'Looking Through' Corporate Expatriations for Buried Intangibles
University of Chicago
November 17, 2013
Primary Job Talk Paper, Forthcoming
U of Chicago, Public Law Working Paper No. 445
The expatriation of U.S. multinationals represents a puzzle. The U.S. tax law is designed to impose a penalty greater than the benefits to expatriation, yet a number of companies continue to reorganize outside of the United States, generating huge profits to the frustration of the taxing authorities. The key fact that Congress and the Treasury have missed is that the penalty is designed around the price of the stock at the time of the expatriation. The thesis of this article that that share prices are undervalued at the time of the expatriation, giving rise to a mispricing phenomenon that has persisted since the very first expatriation in 1994 and continues until the present day, almost twenty years hence. The mispricing associated with corporate inversion announcements is evidenced by abnormal returns amounting to 200 percent above the S&P average in the years following the inversion transaction. This paper tests two hypotheses. First, inverting companies exhibit statistically significant excess returns as compared to the market and, second, these returns are due in large part to growth in intangibles in low-tax foreign jurisdictions. I argue that these corporate inversion transactions amount to disguised transfers of high-value “buried” intangibles that have exploited a gap in the international tax rules. Moreover, these transfers have eluded and will continue to elude the remedies prescribed by Congress to ensure full taxation of gain until a look-through rule is included to capture the value inherent in the related-party transfers of intangibles.
Number of Pages in PDF File: 57
Keywords: corporate taxation, international taxation, corporate inversion, multinational, tax haven, commensurate with income, Fama-French, firm value, tax avoidance, asset allocation, efficient markets, stock priceworking papers series
Date posted: August 15, 2013 ; Last revised: February 24, 2014
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