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3 Corp. Bus. Tax'n Monthly 3 (2001-2002)
Practical and Policy Considerations in Corporate Inversion Transactions

handle is hein.journals/corbus3 and id is 515 raw text is: C O R P 0 R A T E B U S I N E S S T X A T I O N M O N T H L Y PRACTICAL AND POLICY CONSIDERATIONS IN CORPORATE INVERSION TRANSACTIONS CRAIG M. BOISE AND JAMES C. KOENIG INTRODUCTION erhaps the hottest topic in U.S. tax circles over the past few months has been the growing number of U.S. corporations com- pleting or announcing transactions that move their domicile offshore through some form of cor- porate inversion. Companies recently completing or announcing inversion transactions include Foster Wheeler Corporation; The Stanley Works; Nabors Industries, Inc.; Cooper Industries, Inc.; Tyco International; and Ingersoll-Rand Company. In such transactions, the shareholders of a U.S. corporation typically become shareholders of an offshore holding company, which in turn becomes the parent of the U.S. corporation. The offshore holding company typically is organ- ized in a tax haven jurisdiction such as Bermuda, Antigua, the British West Indies, or the Cayman Islands. Notwithstanding the recent trend, and the fact that a great many U.S. corporations have been advised by accounting or consulting firms to con- sider reincorporating abroad, the number of corpo- rate inversion transactions completed to date remains small, and for good reason. There are sig- nificant tax and other obstacles that must be sur- mounted to consummate a reincorporation abroad. The Stanley Works clearly illustrates these difficul- ties. The Connecticut-based toolmaker finally scut- tled its proposed inversion after a torrent of nega- tive publicity and challenges to the transaction from sources as disparate as the Connecticut Attorney General and organized labor.2 Craig M. Boise and James C. Koenig are attorneys at Thompson Hine LLP in Cleveland, Ohio, specializing in domestic and international mergers, acquisitions, and joint ventures. The short- and long-term tax advantages of inverting must be carefully weighed against the taxes that may be immediately imposed on both the U.S. corporation and its shareholders. Adding to the difficulty of evaluating the benefits of an inversion transaction is the fact that a number of measures have been introduced in Congress to penalize inverting corporations, and some states have jumped into the inversion fray as well.3 These measures have been fueled by the negative reaction of the public to the migration of U.S. corporations offshore, and by the perception that such transac- tions are unpatriotic. The concern that this percep- tion may be widely shared by existing or potential shareholders and thus negatively impact a compa- ny's share price has been another factor that has restrained the pace of inversion activity. This article provides an overview of these and other issues that should be considered in deter- mining whether reincorporating abroad through some form of inversion transaction makes sense. We first describe the particular U.S. tax difficulties faced by U.S.-based multinational corporations that may make offshore reincorporation appeal- ing. Next, we address the mechanics of corporate inversion transactions and describe how the exist- ing tax rules apply to such transactions. We follow this with a summary of the Treasury Department's view of inversion transactions and a description of the anti-inversion legislation that has been pro- posed. We conclude with a question-and-answer summary of various issues that should be consid- ered before reincorporating abroad. PROBLEMS WITH THE U.S. WORLDWIDE TAX REGIME The United States imposes income tax on the worldwide income of U.S. persons. A U.S. person, SEPTEMBER 2002

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