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Corporate Inversions To Cost US USD12bn By 2027: CBO

by Mike Godfrey, Tax-News.com, Washington

20 September 2017


So-called tax inversions could cost the US Government up to USD12bn in lost corporate tax revenues by 2027, a new report from the Congressional Budget Office says.

In short, tax inversion techniques have been used by some US multinationals to move their tax residences abroad – away from the high 35 percent US headline federal corporate tax rate – and to unlock their unrepatriated earnings held offshore, even if their management and operations remain in the United States. This is typically through a merger or acquisition with a smaller entity outside the US and a change in the US company's tax residence.

Following an inversion-type merger, a US multinational can further reduce its exposure to US corporate tax by engaging in "earnings stripping," wherein US subsidiaries borrow from their new foreign parent company (or another foreign affiliate) to increase their interest payments, reduce their taxable income, and lower their US taxes. The foreign lender then typically pays a reduced or zero tax rate on the interest income under an existing tax treaty.

While there is broad agreement across the political spectrum that large corporations should be discouraged from carrying out inversion strategies, there are stark differences in opinion over how the Government and Congress should go about this.

The CBO's report says that between 1994 and 2014 companies executing an inversion reported an average decrease in corporate tax liability of USD45bn the year after the fact. These companies also reduced their ratio of worldwide tax expense to earnings from 29 percent the year before the inversion to 18 percent the year after.

US companies have engaged in corporate inversions since 1983. In 2014 the combined assets of companies that planned to invert exceeded USD319bn, more than all the previous years combined, resulting in renewed attention from the authorities.

The CBO has warned that continued inversion activity and the shifting of profits to lower-tax jurisdictions could cause the US corporate income tax base to fall by up to 2.5 percent by 2027, equivalent to a loss of USD12bn.

TAGS: tax | corporation tax | offshore | multinationals | transfer pricing | United States | BEPS

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