Inversions Case Study

1784 Words 8 Pages
Stuart Casey
Professor Ryder
Corporate Inversions

Do you know what McDermott, Tyco, and Herbalife have in common? Even though they are all in different industries they have all taken advantage of the tax breaks that come with a corporate inversion. Tax inversions are a relatively new idea in the history of taxes. The first company to succeed in the modern form of inversions was an oil service and construction company located in Houston, Texas called McDermott. In 1984, McDermott did not buy a foreign subsidiary or merge with a foreign company to move “offshore”, but just moved its tax home to Panama. It would be another 10 years before the next company to complete the move overseas. This happened when a cosmetic company called Helen of
…show more content…
Initially one would believe that the corporate inversion would be great for the shareholders, but this may not be the case. Since most of the inversions that happen today involve some kind of stock for stock swap. This swap leaves the shareholders with a possible capital gain because it is looked at as the shareholder buying the foreign firms stock with the domestic firms stock. The second possible downfall that the shareholders could face is paying the levied 15% tax on stock options required by code section 4985 for executives in the company. An example of this happened this year when Medtronics merged with Ireland based Covidien, and instead of making the executives in the company pay the tax that was excised on their options, the company paid it resulting in a tax bill to the company of $63 million. (Tax Anaylst 2). Also, economically there is no guarantee that the lower tax bill will help the company to outperform the market or allow the company to pay a higher dividend to its …show more content…
Before doing my research, my opinion on corporate inversion would be totally different than now. I would have said let the company move overseas, the company is trying to maximize shareholder wealth. This idea of course has become the major duty of corporate executives in the United States. But, moving the company overseas does not maximize the shareholder 's wealth, but actually takes aways some of their wealth. The company spends all of this money to be “acquired” by a foreign firm to reduce the taxes paid. This reduction is taxes is a savings of real money and cashf low that can be spent on other things to grow the company or pay a higher dividend through the the year. The problem to this idea is most of the 40 or so companies that have moved overseas in the past 20 years have not seen a larger stock price move than companies that are located here in the United States. Also, dividend payout has increased at the same rate or below the dividend increase in the domestic companies. So, the real people that benefit from an inversion transaction is the corporate executives and major shareholders of the company, who happen to be the same individuals who structure the deal. This is why Rep, Levin 's bill is so important. It would help align the executives benefit or loss with the common shareholders like you and I. And if

Related Documents