August 14, 2014
In Inversion Deals, U.K. is a Winner
By Adam Wachler
One of the latest trends in the world of taxes is inversion. Tax inversion occurs when a company moves to a different country in order to avoid their home country’s high tax rate. Many companies are leaving the United States in search of better tax benefits and to avoid the U.S.’s corporate tax rate, which may currently peak at 39.1%. This is the highest tax rate of all the countries in the Organization for Economic Cooperation and Development (OECD). Companies hoping to escape high tax rates are relocating to Ireland, the Netherlands and the United Kingdom, among others, all which all have lower tax rates than the United States. The U.K. seems to be drawing the most business of all.
The U.K. allows companies incorporated in the U.K. to maintain operational headquarters in another country, which is a privilege that the United States does not allow. The United Kingdom also offers tax breaks for companies who file for patents in their country, which is a reason why many pharmaceutical companies are interested in becoming incorporated in the U.K.
Although companies relocate to the United Kingdom primarily for the tax benefits, they are also motivated by the likeness to the United States. Because the standard of living in London is very similar to major cities in the U.S., most executives and employees will have a relatively easy transition moving to London. Additionally, the absence of a language barrier and the strong financial industry further reinforce an American company’s decision to relocate to the U.K.
One disadvantage of tax inversion in the United Kingdom is that the country’s legislation is continually changing. WPP is a large advertising firm that relocated their business to London and reaped the lower tax benefits as a result. However, when the U.K. announced that they planned to raise taxes on overseas income, there was an enormous negative response from the businesses that relocated to the U.K. specifically for the tax advantages. WPP was one of many companies that went as far as to move their business outside of the U.K. As a result, the United Kingdom abandoned their new proposal and WPP, among other companies, returned to the U.K. This demonstrates not only just how unstable this type of legislation is, but also how far companies are willing to go in order to lower their taxes.
The impact of tax inversion in the United Kingdom is being felt overseas as well. The U.S. is losing tax dollars and subsequently the country’s economy is weakening. In an effort to reverse these effects, the OECD is beginning to retaliate against tax inversion. President Obama spoke on the subject of companies moving their headquarters to the U.K. saying, “My attitude is I don’t care if it’s legal, it’s wrong.” The effects of tax inversion are going to continue to negatively impact the U.S. economy if something is not done soon. With nearly 55 companies relocating outside of the United States in the past ten years, many more will inevitably follow if things do not change.