The Corporate Inversion And Tax Avoidance - Free Essay Example

Sample details Pages: 3 Words: 879 Downloads: 3 Date added: 2017/06/26 Category Business Essay Type Research paper Did you like this example? The corporate inversion refers to the act of a parent company, whose headquarters are located within U.S. borders, switching registration with their offshore subsidiary in order to take advantage of foreign tax benefits. This practice is becoming more popular due to increasing offshore tax advantages and corporate mobility (Sikka, 2010). Don’t waste time! Our writers will create an original "The Corporate Inversion And Tax Avoidance" essay for you Create order The U.S. government is attempting to restrict corporate inversion because of losses in tax revenue. Therefore, this paper aims to analyze the advantages and risks of corporate inversion by discussing the case of Stanley, and it also gives suggestions for Handy Works. Inc to make decision. Stanleys corporate inversion makes it enjoy the lower tax burden and makes its operation more flexible, thus bring good opportunities and benefits for its development. Thats why its stock price rose at 5 percent on the second day of the announcement. First of all, such corporate inversion can reduce the tax burden of Stanley, making its tax level cutting down to 23-25% from 32%. Bermuda is a typical tax avoidance haven, which does not levy corporate income tax and personal income tax on corporates and investors (Desai and Dharmapala, 2006). Besides, typical advantages that draw U.S. companies to re-incorporate in another country include lower tax rates, more accommodating corporate governan ce rules, and more flexible banking laws (Huseynov and Klamm, 2012). So Stanleys corporate inversion may bring more flexibility for its operation. Such corporate inversion makes multinational investors to obtain improper benefits. Multinational investors tax avoidance methods are mostly on the basis of establishing fictitious business dealings, which is clearly contrary to the wishes of the most capital-exporting countries. And the government will naturally give non-acceptance and protection to such improper benefits, and on the contrary, giving it punishment (Kim ey al, 2011). Such corporate inversion invades the tax benefit of the capital-exporting countries. So, in fact, such corporate inversion is not favorable for the increasing of Stanleys stock price rising (Wahab and Holland. 2012). Besides, tax havens for transnational investors are on the basis of tax breaks, who has also taken various measures to protect firms improper benefits, resulting in that capital-exporting c ountry cant get its residents operating in formation in tax havens, which makes it difficult to take effective measures to strengthen its inhabitants outside from the tax administration, the inevitable result is the erosion of the tax benefit of the capital-exporting countries (Hasseldine et al, 2011). Therefore, American has issued acts to impose restrictions on it development. Firstly, it required CFCs foreign revenue should be considered as being issued by dividends no matter whether it returned or retained in the local branches, and pay the tax in American, which will significantly prevent American firms profit by setting branch office in the tax heaven. So the shareholder of Stanley cant decrease their investment income tax and its adverse for the Stanleys goal to bring benefits to their customer, shareholder and stakeholders. Besides, multinational companies also need to face the cost allocation limit, even if all the costs were incurred in the United States, the firm ca nt deduct the full cost from the revenue in American, which reduces the expenses that can be deducted and increase the tax need to pay. U.S. tax law requires to calculate some special expense in accordance with the proportion of foreign assets, which is used to calculate the foreign tax credit. This is adverse for the excess credit firms. Seen from the profit table, Stanley is an excess credit firms, for the burden in Bermuda is much lower than that in America, and it also causes some negative influence on Stanleys profit. In 1999-2001, Stanley needs to pay the interest of 33.4, 36.1 and 30.8 million, while all these expenses cant be fully deducted from the revenue, so Stanley cant fully enjoy the interests benefit of tax deduction. The proportion of Stanleys revenue 2001 2000 1999 In American 71.83% 72.19% 71.32% Out of American 28.17% 27.81% 28.68% The proportion of Stanleys long-term assets 2001 2000 1999 In American 64.88% 57.97% 55.31% Out of American 35.12% 42.03% 44.69% Especially, Stanleys revenue structure determines its disadvantage. For the proportion of Stanleys revenue in USA is about 70%. If we suppose that the cost is proportional to the revenue, it should deduct the 70% of its total cost on the US part. But the some special expense is deducted in accordance with the proportion of foreign assets, so Stanley can only deduct approximately 60% of its cost on the US part, which makes it lose some of its profits. In conclusion, Stanleys corporate inversion makes it enjoy the lower tax burden and makes its operation more flexible, thus bring good opportunities and benefits for its development. However, such corporate inversion invades the tax benefit of the capital-exporting countries and is not favorable for the increasing of Stanleys stock price rising. The shareholder of Stanley cant decrease their investment income tax and its adverse for the Stanleys goal to bring benefits to their customer, shareholder and stakeholders. Besides, Stanley cant fully enjoy the interests benefit of the tax deduction and its revenue and asset also make it lose some of its profits Therefore, whether Handy Works. Inc needs to take the form of corporate inversion depends on its asset structure, revenue and cost proportion and the financial policy. The corporate inversion can bring the advantage of tax avoidance, but it will also cause some operational risks and negative tax influences, so Handy Works. Inc should seriously consider this problem.