James Dennin, Kapitall: Inversion – moving your headquarters to avoid taxes – lets businesses buy smaller competitors overseas. So what?
It costs a lot of money to move entire offices. At least that's what Texas Governor Rick Perry is learning – as his expensive trips to court companies based elsewhere have yielded few results.
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Texas seems to want more businesses based within its borders. But even the litany of tax breaks that Perry can offer aren't always enough to off-set the expense of a costly relocation, and the vast majority of job creation usually comes when companies add on to their existing facilities, rather than abandoning them to make a move.According to Dealbook, when Applied Materials (AMAT) and Tokyo Electron (OTC:TOELF) chose the Netherlands as their headquarters, they had more on their mind than finding neutral territory. In fact, if you look closer at some of the major mergers and acquisitions this year – you'll notice that many of them are basing their operations in tax-friendly havens, often a long way from where the companies were founded. Businesses have sought tax havens for as long as they've existed. And once upon a time, it wasn't even all that hard. All you had to do was open an office somewhere with lower taxes – say, the Cayman Islands or Bermuda - and then reincorporate there. The process is known within the industry as inversion:
- It's a popular way to bring down costs.
- Companies that inverted often save about a hundred million dollars a year.
- This is considerably more than the cost of maintaining a mostly empty office.
- It wasn't until the Jobs Act of 2004 that corporations could only re-incorporate to a place where they practiced "significant business activity."
- When that wasn't enough, the IRS put a number on it - a company must have at least a quarter of its assets somewhere for a re-location to be legal.