Inversion accounting

Inversions

Read the attached case study (Links to an external site.) and then answer the following requirements:

  1. Tax inversions have occurred infrequently over the past 30 years. Describe a tax inversion and the factors that impact a company’s decision to complete a tax inversion.
  2. The earliest inversions were usually in tax haven countries. The companies subsequently relocated their headquarters to Europe. Why did these companies decide to move headquarters to European countries?
  3. Most recent inversions either meet a substantial activity test or are accomplished through mergers. What companies are the most likely targets for these types of inversions?
  4. A primary benefit of an inversion is avoiding U.S. tax on foreign-source income. How do multinational companies also use inversions to reduce U.S. tax on U.S.-source income?
  5. Using the information in Table 2, calculate Transocean’s effective tax rate for each of the four years (1998, 2000, 2009, 2015). Estimate the dollar amount of the annual reduction in taxes for the initial move to the Grand Cayman Islands.
  6. The Congressional Budget Office (2017) (Links to an external site.) reports that 60 inversion transactions have occurred. The CBO estimates that the average annual reduction in U.S. tax expense for these companies is $65 million. What is the amount of total annual revenue loss to the U.S. government? What is the amount of total annual revenue loss to the U.S. government as a percentage of total corporate taxes (search for the total corporate taxes in the CBO report or other online source)?
  7. The U.S. recently reduced the top statutory corporate tax rate from 35 percent to 21 percent. In addition, the U.S. changed from a global to a territorial tax system for multinational corporations. Evaluate the likely effects of these tax law changes on inversion activities.
  8. Should companies be allowed to enter into inversions? Consider the perspective of shareholders and the U.S. Treasury in developing your response. Do you believe the changes in U.S. tax law to lower corporate taxes will eliminate inversion activity permanently?

Reference:

Albring, S. M., Elder, R. J., Franklin, M. A. (2019). Transocean and the history of tax inversions. Issues in Accounting Education, 34(1), 1-12.

Congressional Budget Office. (2017). An analysis of corporate inversionshttps://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53093-inversions.pdf

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