Outbound Inversions

Outbound Inversions and Expatriated Entities:

Section 7874

Aspects of International Taxation

Table of Contents

Introduction: 3

What is an Inversion? 4

Stock Inversion Example: 5

Asset Inversion Example: 5

What are the advantages and disadvantages of inversions? 6

Pre IRC Section 7874 6

Consequences of IRC Section 7874 7

Subsequent Guidance on Section 7874 8

Introduction:

Expecting future annual tax savings of over $30 million, in 2002, Stanley Works and Company, currently known as Stanley Black and Decker, announced its plans to complete a corporate inversion transaction in which the Multinational Corporation would reincorporate its corporate structure in Bermuda. At the time of the announcement, Stanley was a US based Multinational Corporation headquartered in Connecticut. As a US person, Stanley was taxed on its worldwide income, US source income and foreign source income. As a Bermuda corporation, Stanley would be subject to that country’s territorial taxation system which, unlike that of the US, does not impose a tax on income sourced outside of its borders. Stanley did not plan to physically move its operations to Bermuda; instead, it planned to create a Bermudan entity that would acquire the stock of its US Corporation. The plan allowed Stanley to restructure its US subsidiary to reduce its US earnings; a term called “earning stripping.” Stanley’s plan to invert its US corporate structure was legal, but not unique. Other former US multinational companies, such as Tyco International, Accenture and Ingersoll-Rand, completed their corporate inversions prior to Stanley’s announcement.

Corporate inversions decrease US tax revenues. In an effort to deter Multinational Corporations incorporated in the US from becoming expatriate entities, Congress enacted IRC Section 7874.

What is an Inversion?

The Merriam-Webster Dictionary defines “inversion” as “the condition of being turned inward or inside out.” A corporate inversion...