Paul L. Caron

Wednesday, September 3, 2014

Yin: Stopping Corporate Inversions Sensibly and Legally

Tax Analysys Logo (2013)George K. Yin (Virginia), Stopping Corporate Inversions Sensibly and Legally, 144 Tax Notes 1087 (Sept. 1, 2014):

A recent article by Mindy Herzfeld, What Can Treasury Do About Inversions?, 144 Tax Notes 895 (Aug. 25, 2014), overlooks a simple and sensible alternative available to the Treasury Department that is not of questionable legality. Treasury could submit a proposal to Congress to redefine a corporation's "residence" for tax purposes -- which determines whether the entire panoply of U.S. tax rules applies to it -- based on the location of the enterprise's principal customer base.

This idea is stimulated by the recent decision by Walgreens to back away from its contemplated corporate inversion. Had Walgreens inverted, it would have gained important tax benefits but might have lost U.S. market share. Prospective customers who viewed an inversion as "unpatriotic" might have begun patronizing instead one of the company's competitors. This possibility was presumably one of the factors influencing the company's decision.

But if this worry was meaningful enough to change Walgreens' mind, why not make it the controlling factor for all corporations? Companies whose principal customers are in the United States would be treated as U.S. residents for tax purposes, no matter how cleverly lawyers devise the corporate and financial structure of the organization. ...

According to Herzfeld's article, the Obama administration is currently contemplating what it can do on its own to prevent the possible tide of corporate inversion activity. The answer is to look to Walgreens' experience and propose a redefinition of corporate tax residence -- effective upon announcement -- based on the location of the business's principal customer base. The administration can act effectively "on its own" while still respecting the important role of Congress in the formation of tax policy.

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The idea is easy to say, but very hard to adminstrate - how does anyone find out market shares when you sell through wholesalers? How do you find the data after the fact? Does a taxpayer's status change throughout the year with the business cycle? Is there a "look through" rule for affiliates? How will tax treaties work when foreign companies become dual residents under the treaty?

Maybe the idea can be made to work only if it applies to the CFC definitions of a US person?

Posted by: John Kelly | Sep 3, 2014 9:14:01 AM