Alameda County
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Inversions, Corporate Expatriations, and the Board’s Duties to the Company and Its Shareholders 

Illustration of Business PeopleIn the last several months, corporate expatriations received a lot of attention in the popular press and in Congress. A corporate expatriation is a transaction by which a corporate group with a US parent restructures, so that the parent is no longer a US company. Prior to 2004, a common destination for the new parent would have been a no-tax jurisdiction such as Bermuda or the Cayman Islands. Starting in 2004, with the enactment of Section 7874 of the Internal Revenue Code, economically developed countries with low-rate corporate tax regimes became the preferred destinations; examples include Ireland, the Netherlands, England, and – most recently – Canada. Iconic American brands such as Walgreens and Burger King have considered or pursued an expatriation strategy.

The thinking underlying this trend is fairly simple. The US system of corporate tax has two features that make the US unattractive as a corporate group’s home. The first troubling feature is high corporate tax rates, that can be as much as 35 percent federally with even more added on by state-level taxes. That is the highest rate in the developed world, with only Japan coming close.  The second troubling feature is the US tax system’s insistence that all profits of a US group, earned anywhere in the world, are ultimately subject to US taxation, either as the profits are earned or when the profits are remitted to the US parent company. This expansive application of taxing jurisdiction is again different from that of many US trading partners, most of which use a territorial system of tax, exempting business income earned in other countries.

The expatriations have attracted colorful rhetoric from Washington politicians. President Obama has referred to companies pursuing inversion restructuring as “corporate deserters,” and Secretary of the Treasury Jacob Lew described such companies as unpatriotic. Legislation was proposed that would restrict corporate expatriates’ participation in US government contracts. Further, the Treasury Department recently announced regulatory changes that would limit – but not eliminate – some US tax advantages associated with corporate inversions.

The politicians’ indignation at the companies themselves seems misplaced.  Most of the outrage is directed at apostates – companies that had been established in the US but then seek to move outside the US. Very little commentary addresses the hundreds of companies in formation that deliberately avoid forming in the US in the first place due to the burdensome tax climate.

Also, the political discussion unfairly anthropomorphizes the business decisions made by these companies. It assumes that a corporation must somehow feel patriotic fervor and love of the motherland, even if those sentiments would harm the economic performance of the company and the financial returns to the company’s shareholders. That is not only a misconception of the business manager’s role, but is posits behavior that would be illegal; the board must put the company and the shareholders first, notwithstanding the board members’ personal devotion to the company’s country of formation.  There may be practical business reasons for a US parent company, and many corporations have decided that US incorporation makes solid business sense.  But,  that decision must be driven by economic analysis, not by feelings of some nationalistic “duty” of a corporate entity.

The clearest path towards slowing corporate expatriations would involve fundamental changes in US corporate tax rules.  Cut the rates, and move to a territorial system of taxation. Align with the rest of the developed world. And then let the advantages of the US market and the US rule of law work their magic. Companies will come flooding into the US instead of seeking expensive and complex methods of moving out.

-Tom Maier, Editor of the ACBA Business Section’s Newsletter. This article originally appeared in the Fall edition of the ACBA Business Law Section Newsletter.

[The opinions expressed are those of the author and should not be attributed to any other person or organization.]