Love It and Leave It?

The hue-and-cry over inversions may change the way overseas income is taxed.

Otherwise, there is little change besides an exchange of U.S. stock for stock of the new foreign company, which typically carries the same symbol it had before. Indeed, so nominal is the change that Ingersoll-Rand, Tyco International, and Cooper Industries–all now Bermuda firms–continue to be listed on the S&P 500, which excludes non-U.S. companies.

The recent rush to invert has been driven by the fact that the recession and lower stock values have weakened the tax code’s existing deterrent to such corporate emigration. Following the February 1994 inversion of Helen of Troy, the IRS limited inversions by levying a capital gains tax on most exchanges of U.S. stock for foreign company stock. That move, until recently, made inversions relatively rare. “Over the last eight years, just a few companies would expatriate per year,” explains John M. Peterson, chair of the global tax practice of Chicago-based Baker & McKenzie, which claims to have pioneered inversion by advising Helen of Troy. “But more recently, with the stock market down, there has been a flurry of activity.”

It’s that timing that has fueled much of the anger in Congress, where the expatriations are seen as capitalizing on the economic effect of the September 11 terrorist attacks. “Here’s a company pulling up stakes when the cleanup at Ground Zero is barely done,” charged Grassley on news that The Stanley Works shareholders had approved reincorporation in Bermuda.

Yet most companies with inversions in the works seem largely undaunted. The Stanley Works, for example, says it plans to proceed with its inversion, despite a warning from Grassley that it was “setting up a showdown with Congress,” as well as charges of irregularities in its shareholder vote by the Connecticut attorney general that have since forced the company to schedule a revote.

Cooper Industries actually turned the September 11 argument around, noting that it had explored “every reasonable alternative that could maximize value for Cooper’s shareholders, including a sale of Cooper in whole or in parts,” but found no takers after the terrorist attacks. The company predicts reincorporation will reduce its effective tax rate from 32 percent to as low as 20 percent, generating $55 million annually in additional cash flow.

Shareholders of New York-based Leucadia National Corp. approved a Bermuda inversion in May, although the firm plans to wait until the one-time tax hit can be reduced from an estimated $315 million to $100 million. CFO Joseph A. Orlando refuses to explain how the company plans to do so–”I think it’s clear enough from [our proxy statement] what we are doing,” he says–but Leucadia has not been shy about its motives. The benefit of avoiding U.S. corporate tax on overseas investments, declared chairman Ian M. Cumming and president Joseph S. Steinberg in their annual report letter, “is at the heart of what we are paid to do–increase shareholder value.”

American Exceptionalism

At the heart of the arguments for inversion is the claim that the United States stands essentially alone in taxing income earned overseas. That’s not entirely true–there are other countries that tax overseas income, and U.S. firms do get credit for income taxes paid to other countries with which the United States has tax treaties. But most other countries have simpler territorial systems that tax only income earned within their borders, or use value-added taxes that are refunded for exports. “No country has rules for the immediate taxation of foreign-source income that are comparable to the U.S. rules in terms of breadth and complexity,” says the May Treasury report. Inversion, it adds, is often referred to as “self-help territoriality.”


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