UK “attractive” tax haven
A report from the US Congress has named the UK as a favoured destination for US corporations looking to avoid tax.
Using a process known as inversion, US companies change their country of residence to reduce tax bills.
The report states that “The UK, in particular, has become a much more attractive headquarters. Because of freedom of movement rules in the European Union, the UK cannot have anti-inversion laws, which may have played a role in both moving to a territorial tax and lowering the corporate tax rate.”
The report, from May this year, says the tactic of inversion can be carried out in one of three ways:
Substantial Business Presence
A US corporation with substantial business activity in a foreign country creates a foreign subsidiary. The US corporation and foreign subsidiary exchange stock—resulting in each entity owning some of the other’s stock. After the stock exchange, the new entity is a foreign corporation with a US subsidiary.
US Corporation Acquired by a Larger Foreign Corporation
In this form of inversion the US corporation merges with a larger foreign corporation, with the US shareholders owning a minority share of the new merged company.
This results in the effective control of the new company being outside U.S. borders. In the case of, US firm, Pride, merging with a UK firm, Ensco, and the headquarters remaining in the UK the directors of the company stated that “Ensco was headquartered in a jurisdiction that has a favorable tax regime and an extensive network of tax treaties, which can allow the combined company to achieve a global effective tax rate comparable to Pride’s competitors.”
A Smaller Foreign Corporation Acquired by a US Corporation
In this form of inversion the US corporation merges with a smaller foreign corporation, with the US shareholders owning a majority share of the new merged company. This merger results in the effective control of the new company staying with the shareholders of the US corporations.
An example is the Eaton Cooper merger. A press release from the company notes expected tax benefits from the merger at $165 million in 2016. In this case, a US corporation used a merger to achieve an inversion while its shareholders retained a significant majority of shares.
The report goes onto name a number of companies that have benefited from the inversion strategy of tax avoidance. These include Chiquita, Actavis, and Perrigo moving to Ireland; Valeant Pharmaceuticals and Endo Health Services moving to Canada; and Liberty Global (a cable company) to the UK by purchasing Virgin Media.
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