What is a Corporate Inversion?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Corporate Inversion”
Corporate inversion refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
There has been a rapid increase in the number of U.S.-based multinational companies renouncing their citizenship by moving their addresses overseas to avoid paying U.S. taxes. Congress enacted Section 7874 of the Internal Revenue Code in 2004 as a way to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction to dodge U.S. taxes. Since the provision was enacted in 2004, there have been approximately 40 corporate inversions, according to Bloomberg.

By Barry Norman, Investors Trading Academy – ITA