Everything you need to know about corporate tax inversion

By Robbie Citrino for Kapitall.

First some basics.

Many large corporations with sales overseas keep some money in foreign banks, often Irish or Dutch, in order to avoid the 35% corporate tax applied to profits brought back to the US. Unlike here, the Irish tax rate is only 12.5%.

Companies that do significant business in the United States are required to have a certain percentage of assets overseas if they want to incorporate anywhere else. And if you don't have enough assets abroad you do what's called  an inversion.

Quite simply, an inversion is where you buy a smaller company in a country with a better tax rate. 

Once an American company reincorporates overseas, they move their headquarters and operations to the new country, and in doing so they save as much as 17.5% of their profits.

So why is this important?

When they leave, the US looses significant tax revenue—money that would likely be reinvested into the country through jobs, manufacturing, and infrastructure improvements. 

The US government, increasingly concerned over  this trend over the past 5 years, has started to get more vocal about trying to find a way to stop it, which paradoxically appears to accelerate the rate of inversions. 

Democrats and President Obama believe that the companies are betraying their country of origin by moving to protect their profits and shareholders. Thus they are looking to close these tax ‘loopholes’, forcing the companies to stay incorporated in the US.

This is difficult because the notion of private property certainly assumes that the owner of a business is allowed to move if they want to. The practice of forcing people not to leave sets an uncomfortable precedent for some. 

Republicans, on the other hand, are pushing for a lower tax rate (around 20%), which they believe, while lowering tax revenue in the short term, will attract large corporations, stimulating the economy with new jobs. 

One thing is for sure: with our current tax rate, shareholders love inversions. When Walgreens (WAG) announced they would stay in the US, shares dove around 15%, and the day of Medtronic’s (MDT) inversion announcement their stock climbed almost 8%.

Who will be the next corporate financial inverser? Let us know what you think in the comments!

Click on the interactive chart to view data over time. 

 

 

1. Medtronic, Inc. ( MDT): Medtronic, Inc. manufactures and sells device-based medical therapies worldwide. Market cap at $61.25B, most recent closing price at $61.48. 

 

 

2. Walgreen Co. ( WAG, Earnings, Analysts, Financials): Engages in the operation of a chain of drugstores in the United States. Market cap at $67.47B, most recent closing price at $70.53.

 

 

(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research.)

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

More from Stocks

Did Trump Just Torpedo the Stock Market Again?

Did Trump Just Torpedo the Stock Market Again?

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day

Trump, China Trade, Target and Las Vegas Casinos - 5 Things You Must Know

Trump, China Trade, Target and Las Vegas Casinos - 5 Things You Must Know

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session