On May 17, 2002, the Treasury Department released a preliminary report on the growing number of U.S. companies that have announced plans to reincorporate outside the country, e.g., in Bermuda, through a paper parent company. The fallout may affect some accounting and consulting firms, as well as their clients.
The report says tax savings, combined with current market conditions are driving the current spurt in these so-called "corporate inversion transactions." Under different conditions, the fact that an inversion triggers potential tax at the shareholder level or the corporate level might serve as a deterrent. But the size of the tax liability may be smaller at this time because (a) the company's shareholders may have little or no gain inherent in their stock, or (b) the company may have net operating losses to offset any gain at the corporate level.
In a radio address on May 18th, Representative Jim Maloney blasted companies with their headquarters located in tax havens, saying,
The tax-dodgers may set up paper headquarters in Bermuda, but they continue operating in the United States. They still receive federal, state and local services, such as police, fire and public schools. And, of course, they still rely on the protection of our courageous Armed Services, here at home, and around the world. The only difference is: they now get it all for free, while U.S. citizens and loyal U.S. companies are paying the bill. This is unpatriotic, especially in light of our current economic situation.
Lawmakers appear to be rallying around a proposed one-year moratorium on these transactions, while they work on a longer-term fix. The moratorium and subsequent legislation may affect some accounting and consulting firms, as well as their clients. The Wall Street Journal recently reported that PricewaterhouseCoopers Consulting (PwCC Ltd.) had found a loophole that would let it escape tax penalties under the proposed legislative fixes currently under consideration.
Download the full report and learn about the key tax consequences, non-tax issues, tax policy considerations, and tax effects on both U.S.- and foreign-based multinationals.