Dear Reader


I have just come back from New York where I opened the US branch of the IBSA, discussing the hottest topic in the US this year: corporate inversions. We will be covering this again in a panel discussion at our forthcoming IBSA annual conference at the Mandarin Oriental Hyde Park Hotel on 19 November. If you haven’t already reserved your place for this conference, you can do so by registering at (click here).

The mechanics of a corporate inversion is that a US corporation is acquired by a non-US corporation with a lower corporate tax rate, as well as other benefits, such as a participation exemption in respect of dividends from existing US subsidiaries. The following diagram shows the method by which such companies ‘invert’ and the subsequent restructuring of its foreign subsidiaries.

The reason for the inversion is that US corporate tax rates (35% federal plus state taxes) together exceed 40% compared to say the UK corporate tax rate of 21% reducing to 20% next year. US tax law does not allow dividend income to be exempt from US tax, so that if such income emanates from low-taxed subsidiaries abroad, the full force of US corporate tax is levied. Compare that to the UK tax system where dividends receivable from low-tax subsidiaries which have a double tax treaty with the UK with a non-discrimination clause will be exempt from UK tax. Moreover, US corporations have to withhold a 30% tax on dividend distributions to ultimate shareholders in the absence of a relevant double tax treaty, whereas the UK has no withholding tax on dividend distributions, wherever the shareholders may be resident (i.e. even for offshore recipients).

It is not difficult, therefore, to understand why US corporations wish to see if they can create a better after tax situation for their shareholders than may currently exist. The US Congress clearly does not want to permit such inversions, and US tax law currently has a limited anti-avoidance provision whereby if 80% of the inverted combined group of companies is owned by the shareholders of the previous US parent company, then the newly created inverted company will be considered a US resident company for tax purposes. This is so even if there is a relevant double tax treaty between the two countries, so that if, for example, a new UK holding company is created through the corporate inversion, the US will be able to override the UK/US double tax treaty even if the place of effective management is in the UK.

Congress wanted to reduce the relevant proportion from 80% to 50%, but this has not been agreed within Congress where Democrats and Republicans fail to decide on most legislative proposals.

Having inverted into, say, a UK company, the common practice would be for the previous US parent company to transfer its foreign subsidiaries to the newly created UK holding company under the inter-group re-organisation provisions. These prevent capital gains tax being imposed on such effective disposals of the foreign subsidiaries by the US parent company. Again, Congress disapproves of the current legislative provisions exempting the previous US parent company from tax on such inter-group re-organisations, but again the indecision in the US Congress has so far failed to reach a consensus on this.

So the jury is still out on whether US corporate inversions will continue to be an effective way of minimising tax incurred by the ultimate shareholders of the US parent companies. But there is another question that should be asked: why are US corporate tax rates so high that corporate inversions have become so popular? According to my US colleagues, it seems as though the US public believe that US corporations are the ‘fat cats’ in their society who pay far too little tax, and any attempt by Congressmen to promote lower corporate tax rates would be extremely unpopular with their electorate. Since Congressmen are elected every two years, and tax reform is not a short term possibility, there is little incentive for Congressmen to rock the boat and risk losing votes when they come up again for re-election in two years’ time.

And just a final thought of mine. The short-term nature of politics is illustrated in the specific issue discussed in this newsletter, but the system may also prevent politicians taking unpopular decisions in other areas. Whether it be the US presidential elections every four years, or parliament dissolving every five years in the UK, politicians need to have tremendous courage to engage in unpopular decisions which they believe are required for their particular country. This could be in respect of an austerity programme to cut budget deficits, or waging war at an early stage of the development of a terrorist force.

But back to the subject with which I am most familiar – governments need to take a long term approach to create a tax system that motivates taxpayers to work and encourages multi-national companies to stimulate economic growth. The IBSA will be holding discussion groups and workshops over the next year, in various regions around the world, to which tax administrations and regulatory authorities are invited to share their ideas with multi-disciplinary professional advisors and their Clients, so that the pathway to reform, where relevant, can be explored to mutual benefit.

I look forward to seeing many of you at our conference next month, and would like to wish my Jewish readers a very happy new year.

With my best regards


Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.

Roy Saunders created International Fiscal Services in 1971 which is a niche international tax boutique at 44 Southampton Buildings, London, WC2A 1AP. Website: (click here) Email: (click here)