Get inversions – AAF


  • US tax legislation became less and less competitive from the late 1980s onwards, leading to a series of corporate expatriations or inversions in which companies reorganized overseas to escape the US tax system.
  • This phenomenon largely ceased after the Tax Cuts and Jobs Act (TCJA) went into effect in 2017; not a single major reversal has been reported since the adoption of the TCJA.
  • The Biden administration is proposing that the United States revert to its previous uncompetitive tax system with higher corporate tax rates and an outdated international tax system that has regularly reversed.


The United States was slow to recognize the importance that corporate tax policies can have on the international competitiveness of its companies. While the United States is home to the most innovative companies in the world, that innovation often came despite a tax regime that was uniquely detrimental to the country’s businesses. Over time, this disadvantage widened to the point that US firms were tempted to increase their stakes and move to host countries with a more competitive tax environment. These conspicuous victims of outdated tax policies known as inversions have demonized policymakers who have tried to stem the flow of inversions through regulatory mandates. Despite these efforts, the trend continued until the United States fundamentally reformed its tax laws in 2017 through the Tax Cuts and Jobs Act (TCJA). Since the adoption of the TCJA, no major reversals appear to have been completed, while at least one major reversal has occurred. The Biden administration is proposing tax policies that would bring the United States closer to the tax system, which was characterized by high corporate tax rates and an outdated international tax system when reversals occurred regularly.

Corporate Tax Policy and Reversals

In 1986 the United States passed the Tax Reform Act, a bipartisan, income-neutral, comprehensive reform of the tax law. Prior to 1986, the United States had a corporate tax rate of 46 percent, which at the time was higher than the average for the United States’ major trading partners. The bill eventually brought the US corporate rate to 34 percent, which brought the United States below the prevailing average. The United States’ major trading partners followed suit, lowering tax rates over the next decade and beyond, making the United States another international outlier in corporate taxation. While other nations lowered their tax rates during this period, the United States was the only nation in the Organization for Economic Co-operation and Development (OECD) to increase its corporate tax rate.[1] The result was that the United States was again in a comparatively uncompetitive tax position.

The 1990s and early 2000s saw a number of corporate “expatriations” in which US firms relocated overseas to reduce their tax burden. This phenomenon, also known as “corporate inversion,” has been the subject of hearings in Congress and the attention of the Bush Treasury Department.[2] The American Job Creation Act of 2004 (AJCA) included important anti-inversion measures that are in effect to this day. The AJCA attempted to limit the tax benefits from inversion transactions unless the transaction met certain criteria – the aim was to limit the benefits of purely tax-related foreign patronage without undue breach of business activity. This policy has somewhat curbed “bare” inversions, where companies simply reorganized into a lower-tax jurisdiction but otherwise did not change ownership or business activity. It is noteworthy that this reform did not fundamentally reduce the relative disadvantage of companies headquartered in the United States. The result was that cross-border mergers and acquisitions replaced bare reversals as a means of achieving corporate expulsions.

The evolution of corporate inversions

While the United States continued to impose an increasingly burdensome corporate tax, US competitors pursued innovations in the taxation of foreign income. In addition to significantly improving the competitiveness of the corporate tax rate, large foreign competitors increasingly adopted forms of territorial tax systems. In a territorial system, active income from foreign sources is generally not taxed, with the exception of the tax levied by the source state. Thus, no additional tax is levied on a particular foreign investment, and thus the foreign investment is taxed at the same rate as an investment made under the domestic tax laws of the foreign country. In short, a territorial tax system ensures a level playing field for foreign investment.

By 2017, 29 out of 35 OECD countries had some form of this tax system in place.[3] The United States adhered to an outdated system of corporation tax on the profits of US companies around the world. US corporations owed US income taxes on domestic and foreign income, although the United States allows a foreign tax credit up to US tax liability for taxes paid to foreign governments. Active income generated abroad is generally not subject to US income tax until it is repatriated, which gives companies an incentive to reinvest profits anywhere but the United States. This system distorted the international behavior of US firms, essentially capturing foreign profits that could otherwise be returned to the United States.

The US tax system was fundamentally uncompetitive and persecuted US companies overseas. Despite the AJCA’s enactment in 2004, cross-border mergers continued. A 2012 article in the Wall Street Journal described an accelerating pace of inversions after a period of relative inactivity. At least 10 companies emigrated between 2009 and 2012.[4] A spate of announced or planned cross-border mergers with recognized brands such as Sara Lee, Pfizer, Chiquita and Medtronic caught the attention of lawmakers and regulators, among others.[5] The Treasury Department issued guidelines and regulations in 2014-2016 that thwarted at least one major reversal, but without a tax reform the incentive to reverse remained. At least five large companies continued to structure inversions to circumvent strict Treasury Department regulations.[6]

Inversions and the TCJA

In December 2017, Congress passed the most sweeping changes to the federal tax code since 1986. The TCJA fundamentally reformed three main elements of the federal tax code: individual income tax, corporate income tax, and the tax treatment of international income. The latter two elements led the United States to significantly improve its international tax competitiveness by lowering its corporate tax rate to 21 percent and joining most of its trading partners by introducing a territorial tax system. These key reforms have significantly reduced the incentives for businesses to turn back. Additional reforms also reduced the tax benefits of inversion. Overall, the Joint Tax Committee estimated that the TCJA would lead to increased investment in the United States.[7] This finding is in line with other research that shows that United States’ uncompetitive tax law resulted in the loss of assets to foreign buyers. It is estimated that if the United States had implemented a corporate tax law similar to the TCJA, it would have retained 4,700 companies over the 2004-2016 period.[8] Data from 2018 and 2019 suggests that U.S. corporate acquisitions increased 50 percent, while U.S. corporate acquisitions declined 25 percent compared to the same period last year.[9]

No major inversions have been reported since the TCJA came into force. In fact, Assurant, Inc. is the most striking example of the inversion landscape after the TCJA. Before the TCJA came into effect, the company had announced its intention to emigrate. However, after the TCJA went into effect, the company restructured the transaction to keep its headquarters in the United States.[10]

The Biden administration has proposed a series of tax policies that would increase the corporate tax rate, bring the United States closer to an outdated global tax system, and impose new restrictions on cross-border transactions. So far, it has been estimated that these restrictions alone put more than 40,000 high quality jobs at risk.[11] Decades of evidence suggests that as long as the United States has a tax system that is essentially out of step with the rest of the world, the incentive to turn back will remain.


Inversions have largely been banned from the business pages. Where once large companies announced their intentions to move abroad, they now stop. Other firms that were previously headquartered in the US are reportedly looking to return as the US has tax policies that are not conspicuously detrimental to US-based firms. This is a political success after decades of half-measures. Some politicians cannot accept this success and try to reverse the current tax system and return the United States to a comparatively uncompetitive tax system. If these efforts are successful, watchers shouldn’t be surprised to see the reversals return.




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[5] Chiquita and Pfizer



[8]; Note that these companies can be relatively small transactions.

[9] 3 Andrew Lyon, “Insights on Trends in US Cross-Border Mergers and Acquisitions After the Tax Cuts and Jobs Act”, Tax Notes, October 2, 2020, pp. 497-507