Tax inversion has become so common a U.S. business practice that the U.S. Treasury Department needs to chalk out a set of rules to discourage domestic companies from shifting their headquarters. The companies often resort to this practice to evade higher tax payments, seeking to make their bases in nations with lower tax burdens.
The U.S. corporate tax rate is as high as 39.1% (per OECD), the highest among the OECD nations. Also, the U.S. is among the few OECD nations without a territorial tax scheme which provides overseas earnings of domestic companies a relief from domestic taxation, as indicated by Forbes.
Thanks to this stringent policy, a scurry of merger-acquisition deals was noticed in the recent past. Through such deals, the U.S. domiciled companies joined foreign companies and shifted their headquarters to foreign lands where tax rates are lower in order to see a cut in tax bills.
Prompted by this trend, we have seen some high profile merge deals taking place between Medtronic, Inc. (MDT) and Irish medical supplies firm Covidien plc (COV), between AbbVie Inc. (ABBV) and another Irish firm Shire plc (SHPG) and between the famous fast food chain Burger King Worldwide, Inc. (BKW) and Canada-based Tim Hortons Inc. (THI) (Read: Deal Activity at 7-Year High: Merger ETFs in Focus).
To stop the flow of these deals, and the resultant loss in tax revenues, the U.S. Treasury altered some sections of the tax code that make it harder for companies to enter into tax inversion deals. One change includes the end of ‘hopsctoch'. This requires U.S. companies to pay U.S. tax on when their overseas profits are returned to the nation.
The other change is that a U.S. company can reach an inversion ...
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