Tax inversions back on the agenda

11 August 2015

George Bull 

Tax inversions – remember them? Some months ago, tax inversion deals were in the headlines almost every week, with reports that US companies were seeking opportunities to move offshore profits out from under the US jurisdiction to those with lower corporation tax rates.

The UK was seen as a particularly attractive location for US firms seeking an overseas base, leading to Pfizer’s attempted hostile takeover of Astra Zeneca. Although ultimately unsuccessful, the deal led to a feverish debate in the US over tax policy and much hand-wringing in the UK over the potential loss of a strategically important industry.

The anti-inversion rhetoric in the US reached its peak when President Obama denounced inverters as ‘unpatriotic’ and in February, the White House unveiled a raft of measures to clamp down on the practice including a 19 per cent tax on future foreign earnings and a one-time 14 per cent levy on around $2trn in offshore profits.

Things went quiet for a while, but two deals in the last week – including Coca Cola’s decision to merge its European bottling operations and headquarter the business in the UK - show that inversions are back on the agenda and the UK is once again a location of choice.

So why is this?

The Obama administration has not succeeded in garnering sufficient support in Congress to pass the legislation designed to clamp down on these deals, and the Administration's tough talking has proved to be an insufficient deterrent. Obama's proposals went against the grain of international tax reforms underway elsewhere and seemed almost archaic in their zeal to tax foreign earnings.

Most major economies have shifted away from corporate taxation towards individual taxation with the notable exception of the US. As a result, US corporate tax rates of up to 35 per cent are way above many other jurisdictions.

The UK Chancellor’s surprise announcement in the summer Budget that he intends to further reduce UK corporation tax from its current low level of 20 per cent to 18 per cent by 2020, combined with the generous tax reliefs on offer, are making the UK an even more attractive place for foreign companies to base themselves.

We can expect the US Treasury to take further steps to deter such deals but in the interim, it looks as if it's open season once again.