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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 285  August 24, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*Corporate inversions and FDI in the United States*
* <#m_-907541361422026199__edn1>
Sarah Atkinson and Jessica Hanson** <#m_-907541361422026199__edn2>

From 1982 until 2016, multiple waves of corporate inversions resulted in
many US-based companies shifting their legal headquarters to countries
offering tax advantages, i.e. redomiciling. A corporate inversion occurs
when a US corporation that is the ultimate owner of its worldwide
operations takes steps to become a wholly-owned subsidiary of a foreign
corporation. Generally, the primary motivation for inversion is to minimize
global tax obligations and access overseas profits without incurring
additional taxes.[1] <#m_-907541361422026199__edn3> Corporate inversions
are a form of FDI in the United States.

The inversion phenomenon largely ended after the US Department of the
Treasury changed the regulations governing these transactions in 2016.[2]
<#m_-907541361422026199__edn4> Analysts have speculated that the passage of
the 2017 Tax Cuts and Jobs Act (TCJA) would lead many inverted companies to
take advantage of the decrease in the US corporate tax rate from 35% to 21%
and the general elimination of the tax on repatriated foreign earnings, and
become US-owned companies again. However, according to preliminary Bureau
of Economic Analysis (BEA) US FDI statistics, there was not a widespread
reversal of corporate inversions in the year following passage of the TCJA,
though companies may choose to do so in the future.

Corporate inversions first gained public and legislative attention in the
1990s because of the erosion of the US tax base, the cost advantages to
foreign-controlled firms and the movement of assets and economic activity
outside of the US.[3] <#m_-907541361422026199__edn5> The first wave of
inversions involved reincorporation abroad with minimal change in
corporations’ physical operations, shareholders or business decisions. The
2004 American Jobs Creation Act included provisions to curtail inversions,
but did not stop them completely. The second wave of corporate inversions
met the new legal requirements by merging domestic firms with existing
foreign companies. Additional Treasury regulations in 2014 and 2016 sought
to end inversions altogether. Evidence suggests that these regulations were
instrumental in decreasing inversions in subsequent years.

BEA publishes FDI statistics based on data it collects on mandatory surveys
of foreign-owned US companies. These statistics include transactions
resulting from corporate inversions. However, the surveys do not collect
information on whether a US corporation became foreign-owned as a result of
a corporate inversion. Consequently, these transactions cannot be
separately identified in the statistics based only on the survey data.
Using publicly available information, such as commercial databases and
media reports, BEA estimates that inversions led to substantial FDI equity
inflows into the US in 2015, which then dropped off after the Treasury
regulation changed in 2016.[4] <#m_-907541361422026199__edn6> In 2015, net
equity inflows into the US were US$340.9 billion, compared with US$51.6
billion in 2014. BEA estimates that approximately one-third of the increase
was due to corporate inversions.

While the TCJA further reduced the advantages of inversions, some
provisions, such as limitations on earnings stripping and the loss of some
tax deductions on intercompany loans, may limit the US appeal as a base of
operations for MNEs. Furthermore, regulations for some TCJA provisions are
still being finalized, and parts of the law are being challenged in the WTO.
[5] <#m_-907541361422026199__edn7> CEO statements and shareholder reports
indicate that some firms considering a reversal of prior corporate
inversions are waiting for the resolution of some of these uncertainties.[6]
<#m_-907541361422026199__edn8> Equity decreases*—*transactions that result
in a decrease in foreign ownership of US companies—were larger in 2018 than
in 2017 according to BEA’s FDI statistics. However, the larger equity
decreases in 2018 do not suggest widespread redomiciling by inverted
companies but rather firm-specific factors.

It may be too early to tell the TCJA’s ultimate effect on corporate
inversions in the US as firms are still adjusting to the new US tax system.
[7] <#m_-907541361422026199__edn9> Additionally, lower US tax rates could
spur other countries to adjust their rates or implement other measures to
encourage FDI. Finally, unwinding direct investments tends to be a much
more difficult and costly exercise than unwinding portfolio investments.
While firms are still adapting to the new law, BEA’s statistics suggest
that, so far, the TCJA has not led to significant redomiciling of inverted
companies. If it ultimately results in widespread redomiciling, this model
of using tax incentives to encourage inverted companies to become
U.S.-owned again will appear to have achieved one of its policy objectives.
[8] <#m_-907541361422026199__edn10>
* <#m_-907541361422026199__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-907541361422026199__ednref2> Sarah Atkinson ([log in to unmask])
is an economist at BEA and Jessica Hanson ([log in to unmask]) is the
Chief of the Direct Transactions and Positions Branch at BEA. The views
expressed in this *Perspective* are solely the authors’ and not necessarily
those of BEA or the US Department of Commerce. For additional information
on corporate inversions and their impact on other statistics, see Jessica
M. Hanson, Howard I. Krakower, Raymond J. Mataloni Jr., and Kate L.S.
Pinard, “BEA Briefing: The effects of corporate inversions on the
international and national economic accounts,” *Survey of Current Business*,
vol. 95 (2015).
The authors wish to thank Patricia Abaroa and Raymond Mataloni for their
input on an earlier draft and Maria Borga, Bruno Casella and Camila M.C.
Costa for their helpful peer reviews.
[1] <#m_-907541361422026199__ednref3> Non-tax related reasons for inversion
include access to foreign markets and technology, lower labor costs,
diversification, reduced regulations, greater operational flexibility,
improved cash management, and access to international capital markets.
[2] <#m_-907541361422026199__ednref4> Congressional Research Service
(CRS), *Corporate
Expatriation, Inversions, and Mergers: Tax Issues*, (CRS: Washington, D.C.,
[3] <#m_-907541361422026199__ednref5> CRS, op. cit.
[4] <#m_-907541361422026199__ednref6> Derrick Jenniges and James Fetzer,
“Direct investment positions for 2015,” *Survey of Current Business*, vol.
96 (2016), pp. 9–11.
[5] <#m_-907541361422026199__ednref7> Allyson Versprille, “Ireland-based
affiliates moved to U.S., but most companies will wait,” *Bloomberg News*,
Sept. 10, 2018.
[6] <#m_-907541361422026199__ednref8> CRS, op. cit.
[7] <#m_-907541361422026199__ednref9> CRS, op. cit.
[8] <#m_-907541361422026199__ednref10> Other policy objectives of the TCJA
include reducing the movement of assets, economic activity and retained
earnings abroad as well as encouraging companies to hire and invest in the
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Sarah Atkinson and Jessica Hanson, ‘Corporate
inversions and FDI in the United States,’ Columbia FDI Perspectives, No.
285, August 24, 2020. Reprinted with permission from the Columbia Center on
Sustainable Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 284, Jens Velten, ‘FDI screening regulation and the recent EU
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*All previous FDI Perspectives are available at *
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*Other relevant CCSI news and announcements*

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   is now open.
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   consultation into each stage of the investment.
   - CCSI and partners call for ISDS moratorium during COVID-19 crisis and
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Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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