Practical analysis for investment professionals
14 August 2014

Poll: What’s Behind the Sharp Rise in Corporate Inversions?

Posted In: Economics

Recently, there has been a sharp increase in the number of US companies renouncing their corporate citizenship via a legal maneuver known as inversion, whereby the company merges with a smaller overseas firm and re-domiciles to take advantage of lower tax rates.

Although the practice has been around for decades, inversions were relatively rare — two to three per year — until 2012. Since then, according to Thomson Reuters, there have been 22 inversions, with more reportedly in the pipeline.

What’s behind the sharp rise in inversions? Earlier this week we asked readers of the CFA Institute Financial NewsBrief.

What is the primary reason behind the rising trend of corporate inversions, whereby US firms opt to redomicile to lower tax countries?

Poll: What's Behind the Sharp Rise in Inversions?

A plurality (46%) placed primary blame on uncompetitive US corporate tax policy. An additional 44% cited management teams’ quest to maximize profits, which almost certainly includes some consideration of the corporate tax burden.

The U.S. has the highest nominal corporate tax rate in the developed world — 35% — and it also stands out as one of the few countries in the world that taxes overseas profits after they have been repatriated.

Politicians have taken notice of the rise of inversions, criticizing them as “unpatriotic.” However, in the absence of meaningful tax reform or proscriptive legislation, the trend is unlikely to abate any time soon.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.


About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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