How companies can save money through tax inversion

Companies that are based in Maryland may be able to save money on taxes by moving their headquarters overseas. Many companies take advantage of lower foreign tax rates by buying or merging with foreign companies and completing what is known as a ‘tax inversion.” Although regulators in the U.S. are trying to make tax inversions more difficult to complete, companies like Coca-Cola Enterprises and CF Industries are still opting to pack their bags.

Corporate tax rates in the U.S. are much higher than they are in countries like Japan, Germany, Canada and Great Britain. U.S. companies with overseas operations must pay taxes on profits that they earn in the U.S. as well as on the profits that they earn in foreign countries. When a company moves its domicile to another country as part of a tax inversion, it can pay only the local tax rate in all of the countries that it operates in.

One of the roadblocks to inversion is the 80 percent rule. This rule requires companies to be taxed at the regular U.S. rate if they complete an inversion that results in the company’s American shareholders owning at least 80 percent of the merged foreign company. In countries like Great Britain, governments are now requiring companies that relocate to have a strong domestic presence. This requirement is resulting in more corporate jobs moving out of the U.S. and into London.

Inversion is a complicated process, but it can make sense for companies that do a lot of business overseas. A company that is considering an inversion may want to consult an attorney about whether the move is feasible. An attorney may also be able to suggest other corporate tax planning strategies.

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