Home-Country Effects of Corporate Inversions

INTRODUCTIONMuch of the international tax reform discourse in the United States is grounded in two truths:1 First, multinational corporations' (MNCs) locational decisions are sensitive to home-country tax burdens.2 High taxes in an MNC's home jurisdiction may induce the MNC to relocate its tax-residence to a low-tax jurisdiction.3 Second, having an MNC headquartered within a jurisdiction has positive effects on the local economy in the form of increased capital expenditures, research and development (R&D) activities, and high-quality jobs.4The combination of these two truths has led to a policy argument that U.S. tax-law should not target corporate headquarters' locations. Taxing an MNC based on the location of its headquarters raises a concern that "management . . . would flee to other countries,"5 resulting in the loss of both the corporate tax base as well as the positive externalities associated with having the headquarters located within the United States.6 This Article suggests, however, that this policy argument is overstated for two reasons.First, there is no reason to assume that the place of tax-residence is also the place of the economic attributes that policymakers care about. For example, under the Internal Revenue Code (IRC) corporate taxresidence is determined based on the place of incorporation (POI). There is little reason to expect that the place of incorporation and the place of a corporation's meaningful attributes converge around a single location. Unfortunately, much of the empirical research in this area implicitly assumes such convergence. It is well established, however, that the meaningful functions of the modern MNCs are decentralized.7 Different substantive attributes of a corporation may be located in different jurisdictions, which are not necessarily the jurisdiction of the MNC's tax residence. Tax residence can be changed with no need to dislocate any meaningful structures in the jurisdiction from which an MNC inverts. Conversely, economic attributes of an MNC can be shifted across borders with no corresponding change to the tax-residence. A change of an MNC's tax-residence ("inversion") and a dislocation of economic attributes in the jurisdiction from which the MNC inverts are two distinct phenomena.Second, even if corporate tax-residence is based on the location of meaningful economic attributes (for example, by determining taxresidence based on the place of management or assets), there is no reason to assume that MNCs will dislocate such attributes en masse in order to change their tax-residence. Literature in organizational studies suggests that meaningful corporate functions are likely to be located in jurisdictions that offer substantive non-tax advantages, such as developed financial markets, skilled labor force, infrastructure and other agglomeration benefits.8 The dislocation of real attributes is costly and may result in the loss of agglomeration benefits. This Article suggests that when the dislocation of real economic attributes is necessary in order to "lose" tax-residence, tax savings may not justify the cost of such dislocation. Stated differently, current literature fails to balance the tax benefit expected from an inversion, with the non-tax cost associated with arbitraging one tax regime for another.9A possible reason for the lack of coherence in policy implications of inversions literature is that it lacks testable theoretical constructs. Public finance economists have long studied the effects of taxation on locational decisions.10 However, there is no theoretical framework that explains what substantive dislocations may specifically be associated with inversion transactions. This Article aims to fill such gaps through case study research. The aim is to develop theoretical propositions based on observed dislocations in inversion transactions. Several case studies of large-scale inversions are examined in order to articulate-in policy- relevant terms-the possible meaningful economic effects of an inversion in the jurisdiction from which a corporation inverts. …