Actions on Inversions Impede but Don't Resolve Trend

Compared with the rest of the industrialized world, the US has a high corporate income tax rate (35%), and the tax is imposed on a domestic parent's worldwide corporate earnings. Many other nations, however, have lower corporate income tax rates and use territorial tax systems. An inversion, then, can be thought of as basically a merger in which a US corporate parent is replaced by a non-US parent, changing the manner in which the corporate group is treated for US corporate income tax purposes. The US Department of the Treasury is concerned that inversions are increasingly being undertaken to reduce US taxes. In an attempt to discourage corporate inversions, Treasury issued Notice 2014-52. But under IRC Section 7874, tax law already subjects inversions deemed to have been undertaken primarily due to tax considerations to adverse tax consequences. Notice 2014-52 could temporarily curb inversions by signaling Treasury's intent to crack down on such transactions and erect additional regulatory barriers, but it does not fix the underlying economic incentives that are driving the current wave of corporate inversions.