Inversion: The Path of Least Resistance
By: Gabriel PotterMBA, AIFA®
There is a phrase being passed around business news a lot recently: inversion. This word is generally used to describe companies that move overseas, but why is it called inversion anyway?
Imagine an international company, John Doe Umbrellas, that was founded in the USA with subsidiary offices in Ireland to manage their European sales force. John Doe Umbrellas sells umbrellas across the US, Canada, and Europe, and their revenue is roughly 1/3rd from each source. US corporate tax rates are typically higher and regulations are often stricter compared to the rest of the world; revenues from oversea markets are taxed both in the US and in the original country of sale. However, John Doe can re-incorporate the business and change the head office to Ireland to prevent some of the double taxation. In other words, John Doe will invert the relationship of parent company and subsidiary, to save on taxes – hence, inversion.
Water flows downhill. Factories move to where labor is cheapest. Capital invests into the projects with the highest net present value. Retirees move from high tax states to low tax states. And corporate headquarters move to out of the country to minimize double-taxation . It’s all the same principle: following the path of least resistance.