Serial Inverters Curtailed As Global Reforms Move Forward

The US Treasury Department’s recent rules against corporate inversions are intended to stop “serial inverters.”

The three-year limit on foreign companies’ bulking up on US assets to avoid ownership requirements for a later inversion deal was enough to scupper the planned Pfizer-Allergan deal—because Allergan itself was a result of a number of inversions. But it’s considered unlikely to impact the planned Johnson-Tyco and IHS-Markit deals—as, unlike Allergan, the non-US partners have not made acquisitions over the past three years.

Corporate inversions involve a larger US company merging with a smaller foreign company and relocating the tax residence of the merged company within the foreign jurisdiction, where it will be taxed at a much lower rate.

“In my view,” says Ben Jones, partner at the London office of advisory firm Eversheds, “the recent inversion announcements by the US Treasury probably represented all the US government can do to crack down on an activity that has the disapproval of both sides of the political divide in the US. Inversion activity is a symptom of the outdated US tax system, and fixing that system would be the ultimate panacea, but the type of fundamental change required to fix the US tax system is just not possible in the current political climate, particularly given the forthcoming elections.”

So, although US domestic tax policy may not be leading the charge, Jones says, global tax reform, in the form of changes being proposed by the OECD as part of its Base Erosion and Profit Shifting program, is well under way.

“Some of the issues that are at the heart of the corporate inversion debate—tax competition between states, earnings stripping through artificial structures and holding structures without appropriate substance—are also being targeted by the BEPS project,” he says.

The US has been a reluctant participant in the BEPS process and a slow adopter of OECD recommendations. “While greater engagement in the BEPS process may not directly impact the corporate inversion issue, it could, in my view, better set the stage in the US for domestic tax changes that could ultimately protect the US from the type of profit-shifting and tax-planning activities of which corporate inversions are but one example,” concludes Jones.