The main purpose of any given business is to make a profit. It, therefore, has to come up with a way to minimize overhead costs such as taxes and other costs that may reduce the profit margin. In a bid to maximize the profit earned through business activities, companies and firms have adopted different strategies that help them minimize the cost. One of the most popular ways in which businesses are using to minimize their costs incurred is the use of corporate or tax inversion strategies. It is a strategy that aims at reducing the level of taxes paid by the company in a given foreign countries. In this case, companies decide to re-incorporate or register their company in a given country (overseas), as part of its tax reduction strategy on the income earned from that given country (Thomson). Companies that tend to accrue most of their income from foreign countries tend to favor the concept of tax inversion. This helps them to reduce the chances of double taxation on income earned in foreign markets. For an efficient corporate or tax inversion, a country has to select a country that offers safe economic havens for foreign firms. It is therefore rational for a country to incorporate in a foreign country as a strategic measure that will allow it to cut down on the amount of tax that it will have to pay on the income earned from abroad. If that does not happen, the firm will have to pay tax in the country of origin as well as in the country where the income is coming from.
In recent times, there have been recent cases of major companies which have tried to strategize on the ways to minimize their expenditure on tax as part of raising their profit margin on income from abroad. Some have succeeded while others have failed as most governments are looking for ways to earn income from corporate taxes. One example of a corporate tax inversion is the case of Pfizer, a United States company which decided to incorporate itself in the Republic of Ireland. This happened in the year 2015, when the management of company decided to use tax inversion as a way of escaping the 35% income rate tax in the United States. This is one of the highest tax rates in the world and thus it was financially strategic for pFizer to look for a safe haven for its foreign revenue. Ireland being country that offers good rate on income tax was the best alternative for the company due to its low-tax rate (MoneyTips.com). It is a move that attracted much criticism from the Obama administration which opted to tighten the rules on tax-inversions (MoneyTips.com). In a bid to use tax inversion, Pfizer decided to buy stakes in Ireland belonging to Irelands Allergen (AGN) for a sum worth $160 billion (MoneyTips.com). The deal was however terminated due to strict measures on inversion.
Another recent case of corporate inversion is the pending case of the Arris, which is an American telecommunication firm that had decided to invert its taxes by incorporating in the United Kingdom (Thomson). The companys management opted for a tax inversion by having a take-over of shares worth $2.1 billion belonging to British set box firm Pace Plc in 2015 (Thomson). The move was aimed at cutting down on the high taxes the company has to pay in the American market. The move is still pending following the stringent rules placed on companies that aim to use tax inversion as a financial strategy to cut down on taxes.
Despite the move being beneficial to companies in their bid to cut down taxes, most economists and governments have slammed the move as being unpatriotic. It is for this reason that most governments place tough rules on companies that opt to use tax or corporate inversions.
MoneyTips.com. Foxbusiness. 13 April 2016. 14 April 2016 <http://www.foxbusiness.com/politics/2016/04/13/obama-administration-targets-tax-inversions.html>.
Thomson, Cecile Daurat& Amy. Bloomberg. 23 April 2015. 14 April 2016 <http://www.bloomberg.com/news/articles/2016-04-13/peabody-majority-of-its-u-s-entities-file-for-chapter-11>.
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