Corporate Inversions - Background, Causes, and Policy Options

34 Pages Posted: 2 Nov 2014 Last revised: 11 Nov 2014

See all articles by J. Richard (Dick) Harvey

J. Richard (Dick) Harvey

Villanova University School of Law and Graduate Tax Program

Date Written: October 31, 2014


Corporate inversions have been front page news during most of 2014. In addition to providing background on inversions, this presentation discusses why inversions are occurring and various policy options.

What is the primary driver of inversions? Contrary to many public reports, the 35% US corporate tax rate is not the cause. Rather, US MNCs have shifted so much income to tax havens that they have a liquidity issue (i.e., the lock-out effect). In addition, US MNCs may also be worried the SEC and their external auditors could start questioning their assumption that foreign earnings are indefinitely reinvested.

Treasury Notice 2014-52 puts some fingers in the proverbial dike, but the bottom line is that inversions are going to continue until the US modifies its tax system. US MNCs want a territorial system with minimal base erosion protections, while others would accept a territorial system with strong base erosion protections. Both options have major issues.

The ideal solution would be to attempt to equalize the tax burden of US MNCs, foreign MNCs, and domestic US businesses. This could be accomplished if the US viewed itself as a source country and based its tax on the volume of sales to US customers. Many US states have effectively adopted this approach because of the fierce tax competition among states.

Keywords: Inversions, Income Shifting, US Corporate Tax Rate, International Tax, Lock-Out Effect

Suggested Citation

Harvey, J. Richard, Corporate Inversions - Background, Causes, and Policy Options (October 31, 2014). Villanova Law/Public Policy Research Paper No. 2014-1017, Available at SSRN: or

J. Richard Harvey (Contact Author)

Villanova University School of Law and Graduate Tax Program ( email )

299 N. Spring Mill Road
Villanova, PA 19085
United States
610-519-4474 (Phone)

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