Despite hurdles, companies could merge with a smaller foreign company and relocate outside the U.S. to avoid a big tax bite.

Companies could start looking at inversions again as a way to avoid higher taxes should the Biden administration’s tax-increase plan pass, tax specialists say. 

Inversions had a moment in the early 2000s when the top corporate marginal tax rate was 39.6% and other provisions in the tax code made it financially beneficial for U.S. companies to move their headquarters to low-tax countries.

The practice came to be known as inversions because the move typically involved a company merging with a smaller overseas competitor to domicile outside the U.S. 

In one of the most well-known such moves, Burger King in 2014 merged with Tim Horton’s, the Canadian fast food franchise based in Toronto, to lower its tax bill by some $275 million a year.

The Minneapolis-based medical device maker Medtronic moved its headquarters to Dublin in 2014 after merging with the smaller Covidien to take advantage of Ireland’s 12.5% corporate tax rate.

Ireland has been the most popular destination for the tactical move. Almost two dozen of approximately 85 inversions since the 1980s have been there, followed by Bermuda and England. 

Possible, but unlikely

The likelihood of a mass exodus of U.S. corporations to low-tax countries is small, tax specialists say, even if the Biden tax increases as proposed are enacted. That’s because changes in law in recent years have reduced inversions’ attractiveness. 

But companies are nevertheless doing the due diligence to see if it makes sense, says Paul Schmidt, chairman of the law firm BakerHostetler and a former legislative counsel to the Joint Committee on Taxation.       

“It’s going to be harder than ever now to undertake inversion deals, with so many new rules and restrictions, but that hasn’t stopped many companies from modeling tax payment projections under various types of inversion scenarios,” Schmidt said in an email.

Biden’s tax plan calls for raising the corporate tax rate to 28% from 21% and creating a 15% minimum tax for companies with net income of more than $2 billion that pay little or no U.S. income tax. It would also make changes for companies with assets in foreign countries. These include an increase in the global intangible low-taxed income (GILTI) tax and elimination of the tax rate on foreign-derived intangible income (FDII). 

The Tax Foundation estimates the plan would increase taxes on U.S. multinational corporations in 2022 by 81%, to $104 billion, and by 72% over the next decade, to $1.2 trillion. The plan is also expected to increase profit shifting to operations outside the U.S. by some $75 billion over 10 years, since taxes on domestic income would rise more than on foreign income, the Tax Foundation says.  

Inversion disincentives

To discourage companies from moving overseas if taxes go up, the Biden plan would build on recent steps taken by lawmakers to keep companies in the U.S.

In 2004, Congress passed curbs on inversions for companies whose stockholders continued to own 80% of the company after merger. The curbs had exceptions, including for companies that maintained substantial operations in the other country. 

Lawmakers tightened the curbs in 2017 as part of the Tax Cuts & Jobs Act by lowering the ownership threshold to 60% of stockholders and more tightly banning inversions for companies at the 80% ownership threshold.

The Biden plan would take these curbs to the next level by dropping the threshold to 50%, which means investors would have to share half the ownership of the merged company with new shareholders to get the full tax benefits of the inversion. 

“I think that makes perfect sense,” Steve Wamhoff, director of federal tax policy for the Institute of Taxation and Economic Policy, told Bloomberg Tax. 

He called the idea of companies calling themselves foreign domiciled because of a merger “just a fiction.” 

Other strategies

Despite the hurdles, some companies can be expected to consider the tactic, or others like it, if their tax hit is large enough, Schmidt said.

One tactic for companies already inverted is to move their key officers — the CEO and CFO, for sure, and possibly others — to the country they’re domiciled in. 

“The concept of actually moving senior leadership has traditionally been met with significant resistance,” Schmidt added, but “changes in law could invite a discussion around whether the CEO and CFO would consider relocating.”

These tactics will continue to be explored, he said, as long as business taxes in the U.S. are based on incorporation. That, he said, “will continue to motivate many companies to incorporate elsewhere for legitimate purposes while also gaining a tax advantage.”