US Academics Study Causes And Consequences Of Corporate Expatriations

by Mike Godfrey, Tax-News.com, Washington

29 October 2002

Reporting on the results of a study on corporate inversions recently released by researchers from the Harvard and Michigan Business Schools, the Bermuda-based Royal Gazette observed that the conclusions would 'only surprise those outside Bermuda'.

With Congress in recess for the November elections, the US debate over corporate inversions - whereby a company based onshore, but with an offshore subsidiary, decides to 'invert' its corporate structure, so that the foreign subsidiary becomes the parent company and vice versa - has temporarily stalled, but no-one in the jurisdictions which have recently undergone such rigorous scrutiny from US lawmakers, is prepared to bet that the furore over the issue of offshore relocations is likely to die down any time soon.

However, a study conducted by Professor James R. Hines Jr, and Professor Mihir A. Desai (of Michigan and Harvard respectively), has suggested that the view currently taken of the process in the United States is excessively simplistic, according to the Royal Gazette.

The newspaper reported on Monday Hines and Desai's observations that: 'The decision to invert the corporate structure...is influenced by interest expense allocation rules associated with lost tax shields, and the forced capital gains realisation and consequent tax burden imposed on shareholders.'

The academics found that stock price reactions can sometimes play a large part in the decision to relocate corporate headquarters, as they tend to react positively to such news. The Royal Gazette revealed that Hines and Desai found that prices tended to rise: 'by an average of 1.7% over a five-day window centred on the announcement to expatriate'. However, this means that shareholders incur sizeable capital gains liabilities when required to exchange their old shares for new ones as part of the inversion process.

'The fact that embedded shareholder capital gains discourage inversions suggests a natural counterweight to the rush to expatriate, one that supplements any costs associated with being subject to the corporate laws of new host countries, and the public relations impact of abandoning the United States,' the report - soon to be published in the National Tax Journal - observed.

The Royal Gazette concluded by expressing the hope that although the observations contained within the research 'were considered obvious by those looking at inversions from a non-US perspective', they may help the House and Senate to take a more balanced view of the situation when they return to the debate after the Congressional elections.

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