Tax on global income: There are two tax systems in the world- territorial and worldwide. In territorial tax system, only domestic income are taxed but not foreign income; whereas in worldwide tax system corporations have to pay taxes on all of its income, regardless of geography. Although territorial tax system is the most prevalent tax system in the world, the U.S. tax system has been an outlier in the world economy. 28 of the 34 OECD nations (and all other G8 member countries) have adopted some form of territorial tax system. A decade ago the number was just 17.5 U.S. tax system is not purely a worldwide system. US allows the same corporations to defer paying U.S. tax on profits earned overseas until they repatriate those profits in the U.S. . This deferral is a big exception to a worldwide taxation principle. When that income is repatriated, tax is reduced by any foreign tax already paid on it. Thus, there is no double taxation. On the other hand, territorial tax systems have strong provisions to prevent domestic companies from shifting income to foreign subsidiaries . United Kingdom is introducing a 10 percent tax on the patent-related income of U.K. companies. This tax will also apply to income earned by a foreign company the U.K. company controls. Such measures makes the tax rate in some territorial countries higher than effective corporate tax in the U.S. . Deferred foreign earning As mentioned earlier, the foreign earnings of US corporations are not taxed until they are repatriated. Such earning are considered deferred earning. As long as the corporation is incorporated in US, there is a potential that those earning will be taxed later. However, after inversion foreign profits are no longer subject to US tax. The legal home for the new company is now a country with no income tax on foreign income. US multinational holds trillions of dollar in their deferred accounts 6. The sooner they can invert, the earlier they open up the possibility of paying low tax or no tax on those income. These big pile of cash hoarded outside of US is a big driver for corporations to invert. The following table shows the top 15 companies with most money held offshore. Image The inherent provision in the tax system to use corporate inversions to avoid U.S. tax on deferred earnings is unfair. In many cases, the intellectual property used to earn those profits has been developed by the US part of the company. As a result, the contribution of the government's legal system, research and transportation infrastructure, and educated workforce cannot be ignored. Earning Stripping A US corporation can finance its foreign operations with loans . The loan is deducted against the Us earning. It is called earning stripping, as it effectively trims off the taxable earning from US company. Since the corporate tax rate is high on US part, they try to reduce the earning in US as much as possible and transfer the profit to a foreign affiliate. There are provisions in tax code to combat such stripping. However, they are not strong enough to address all the tax avoidance cases by the corporation. IRs has had mixed success in challenging the corporations to stop such practices. Because earning stripping along with deferred earning can be significantly financially rewarding after inversion, it works a big influence on inversion decision. For example, Medtronic could use $20.5 billion in its untaxed profits now offshore to invest back in US and avoid paying taxes on those funds. Competitiveness United States companies cite competitiveness as a reason of their inversion. Let us consider Proctor & Gamble and Unilever. Both of them sell consumer products worldwide. P&G is based on Ohio, whereas Unilever is based on based on Netherland and Britain. Unilever enjoys 55% of sales in emerging markets whereas P&G has only 37%.7 The gap in market share in emerging market between is Unilever and P&G is widening every year. The reason lies in the inherent structure of emerging market. The profit margin in those emerging market is low. No tax on those low-profit margin provides an incentive for Unilever to win those markets. As international business becoming more and more important part of the business, corporations are adopting suitable strategies to boost their international business- inversion being one of them. The opponents of such reasoning do not see it like that. According to them, the profit of United States companies is at all time high.Corporate revenue is declining as a percentage of total revenue from about one-third in 1950 to about one fifth today. US corporations are bigger than most of its rival in other countries in terms of profitability, revenue and market capital. Image Image Benefits to the corporations Tax saving Inversion can save billions of dollar in terms of tax savings.
Walgreens, which had $72 billion in U.S. sales last year, would likely avoid $4 billion in U.S income taxes over five years if it inverts with a Swiss firm. Pfizer, which tried to do an inversion with AstraZeneca in the U.K., would dodge $1 billion a year in taxes here. Also, U.S. companies with billions of untaxed profits offshore can escape paying taxes on those profits in America if they invert. . 8
New Customer
Inversion allows corporations to reach new customers. It also facilitates better global cash flow. Sometimes the inversion to neutral countries provides a level playing merger for the corporations. For example, if the US and French company merge, the French might perceive the US is dominating the show. Reincorporation in a country like Netherlands, Ireland, UK or Luxembourg, therefore, facilitates a better collaboration for multinational corporations via merger.
Flexible governance
The global landscape for business has become increasingly complex. Flexible governance is needed to operate in many markets. US impose a rigid governance model whereas many EU jurisdictions like Netherland offers corporate law that allows flexible governance models. As a result, businesses have the flexibility of setting it up. One such example is flexibility to operate management and supervisory board as a whole or
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separate. Strategic advantage Sometimes, the newly formed headquarter provides strategic advantages. US corporations view Ireland as a gateway into Europe. In order to create a larger footprint in Europe, such strategic locations are handy. It also gives access to the highly skilled labor force. Cost of corporate inversion: Tax burden for common people The losers in corporate inversion are Federal government and general people. Inversion transactions erode federal tax base, places a larger burden on all taxpayers, including medium and small businesses and hardworking Americans. As the federal debt increasing every year, the federal government cannot afford to loose any legal source of revenue. The $20 billion in missed federal tax revenue over the next decade estimated by the Joint Committee on Taxation is big enough not to let go. It is approximately 0.5 percent of overall corporate tax revenue (about $4.5 trillion) during the same period.9 Tax hit for shareholders In addition, corporate inversions can affect the average mutual fund shareholder. Stockholders in companies that complete an inversion are treated by current IRS rules as if they have sold their shares. They will then owe taxes on all capital gains earned since they bought those shares. Choosing to continue as shareholders of the new entity does not help to avoid this huge tax. Mutual fund shareholders get hit with large short-term capital gains if their funds own shares in “inverters.” Negative impact on credit rating Inversions can harm corporations' credit ratings. Inverter company undertakes a large amount of debt to fund inversion deals. They also use funds in deferred earnings accounts to buy back company shares and make dividend payments. Both of these hurts the credit rating. Case study 1: Walgreen A few years ago, Gregory D.
Wasson, the chief executive of Walgreen sought a series of tax breaks from Walgreen's home state, Illinois.The state awarded $46 million in corporate income tax credits over ten years to Walgreen. The state asked for a commitment to create 500 jobs . In addition, Illinois also provided $625,000 in training money and $875,000 in other tax incentives. After all those incentive, Walgreen is now considering moving the company's headquarters to Switzerland as part of a merger with Alliance Boots, a European drugstore chain10.
This proposed inversion is an affront to United States taxpayers. A quarter of the revenue of Walgreen comes directly from the government; it received $16.7 billion out of its total $72 billion from Medicare and Medicaid last year.
According to Americans for Tax Fairness, a inversion move by Walgreen to Switzerland would cost United States taxpayers about $4 billion over a period of five years. Illinois taxpayers in particular would be hurt most. The company's tax rate would be cut from 31 percent at present to 20 percent as part of the merger.
It is not illegal for the United States company to seek to lower its tax rate by merging with a foreign company. However, such deals have large consequence. If Walgreen were to move, CVS would most likely to be next. CVS's tax rate was about 34 percent last year. The inversion would make CVS less competitive than a reincorporated
Walgreen.
The charts below highlight the revenue centers for the respective legacy organizations of Walgreens and Alliance
Earlier on this paper, the industry five forces analysis has been discussed generally. In this part, the paper analyzes Walgreens ' actions based on industry five forces model and suggests the next actions that Walgreens would rather do to maintain and improve its power in each five areas. This section will go into each force of five forces model in the order of priority, including bargaining power of buyers, the threat of substitutes, the degree of rivalry within the industry, the threat of new entrants, and bargaining power of suppliers.
With Wal-Mart being so outrageously huge in this short of time, I believe that it has not yet settled into their customers why Wal-Mart is so cheap. Wal-Mart will replace higher wage jobs with lower wage jobs and require taxpayer assistance to keep Wal-Mart employees out of poverty. Numerous studies reveal that, contrary to the company's PR, Wal-Mart does not create new jobs when it comes to town. Wal-Mart simply replaces higher paying retail jobs with lower paying ones and, due to its adverse impact upon local businesses, may actually cause a net decrease in job numbers. The factories in China supply their employees with a whopping three dollar...
Walgreens was founded in 1901 measuring 50 feet by 20 feet by Charles R. Walgreen, Sr.. Mr. Walgreen was born near Galesburg, Illinois and his family later relocated to Dixon, Illinois at town about 60 miles north of his birthplace. Mr. Walgreens’ father was a farmer who turned into a businessperson and saw a great potential of the Rock River Valley (Walgreen, n.d., p.1). At age 16, Charles Walgreen had his first experience working in a drug store. He didn’t always have pleasurable experiences but it was a job with pay. He had an accident at a shoe factory that cut off his left middle finger from the top joint. This injury also stops him from playing any sports at school. After a year and a half with the drug store, Mr. Walgreen left to pursue something bigger in the big city-Chicago.
More than 95 percent of the stores to be closed in the USA are near another Wal-Mart, including all the Wisconsin locations. The company said the stores it plans to close are generally poor performers, and most are within 10 miles of another Walmart. Financial performance is just one of many factors the company took into account when deciding which stores to close. Of the 16,000 associates or employees to be affected, 10,000 will be in the United States. The company aims to place those associates in nearby
There are 940 stores just in British Columbia or 10.6% of the Canadian market. The most competitive are Shoppers Drug Market and London Drugs. Shoppers Drug Market makes up 31.8% of the whole Canadian market, so we figured we should look into a smaller city in order to eliminate a high number of competition. We selected Fort St. John, BC because according to the city website, it is the biggest and secondest fastest growing city in the province. It does have drugstore pharmacies in the area, but we could not find any that offer 24 hour service, which would make us stand out. As of now, it has over 21,000 people that make an average annual income of $69,001.10. Young couples with children make up most of the population. In comparison, the target market for Walgreens in the US is women 25 to 54 years old with two children and an average annual income of $48,000. We believe Walgreens has potential in Fort St. John because this “energetic city” is flourishing at such a high
The IRS usually do not need to validate ordinary business transactions since both the involved parties behave on their own self-interests. However, the IRS is skeptic of any transactions when it comes to evasion of estate taxes and international subsidiaries. When two unrelated companies enter in a transaction, they are involved in arm’s length transaction. However, such is not the case for related companies as they may try to distort the price of the transaction to avoid tax burden. As the boundary of tax evasion and tax avoidance is very thin, especially when it comes to estate tax and international subsidiaries, people often tend to topple over to the evasion side. The case of Estate of H.A. True, Jr. v Commissioner of Internal Revenue in 2005 illustrates the difficulty of obtaining the objective of tax avoidance and how expensive the failed effort of tax avoidance can be (Journal of Financial Service Professionals). Numerous cases of tax avoidance and evasion such as XILINX Inc. and H.A. True illustrate the confusion surrounding the arm’s length standards (ALS) and its application to cost sharing agreements (CSAs). In case of XILINX, the court altered its decisions few times considering the uncertainties of the arm’s length standards. Meanwhile the company believed to have satisfied the standards. Due to the complexity of the arm’s length standards, these cases were compared to other similar transactions. However, it is rare to find two identical cases which meet all the criteria. In both of these cases, the court couldn’t pin point what the actual standards of the arm’s length standards were, giving rise to opportunities of tax evasion. To put the arm’s length standards to a simplest form, the standard requires the two related parties to structure their transactions in such a manner as they would if they were two unrelated parties in similar
Investor's, B. D. (2014, Janurary 8). Health Reform Wal-Mart's Way. Investors Business Daiky, p. A14.
A merger is a partial or total combination of two separate business firms and forming of a new one. There are predominantly two kinds of mergers: partial and complete. Partial merger usually involves the combination of joint ventures and inter-corporate stock purchases. Complete mergers are results in blending of identities and the creation of a single succeeding firm. (Hicks, 2012, p 491). Mergers in the healthcare sector, particularly horizontal hospital mergers wherein two or more hospitals merge into a single corporation, are increasing both in frequency and importance. (Gaughan, 2002). This paper is an attempt to study the impact of the merger of two competing healthcare organization and will also attempt to propose appropriate clinical and managerial interventions.
and 2000 for a spokesperson had publicly mentioned that more than two thirds of our people are not trying to support a family that 's why our jobs are designed for, and yet it seems that they 're low wages and 2000 for a spokesperson had publicly mentioned that more than two thirds of our people are not trying to support a family that 's why our jobs are designed for, and yet it seems that they 're low wages don 't even support those who aren 't trying to support a family. So who do they help? Walmart doesn 't provide adequate healthcare, the healthcare isn 't just for the family it is for everyone who would like good health. But while Walmart has its downs it also has a few pros, like their genius inventions such as the Telon, And their ingenuity have helped make and bring Walmart to the top. They have intelligently used their barcodes on products to bring about information, such as how many our soul, how many are expected to be sold, prices and even discounts. Then Walmart brilliantly patented the idea so if other competitors want to stay in the game, they have to buy this idea from Walmart just to keep up with Walmart. It 's pretty brilliant when you think about it. They also use a open price system where you are drawn into a department by the low prices they stick in front and you stay because you assume that other products in this department will have similar low prices, when in reality they might be more expensive than other
Wal-Mart has taken their mind and cash over the last 20 years to become the world’s largest retailer. Wal-Mart had a base of 2,200 stores in the 80’s, closing out of the 90’s with a bang of 3,600 stores and $4.4 billion in net income. Spurred by NAFTA, Wal-Mart took advantage foreseeing potential growth in the foreign markets. Currently they have stories in the following countries: Mexico, Puerto Rico, Canada...
Whenever a huge corporation such as Walmart moves into an area with local stores and merchants, all of them are bound to go out of business because all the customers will be attracted to the huge selections and discount. There has been huge protest by these merchants and locals whenever a Walmart is being decided to be implanted there. This hurts their business which can make families go bankrupt and although it can create job opportunities within the Walmart but as you know Walmart has really bad working conditions such as no wages and unfair treatment. Walmart is also to be said to be the most poorly run and understaffed retail store. In previous studies Walmart was shown to be listed as the lowest in customer satisfaction. If you have visited a Walmart previously you might have seen the customers swarming over just 2 or 3 checkout lanes. In recent days Walmart has been better about this by opening more lanes up whenever there are more
... helps employees feel that they have support and comfort. In addition, companies provide scholarships and internship opportunities to each community, which indicates that Walgreens does this to all the 50 states in United States and all the communities.
Wal-Mart’s FSAs, as mentioned in the case, are its ‘every day low price’ (EDL) philosophy and its so-called ‘exceptional service’. The every day low price philosophy is based on efficiency: efficient processes with suppliers and efficient distribution systems. Furthermore, Wal-Mart negotiates low prices with its suppliers and works with innovative technology. This FSA could be seen as internationally transferable. However, in this case it is only transferable to the point where this strategy was hindered by German rules and regulations. Because of German law, Wal-Mart Germany was unable to expand rapidly and thus
Companies merge and acquire other companies for a lot of strategic reasons with different degrees of success. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The impact of mergers and acquisitions on an organization can be small and big in other cases. Mergers and acquisitions immediately impact organizations with changes in rights, and ideas and eventually, in practice. There are multiple reasons, some are motives and financial forces just to name a few.