Inversions are not new. Inversions reduce U.S. taxes on foreign income—not on U.S. based income. Yet in a short period they have undergone a startling metamorphosis.
Once they were interesting transactions for a few companies with the right facts and international ambitions. Then almost out of the blue, these deals became one of the hottest trends in years. Equally suddenly, inversions—and those perpetrating them—became pariahs. They carry hard to quantify negative press and investor relations backlashes.
They even carry the possibility of a retroactive legislative fix, although that seems increasingly unlikely. The information, misinformation, and invective is also hard to quantify. Although inversions probably commenced in the 1980s, there were few even through the 1990s.
The U.S. flag from close up and at an angle. (Photo credit: Wikipedia)
There was the inversion into Panama of McDermott International in 1982, followed by the inversion into Bermuda of Helen of Troy in 1994. Tyco International, which would later become infamous over the criminal conviction of CEO Dennis Kozlowski, inverted into Bermuda in 1997. Other inversions followed, including Fruit of the Loom into the Cayman Islands in 1998, Ingersoll Rand into Bermuda in 2001, and Transocean into Switzerland in 2008.
As the trend became something Congress thought was abusive, it put the brakes on inversions. In 2004, the tax code started requiring inversions to have more than 20% foreign ownership. One of several 2014 proposals to stem the new inversion tide would increase this 20% rule to 50%. The controlling buyer would really and truly have to be a foreign company.
Even under existing law, a domestic company can be classified as a surrogate foreign company if the domestic company's shareholders own at least 60 percent of the inverted company after the transaction. If there is continuity of ownership between 60 and 80 percent, the provisions restrict the inverted company's ability to use historical tax attributes.
If there is continuity of ownership of 80 percent or more, the surrogate foreign company is treated as domestic. Having 60 percent continuity of ownership can also trigger excise taxes to officers. However, this may not be a significant deterrent. Some companies will pay excises tax for their officers, grossing up their compensation.
Notable 2014 inversion developments may help explain some of the hysteria:
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