U.s. Corporate Inversions and Analysis of Earnings Stripping

Open Access
Author:
Auerbach, Alayna Petty
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Louis Gattis Jr., Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • inversions
  • earnings stripping
  • corporate tax inversion
  • finance
  • tax
  • tax avoidance
  • tax strategy
  • effective tax rates
Abstract:
This study examines the current U.S. corporate inversion environment, accompanied by the history of U.S. corporate inversions to date. A corporate inversion occurs when a U.S.-incorporated firm merges or acquires a foreign-incorporated firm and a new foreign parent is created. The new foreign parent owns both the former U.S.-incorporated and foreign-incorporated firms as subsidiaries. Upon inverting, the former U.S.-incorporated firm gives reasons such as a lower effective tax rate because the firm can avoid U.S. tax on foreign earnings. This study explores the current environment by creating a comprehensive list of inversions completed between 2005 and the end of 2015 and analyzing the effective tax rate changes pre- and post-inversion of forty-five companies that completed inversions between 2005 and 2013. The effective tax rates of these companies are lower post-inversion. This study also examines the evidence of “earnings stripping,” a tax strategy used by inverted U.S. firms to avoid U.S. tax on U.S. earnings by issuing intercompany debt to shift earnings abroad. This strategy is not acknowledged publicly by inverting firms. A case study of the company Eaton Corporation plc finds evidence of the use of intercompany debt and increased in net income from earnings stripping.