Corporate Inversions and the Unbundling of Regulatory Competition

Several prominent public corporations have recently embraced a noteworthy (and newsworthy) type of transaction known as a tax inversion. In a typical inversion, a U.S. multinational corporation ( MNC ) merges with a foreign company. The entity that ultimately emerges from this transactional cocoon is invariably incorporated abroad, yet typically remains listed in U.S. securities markets under the erstwhile domestic issuer\u27s name. When structured to satisfy applicable tax requirements, corporate inversions permit domestic MNCs eventually to replace U.S. with foreign tax treatment of their extraterritorial earnings – ostensibly at far lower effective rates. Most regulators and politicians have reacted to the inversion invasion with alarm and indignation, no doubt fearing the trend is but a harbinger of an immense offshore exodus by U.S. multinationals. This reaction, in turn, has catalyzed myriad calls for tax reform from a variety of quarters, ranging from the targeted tightening of tax eligibility criteria, to moving the United States to a territorial tax system, to declaring (yet another) tax holiday for corporate repatriations, to reducing significantly (if not entirely) American corporate tax rates. Like many debates in tax policy, there remains little consensus about what to do (or whether to do anything at all). This Article analyzes the current inversion wave (and reactions to it) from both practical and theoretical perspectives. From a practical vantage point, I will argue that while the inversion invasion is certainly a cause for concern, aspiring inverters already face several constraints that may decelerate the trend naturally, without significant regulatory intervention. For example, inversions are but one of several alternative tax avoidance strategies available to MNCs – strategies whose relative merits differ widely by firm and by industry. Inversions, moreover, are invariably dilutive and usually taxable to the inverter\u27s U.S. shareholders, auguring potential resistance to the deals. They virtually require strategic (as opposed to financial) mergers between comparably sized companies, making for increasingly slim pickings when searching for a dancing partner, and a danger of overpaying simply to meet the comparable size requirements. They involve regulatory risk from competition authorities, foreign-direct-investment boards and takeover panels (not to mention from tax regulators themselves). They frequently provide only partial relief from extraterritorial application of U.S. taxes, especially for well-established U.S. multinationals. And finally, tax inversions can introduce material downstream legal risk, since they move the locus of corporate internal affairs out of conventional jurisprudential terrain and into the domain of a foreign jurisdiction whose law is – by comparison – recondite and unfamiliar